America has become a nation of two foreclosure realities: judicial states, where judicial review is required for every foreclosure, and non-judicial states. Both have their processing problems, but delays in judicial states are setting new records and impacting local real estate economies.
December data from Lender Processing Services (LPS) paints a picture of increasingly clogged foreclosure pipelines struggling with aging properties and unmanageably large inventories. Half of all loans in foreclosure in judicial states have not made a payment in more than two years. Foreclosure inventories in judicial states are two and a half times the size of those in non-judicial states, and the gap continues to widen. The backlogs are causing overall foreclosure activities to drop significantly; starts and down and foreclosure sales rates in non-judicial states stood at approximately four times those of judicial foreclosure states in December.
In some judicial states, delays are extraordinary. The average foreclosure process in New York has increased 37 percent since 2010, and New York properties take an average of 1,019 days to complete the foreclosure process — the longest of any state. New Jersey documented the nation’s second longest average foreclosure process, at 964 days, and Florida documented the nation’s third longest average foreclosure process, at 806 days. Foreclosure activity in both these states dropped more than 60 percent from 2010 to 2011.
The reason for the dramatic differences between judicial and non-judicial states is not just delays caused by judicial review, per se, though clogged courtroom calendars and an overwhelmed legal bureaucracy are to be expected in a system that was never meant to process hundreds of thousands of foreclosures a year. Rather, the real problem is robo-signing paranoia. Knowing that they are operating in the crosshairs of federal regulators and litigators, lenders are bending over backwards to see that the paperwork is perfect for every foreclosure. Judicial states’ foreclosures have more paperwork and procedures that do non-judicial states. For all states, the length of the average foreclosure process has increased 24 percent from 281 days in the third quarter of 2010, when lenders began to re-evaluate foreclosure procedures in earnest as the result of the so-called robo-signing controversy.
A lot is at stake for investors in the 21 judicial states: Connecticut, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Nebraska, New York, New Jersey, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, South Carolina or Wisconsin. Foreclosures in their markets are taking longer to process than they would in a non-judicial state. The result is smaller REO inventories, which translates into less opportunity. Certainly robo-signing paranoia was a contributing factor to the 24 percent decline in foreclosure activity last year.
“While foreclosures continue to represent an excellent bargain-buying opportunity for many buyers and investors, foreclosure sales accounted for a smaller share of the total market in the third quarter. That trend is not too surprising given the continued ambiguity surrounding proper foreclosure procedures — and the ripple effect that has on sales of foreclosed properties that might have been improperly foreclosed,” said Brandon Moore, chief executive officer of RealtyTrac last week. “The sooner the market gets more clarity about accepted foreclosure procedures, primarily through the long-promised settlement between multiple states attorneys general and major lenders, the sooner the market can more efficiently dispose of these distressed properties.”
That settlement is due to take effect this Friday, February 3. By then states must decide whether or not to accept a proposed $25 billion nationwide settlement with banks of a foreclosure probe that was an outgrowth of the robo-signing scandal. The settlement would set standards for how banks conduct home foreclosures while providing mortgage relief to borrowers.
Banks have been waiting for the new standards before re-designing their processing standards and moving ahead with backlogs in judicial and non-judicial states. However, LPS found that some were moving ahead anyway to clean out their foreclosure pipelines. Pipeline ratios (the time it would take to clear through the inventory of loans either seriously delinquent or in foreclosure at the current rate of foreclosure sales) declined significantly in judicial states in the last quarter of 2011.
JPMorgan Chase and Wells Fargo cut their foreclosure timelines by as much as 100 days for some of the worst mortgages handled in the third quarter, according to a report from Moody’s Investors Service. Moody’s tracked completed foreclosure sales in some of the most backlogged states in the country such as New York, Florida, Nevada, California, Illinois and Pennsylvania. All but two of the six were judicial states.
“Although pending foreclosure volumes remain high for all product types, (third quarter) foreclosure sale timelines improved from the second quarter, as judicial states continued to work through their significant backlogs of foreclosed loans,” Moody’s said.
However, Moody’s found that streamlining the process doesn’t speed up the timeline for selling REOs. After foreclosure sale, Wells took an average 197 days to unload Alt-A foreclosures in the third quarter, up from 191 in the previous quarter. REOs once linked to subprime loans continue to take the longest to sell. For those liquidated in the third quarter, Ocwen Financial Corp. took an average 288 days to sell an REO after the foreclosure sale, up from 237 days on REO sold in the second quarter.
“Our outlook is that REO timelines will lengthen dramatically over the next year, hampering servicer efforts to expedite their foreclosure procedures as they try to maximize return to investors,” the Moody’s report said, as reported in HousingDaily. “Given the significant number of loans in foreclosure, an increase in REO volume is inevitable.”
More REOs in inventory and longer time on market? Sounds like a recipe for good deals. At last, happy days are on the way for investors in states that have been getting the short end of the stick for a long time.