-by the Mysterious Flying Miser

The following questions were sent to the FDIC, OTS, OCC, and Federal Reserve. Answers from the FDIC were posted previously.  Answers from the OTS and OCC are pasted below.  The Federal Reserve has not responded.  It seems to this author that these two agencies are skirting the question.

The OCC insists that banks have no incentive to hoard or delay foreclosures.  Well, that's the point we've been making all along.  If there is no incentive for them to do so, then how does one explain the plain fact that they are?  One can't resist the creeping inkling that these guys are colluding, and the collusion is organized on a grand scale.

The answer from the OTS is classic.

From the OCC (Office of the Comptroller of the Currency):
Initial Response:
While I'm working answers, the questions seem to stem from the flawed assumption that the banks have a financial incentive to delay foreclosures and the liquidation of foreclosed properties, and as a result are purposely creating what you referred to as a shadow inventory. On the contrary, the financial incentive is to liquidate as quickly as possible to avoid maintenance costs and increased risk of greater loss later. Like other federal financial regulators, we require banks to charge off mortgages on their balance sheet down to fair market value at 180 days delinquent and quarterly thereafter - based on valid valuation methods - regardless of whether the loan is in foreclosure. This is consistent with the Generally Accepted Accounting Principles (GAAP). The OCC only regulates national banks.

The OCC, with the Administration and other financial regulators, encourages banks to work with troubled borrower in an effort to avoid preventable foreclosures if it is in their best economic interest. Those that participate in the federal Home Affordable Modification Program (HAMP) are required to exhaust all modification efforts prior to consummating foreclosure. In many cases this might "extend" the foreclosure process beyond what used to be considered "normal" while the bank is working with the borrower. This can contribute to the perception of a "shadow inventory" that you referred to. There are also other factors that contribute to what you referred to as a "shadow inventory" First, homeowners continue to feel the stress of difficult economic conditions resulting in more delinquencies overall. Second, the length of time required to complete a foreclosure has increased due to the volume of mortgages in the pipeline. Foreclosure processes are governed by state law and vary from state to state; processes range from 2 to 15 months. This means the backlog of properties grows as more properties enter the foreclosure pipeline than result in a foreclosure sale each quarter.

Final Response:
Hopefully, my initial response provided some help to you because it generally answers the concerns reflected in all your questions. Attached are responses to your specific questions. In many cases, your questions start from an incorrect assumption or present an unsupported hypothetical situation and it would be inappropriate for me to engage in those kind of hypotheticals. But, I tried to give you context that I think you were missing. Please let me know if this is helpful.

If you would like to call me to discus, please do.

Bryan Hubbard
bryan.hubbard@occ.treas.gov
(202) 874-5770

1. Are there any laws, regulations, or rules governing the length of time that can pass between the mortgagor's first default and the initiation of the foreclosure process?

Answer: Foreclosure proceedings are typically governed by state law and vary from state to state. They can range from 2 to 15 months. Many states and municipalities have placed temporary moratoriums on foreclosure proceedings in the past couple years to provide time to develop effective workout strategies and larger scale programs to assist responsible homeowners in avoiding preventable foreclosures.

2. Are there any laws, regulations, or rules governing the length of time that can pass between commencement and finalization of the foreclosure process?

Answer: Foreclosure proceedings are typically governed by state law and vary from state to state. They can range from 2 to 15 months. Many states have placed temporary moratoriums on foreclosure proceedings in the past couple years to provide time to develop effective workout strategies and larger scale programs to assist responsible homeowners in avoiding preventable foreclosures.

3. Are there any laws, regulations, or rules governing the length of time that can pass between foreclosing and marketing properties?

Answer: No. There are no federal laws or regulations pertaining to foreclosure processing. Timelines are dictated by state law and/or investor requirements. The only federal marketing regulation limits loans held as other real estate owned to 5-years. Furthermore, delaying the sale of bank-owned properties incurs additional maintenance cost and may result in financial disadvantage to banks holding foreclosed properties. So, the financial incentive is to liquidate properties as quickly as possible as to avoid maintenance costs and the risk of greater loss later.

4. Are there any laws, regulations, or rules preventing banks from colluding to manipulate the perceived market value of properties they own?

Answer: I'm not sure what you mean by colluding to manipulate perceived market value. Banks will, and should, attempt to market properties that they have taken possession of and actually own in a way maximizes the recovery of everything owed to them (plus additional funds they may have invested to ready the property for sale and market it.) They are not required to sell at current perceived market value if it is less than the amount they have invested in the loan/property.

5. Are there any laws, regulations, or rules preventing banks from individually attempting to manipulate the perceived market value of the properties they own?

Answer: Again, I'm not sure what you mean by "manipulate the perceived market value." Banks will, and should, attempt to market properties that they have taken possession of and actually own in a way that maximizes the recovery of everything owed to them (plus additional funds they may have invested to ready the property for sale and market it.) They are not required to sell at current perceived market value if it is less than the amount they have invested in the loan/property.

6. Is it acceptable to the OCC for banks to stall the foreclosure process on nonperforming assets in an attempt to manipulate financial statements for regulatory purposes?

Answer: It is not acceptable, and the process does not support that such manipulation occurs. The OCC requires banks to charge mortgages down to Fair Market Value on their balance sheets at 180 days delinquent and quarterly thereafter - based on valid valuation methodologies - regardless of whether the loan is in foreclosure (Retail Credit Classification Guidelines and Call Reports). At 180 days delinquent, the nonperforming assets typically are "written off" well before foreclosure. This process complies with Generally Accepted Accounting Principals (GAAP) and is not a manipulation of the financial statements. Because the asset is written down prior to foreclosure, the "hit" to the financial statement occurs regardless of the foreclosure status. Furthermore, there is no financial advantage or incentive to stalling foreclosure processes because delays in foreclosure may result ultimately in greater loss to investors and continued maintenance costs.

7. Is it acceptable to the OCC for banks to stall the foreclosure process on nonperforming assets in an attempt to prevent the properties from coming to market, which would make true supply available to the public?

Answer: It is not acceptable to the OCC for banks to "defer losses" on nonperforming assets, and the agency has stressed to banks and examiners that banks should account for losses on nonperforming assets in accordance with GAAP through the Trouble Debt Restructuring process (TDR). Additionally, there is no financial advantage or incentive to stalling foreclosure processes. Because banks have already realized the loss related to the nonperforming asset, delaying foreclosure results in additional maintenance costs and may result ultimately increased loss.

8. Did the TARP money given to banks cause fewer properties to be liquidated/marketed?

Answer: Questions about TARP should be directed to the Department of the Treasury's public affairs office. The effect of federal programs to help homeowners avoid preventable foreclosures can be found in the most recent report on the Making Home Affordable Web site at http://www.makinghomeaffordable.gov/pr_04142010b.html.

9. If banks are purposely keeping properties off the market, then how can consumers know whether or not a house bought today will hold its value? Doesn't the consumer need to know how many houses are in the pipeline to discern the direction of the market?

Answer: The first question sets up an unsupported hypothetical situation, that I'm not going to address. More importantly, like any other markets, home values fluctuate and nothing can guarantee that a house bought today will hold its value in the future. There are a number of publicly available resources for consumers to understand the number of foreclosures in process and the number of seriously delinquent mortgages that are at risk of foreclosures, including the OCC and OTS Mortgage Metrics Report (http://www.occ.gov/mortgage_report/MortgageMetrics.htm).

In the past couple years, the national emphasis to assist responsible homeowners with avoiding preventable foreclosure has helped many troubled families keep their homes. Keeping families in their homes supports the families, helps protect communities from the blight of vacant properties, and protects the property values of neighboring homes. While homeowner assistance programs have helped many, others will eventually move to foreclosure. Servicers report that they expect new foreclosure actions to increase in upcoming quarters as alternatives to prevent foreclosure are exhausted and a larger number of seriously delinquent mortgages slip into foreclosure.

10. If consumers are buying houses today that are destined to slowly lose value over time (as the rest of the inventory inevitably comes onto market), then won't many of these consumers be underwater in the future? Doesn't this practice actually raise the probability of future foreclosures?

Answer: The key to preventing future foreclosures is to ensure mortgage originators use sound underwriting standards. The Comptroller of the Currency has called for establishing national and international underwriting standards to be used by all mortgage originators. Sound mortgage underwriting standards consider the borrowers' ability and willingness to pay the debt, avoids the layering of debt risk, and ensures reasonable loan-to-value origination, which all help mitigate the risk associated with fluctuations in housing market values. The first questions, again, sets up an unsupported hypothetical situation that would be inappropriate for me to speculate about. While there are no guarantees that a house bought today will retain its value in the future, it is also impossible to assume homes purchased today will lose value in the future. Furthermore, being "underwater" does not necessarily lead to foreclosure. The driving factor behind foreclosure is the borrowers' ability to meet their debt obligations.

11. Does your agency have a plan to protect consumers and limit future foreclosures by ensuring that banks are not hiding nonperforming assets and accumulating a shadow inventory?

Answer: The agency has emphasized guidance that banks are not to defer loss related to nonperforming assets. Banks must account for their losses in accordance with GAAP, and are examined to ensure that they do. The OCC has also worked closely with other financial regulators and the Administration to implement guidance and support programs to assist homeowners with avoiding preventable foreclosures, including the Administration's Home Affordable Modification Program. The agency also acted with other regulators to shore up lending underwriting standards related to nontraditional mortgage products and has called for stronger underwriting standards to be applied to all mortgage regulators.

The question also incorrectly assumes that growth in the number of foreclosures in process and those that are seriously delinquent which may enter foreclosure (referred to as "shadow inventory") is a result of specific actions taken by banks. This is not the case at all. The growth in the number of foreclosures in process and the large number of serious delinquencies is a result of the increased time associated with processing foreclosures which varies from state to state and can range from 2 to 15 moths and the fact that delinquent loans are held in delinquent status longer as servicers work with borrowers through the federal and proprietary programs to help responsible homeowners. In fact there is no financial incentive to create a "shadow inventory" which incurs both a maintenance cost and increased likelihood of greater loss. On the contrary, the incentive is to liquidate more quickly, consistent with the banking adage, "the first loss is the best loss."

From the OTS (Office of Thrift Supervision):
Are you investigating or reporting on a specific incidence? If so, please give me the details. I cannot answer these questions in a hypothetical context.