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» REGULATORS STRIKE $8.5B FORECLOSURE SETTLEMENT WITH SERVICERS Ten major mortgage servicers signed an agreement with federal regulators last month to pay more than $8.5 billion for alleged foreclosure abuses. The servicers involved in the settlement include Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank, and Wells Fargo. In April 2011, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve announced enforcement actions against these 10 firms along with four others after investigations uncovered what officials described as deficient practices in mortgage loan servicing and foreclosure processing. Regulators' enforcement actions required the servicers to hire third-party consultants to implement an Independent Foreclosure Review process for borrowers who believed they incurred financial harm due to faulty foreclosure practices. The reviews were to encompass foreclosure actions that occurred in 2009 and 2010. The new agreement reached in January with 10 of the servicers subject to the enforcement actions replaces the Independent Foreclosure Review process with a new framework that regulators say will allow eligible borrowers to receive compensation more quickly. Under the settlement, eligible borrowers will receive compensation even if they did not request a foreclosure review. Reparations range from a couple hundred dollars to $125,000, depending on the type of servicer error and the individual's situation. Of the $8.5 billion, $3.3 billion will go to eligible borrowers in the form of direct payments, and $5.2 billion will be used to assist borrowers in other ways, such as through loan modifications and deficiency forgiveness. According to officials with the OCC and the Federal Reserve, they agreed to forego the independent case reviews in lieu of the multibillion-dollar settlement because it will enable more money to go to more affected borrowers and allow funds to be dispensed in a more timely manner. Regulators say they are working to reach similar agreements with the other four servicers subject to the initial enforcement actions: Ally Financial, Everbank, HSBC, and OneWest Bank. VISIT US ONLINE @ DSNEWS.COM SHADOW INVENTORY SHRINKING BUT ANALYSTS STILL WORRY OVER RISKS As of October 2012, 2.3 million housing units were part of the industry's socalled shadow inventory, CoreLogic reported. That total translates into a supply of 7.0 months and sits 12.3 percent lower than the 2.6 million units the data provider reported as in the shadows in October 2011. From September to October 2012, shadow inventory shrunk by about 1 percent. In dollar terms, shadow inventory stood at $376 billion in October 2012, down from $399 billion a year earlier. "The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent," said Anand Nallathambi, president and CEO of CoreLogic. "We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold." To determine the size of the industry's shadow inventory, CoreLogic calculates the number of properties seriously delinquent, in foreclosure, and held as REOs but not currently listed on multiple listing services. Seriously delinquent properties were the main contributors to shadow inventory and numbered 1.04 million units (3.3 months' supply) out of 2.3 million. About 903,000 properties in some stage of foreclosure lurked in the shadows, representing a supply of 2.8 months, while REOs in shadow inventory totaled 354,000, or 1.1 months' supply. "Almost half of the properties in the shadow are delinquent and not yet foreclosed," noted Mark Fleming, chief economist for CoreLogic. "Given the long foreclosure timelines in many states, the current shadow inventory stock represents little immediate threat to a significant swing in housing market supply." Shadow inventory represents 85 percent of the overall 2.7 million U.S. properties that are seriously delinquent, in foreclosure, or in REO, according to CoreLogic. While lengthy foreclosure processing curtailed any immediate risk posed by the shadow inventory, analysts at the ratings agency DBRS are concerned this hidden inventory could jeopardize the extended view of the housing recovery. In addition to the 2.3 million homes in the shadows, another 2.5 million homes are in existing- and new-home inventory, or visible inventory, according to DBRS'. "Once unleashed, the number of shadow properties will undoubtedly boost supply and distress the local markets that were just beginning to recuperate," the agency warns. Of particular concern to DBRS is shadow inventory in judicial states. Currently, liquidation timelines in judicial states average 29 months with New York and New Jersey stretching out foreclosures to three years, and DBRS believes the gap between judicial and non-judicial states will widen even further. DBRS notes that, like shadow inventory levels, data show visible inventory fell 23 percent from 2011. In addition, servicers increased their use of foreclosure alternatives such as short sales and deeds-in-lieu; DBRS cites growth of 14 percent and 33 percent, respectively, over the past two years. Another positive—investors are swallowing up foreclosures and renting them out to homeowners locked out of the market with a foreclosure on their records. DBRS used Zillow data to track the largest drop in bottom-tier inventory and found many California cities show declines of greater than 35 percent. Some areas, though, do not experience this trend of diminishing lower-priced inventory, and that suggests investors target specific areas with characteristics such as healthy population growth, low unemployment rates, and affordable homes, the agency's analysts explained. Considering the challenges ahead, DBRS— unlike other projections—predicts a decline in home prices. According to the agency's projection, national prices should fall by 3 percent and property values should bottom in 2014. 47

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