All signs point to stagnancy in Boston

On Friday, unemployment rate increased to 9.8 percent, a seven-month high, according to the Department of Labor. The Federal Reserve’s second wave of bond purchases, this time spending as high as $600 billion and intended to keep interest rates low and create jobs, is currently underway. A year and a half later, the United States is in the midst of a postpartum depression. Has the Great Recession really left?

NATIONAL TREND

RealtyTrac, the leading online marketplace for foreclosure properties, reported a 4 percent increase in foreclosures nationwide from the second to third quarter. During that span, one in every 139 housing units received a foreclosure filing.

Michael Johnson, director of the Public Policy Ph.D program at University of Massachusetts-Boston’s McCormack Graduate School of Policy Studies, voiced his concern on the matter in an interview.

“The trend nationally is not favorable. Property values may have stabilized in many areas, but the jobs have not come through,” he said. “The first wave of foreclosures was triggered by declining property values, but the second wave happening now is triggered by unemployment.”

One answer to the foreclosure question is that mortgage prices are rising in relation to the actual value of homes. Invariably, when homeowners are paying more for their home than what it is actually worth, they will default, especially when the homeowner is jobless.

The difficult answer, however, is that the root of the foreclosure problem stems from the actual ownership of the mortgage.
In a statement on Oct. 14, James J. Saccacio, chief executive officer of RealtyTrac, said the number of foreclosures would go down temporarily in the imminent future.

“We expect to see a dip in those bank repossessions—and possibly earlier stages of the foreclosure process—in the fourth quarter as several major lenders have halted foreclosure sales in some states while they review irregularities in foreclosure-processing documentation that has been called into question in recent weeks,” he said.

According to Saccacio, the rate of foreclosures will not decline due to a bettering economy, but rather, to irregularities in documentation. What, then, are these irregularities?

MORTGAGE OWNERSHIP

Mark Roberts, professor of finance and economics in the School of Management, weighed in on the issue in an interview.

“There are so many players involved in a mortgage due to how the market has evolved. Banks nowadays are most likely servicing agents. They are collecting the payments and passing them through to the individuals who actually own the mortgages,” Roberts said. “These individuals can be investment entities or securitized investments in which a bunch of people share a portfolio of loans.”

The chain of ownership in a single mortgage is, for lack of a better word, complex.

“When you sit down to refinance your mortgage, you don’t know who’s going to be on the other side of the table,” he added.

“Courts require documentation that certifies the actual ownership of a house, which may have been destroyed, or lost, or insufficiently documented,” Johnson said. “Or perhaps they were fraudulently documented.”

It seems that whereas the 2000s were dedicated to constructing the labyrinth of mortgage ownership, the 2010s serve to destroy it.

According to an article titled “The Case of the Missing Mortgage” in the Nov. 29 issue of Time magazine, banks are losing the physical documentation of mortgages “to hide any evidence of their shoddy lending practices.” Then again, the documentation was most likely sold, often more than once, to securitized investments during the height of the housing boom in the 2000s, inevitably becoming lost in the flood.

The act of obtaining the initial promissory note of a loan often proves ineffectual. According to Lender Processing Services, the nation’s leading provider of integrated data for mortgage lenders, loans in foreclosure have been delinquent for an average of 484 days in 2010. That means it takes almost a year and a half for a bank to evict someone who has stopped paying his or her mortgage.

Even if the documentation issue were resolved, the rate of foreclosures would increase as delinquencies dwindled. Conversely, if the issue were to remain unfixed, housing sales would decrease.

“If the documentation issue expands to more lenders,” Saccacio said, “we could see a chilling effect on the overall housing market as sales of pre-foreclosure and foreclosed properties dry up and the inventory of distressed properties grows—causing more uncertainty about home prices.”

EFFECTS IN BOSTON

Fortunately, national precautions have been taken to tackle the problems associated with current foreclosures. A portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed by President Barack Obama in July is dedicated to mitigating the holding power of banks.

“The law says that the bank will have to hold a certain amount of the mortgage to align the interest of the underwriting process with that of the bank,” Roberts said.

“But we’re still in the middle of implementation,” he added. “Because of the reform, I think the mortgage market will retreat to a more traditional lending, with a stronger focus on borrower credentials and less of a focus on making money from mortgage bonds.”

In addition, Obama’s Home Affordable Modification Program is intended to reduce the burden of exorbitant loans. Under the program, known as HAMP, eligible troubled borrowers are put into trial modifications to determine whether they can keep up with the lowered payments and to give loan servicers time to verify income and hardship.

However, in the Boston metro area, the number of active trials under HAMP has gone from a peak of roughly 15,000 in January to only 7,000 in May, according to the data on the website of the Federal Reserve Bank of Boston.

“HAMP has not worked because the chain of ownership is just too complicated,” Johnson said.

“Despite this failure, Boston generally has a robust housing market. The distressed areas such as Dorchester, Roxbury, Mattapan and Hyde Park are attracting investors from inside and outside the city,” he said.

Even so, the rate of foreclosures is recognizably high. According to RealtyTrac, one in every 617
housing units in Boston received a foreclosure filing in October, way above the national average of one in 389.

Regardless of statistics, Johnson expressed his optimism.

“Boston is in a position to do well against the rest of the country because of the city’s attractive education system and its position as a strong destination for immigrants,” he said.

The country is making headway, but it is also at a sluggish point in the process.

“There’s great ideas, and then there’s implementation,” Roberts said. “And we are in the process of doing just that.”