Loan servicers help homeowners modify their mortgages at the Los Angeles… (Jonathan Alcorn, Bloomberg )
Reporting from Los Angeles and Washington— — Big banks put the brakes on foreclosure activity last month as the American foreclosure system faced a major overhaul and homeowners challenged their lenders in court.
The decline in foreclosure actions — from default notices to bank repossessions — dropped the most in states where a court order is required to take back a home; such so-called judicial states do not include California.
Nationally, foreclosure activity fell 14% from January and 27% from February 2010, according to RealtyTrac. That is the largest year-over-year decline since the Irvine data firm began keeping statistics in 2005.
Evidence of a foreclosure slowdown comes as state attorneys general and federal regulators push the banks to revise the way they service loans, consider troubled borrowers for potential mortgage relief and conduct their foreclosure proceedings. Officials last week sent the nation's biggest mortgage servicers a 27-page list of terms outlining these demands.
"The foreclosure process is stalled, and the seemingly impending settlement is delaying foreclosures," said Mark Zandi, chief economist for Moody's Economy.com. "The whole process is slowing down because of these issues."
Negotiations involve the five largest providers of home loans. They include the arms of four national banks: Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. Also part of the talks is Ally Financial Inc., the former GMAC, which services loans through its GMAC Mortgage unit.
The wrangling began last year after revelations that some of the nation's largest financial institutions relied on "robo-signers," people who signed key court documents used in thousands of foreclosure cases across the country without reading or understanding them. The revelations led several banks to issue foreclosure moratoriums and lawmakers to question the integrity of the entire foreclosure system.
The February decline was probably related, in part, to banks resubmitting foreclosure filings that had been found to be faulty, said Rick Sharga, RealtyTrac senior vice president. About 70,000 foreclosure filings were resubmitted nationally last month, a number RealtyTrac did not include in its February estimates.
Courts have also delivered setbacks to some of the nation's largest lenders in recent months, ruling on behalf of homeowners in key foreclosure cases. This increased scrutiny is probably leading banks to be more cautious with the way they conduct repossession proceedings, said Walter Hackett, an attorney who represents Inland Empire homeowners.
In seeking a global settlement, government agencies have proposed penalties against banks ranging from $5 billion to $20 billion. That money would be used to fund principal write-downs, officials have said.
But bank executives and Republicans this week began publicly pushing back. "We've got to be very careful that we don't create an environment where we encourage people not to pay, and that's the danger you have when you get into broad-based principal forgiveness," Charlie Scharf, chief executive of retail financial services for J.P. Morgan Chase, said in a CNBC interview Wednesday.
Sen. Richard Shelby (R-Ala.) also on Wednesday blasted efforts by the state attorneys general and the Obama administration, calling them a "regulatory shakedown."
House Republicans sent Treasury Secretary Timothy F. Geithner a letter asking him to explain the government's legal justification for trying to impose sweeping changes on the way banks process problem loans, the Associated Press reported.
A total of 225,101 properties received a foreclosure filing last month, according to RealtyTrac, meaning 1 in every 577 homes was caught in some stage of the process. Big banks took back 64,643 properties, a 17% decline from January and an 18% drop from February 2010.
In California, 56,229 properties received filings, a 16% decline from January and an 18% decline from February 2010. Banks took back 12,734 properties, a 20% drop from January but a 1% increase from February 2010.