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» VISIT US ONLINE @ DSNEWS.COM MARKET INSIGHT Will the servicer settlement really bring a new onslaught of foreclosures? S ince late last year, scads of market analysts have predicted a new foreclosure crisis—a crushing wave of shadow inventory coming into the light, depressing home values and taxing already over-burdened servicers and lenders. "We are right back where we were two years ago," Mark Seifert, executive director of the counseling firm Empowering & Strengthening Ohio's People, told Reuters last month. "I would put money on 2012 being a bigger year for foreclosures than 2010." Seifert's not alone. There are plenty of reasons to think America's default backlog could come back with a vengeance. When news broke two years ago that lenders, laden with mounting delinquencies and foreclosures, were shuffling cases through the foreclosure pipelines with unsavory tactics, banks (and plenty of states) essentially halted foreclosures to institute some quality control. Fast forward to this past February when representatives from five big banks signed that landmark $25 billion national settlement with state and federal authorities to make amends for servicer abuses and reform the foreclosure process. With the servicer settlement's cementing, fail limitations have been removed and the foreclosure floodgates have been thrown open. So will the trickle become a torrent? And is the industry ready? Whichever way the foreclosure tide turns, capacity is likely to be tested again. How do lenders—already burning the candle at both ends—prepare for the unknown in a market that's already stressed and overburdened? DS News decided to dig a little deeper and find out. Great Expectations First, let's not get ahead of ourselves; the coming mortgage apocalypse may be greatly exaggerated. Nationwide foreclosure filings hit a five-year low this spring, down to 188,780 in April—numbers not seen since summer 2007, according to the market data analysts at RealtyTrac. "Mortgage delinquencies normally fall during the first quarter of the year, but the declines we saw were even greater than the normal seasonal adjustments would predict, so delinquencies are clearly continuing to improve," Michael Fratantoni, VP of research and economics for the Mortgage Bankers Association, told journalists in mid-May. "Newer delinquencies, loans one payment past due as of March 31, are down to the lowest level since the middle of 2007, indicating fewer new problems we will need to deal with in the future." Of course, there are still warning signs. Foreclosures did rise early in the first quarter of 2012, RealtyTrac reported. More than 100,000 properties nationwide started the foreclosure process in March, up 7 percent from February. The tracking company also reported 28 percent of the 45 million outstanding mortgages nationwide are "seriously" underwater. According to Sanjeev Dahiwadkar, CEO and president of IndiSoft, which provides technology to help counselors, servicers, lawyers, and mortgage insurers, there is a lot of shadow inventory out there. There's also the "shadow of a shadow" —loans that were cured in the past few years and are at risk of re-defaulting in the future. Foreclosures on FHA loans, for example, jumped suddenly in April—double the previous year's total—largely because half the loans it already modified were back in default in a year or more. "Therefore another foreclosure wave is certainly on the horizon. But, this time, the industry is a little more prepared and the wave is not expected to create the same devastation as it did the first time," Dahiwadkar says. "Unfortunately, the problem is not going to disappear as quickly as we would like. We are in this for at least another three to four years that may stretch to 10 years." Settling the Market In theory, the primary check on foreclosures is the servicer settlement itself. Many of its provisions and requirements are expected to prevent future foreclosures by standardizing servicer behavior with restrictions on dualtracking and mandates for a single point of contact, for example. But how will help get to borrowers who were already in trouble when the pipelines were squeezed shut? 51

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