It stands to reason that if you pass a law delaying something bad for your local housing economy, like foreclosures, in hopes of buying time to help a few defaulting borrowers, you’ll be delaying the inevitable and all other homeowners in the market will eventually pay the price in the form of delayed depressed values and extended pain.
That’s pretty much what’s happening right now in several states with new laws that lengthens the foreclosure process to give defaulting homeowners more time to fight and to place tougher requirements upon mortgage servicers to produce proof of ownership. Sound familiar? The same marketplace chaos caused by legislated moratoria in California and elsewhere four years ago will return, except on a larger scale because inventories are greater this time and more unfairly, because some markets will suffer much more than others.
In the latest June foreclosure data from CoreLogic, two states stand out for the size of their backlogged foreclosures. Nevada and Maryland also happen to be states that have enacted legislation that has had the effect of bringing foreclosure processing to a crawl.
CoreLogic reported that nationally that the foreclosure inventory?properties ranging from seriously delinquent to auction has hardly changed since the first of the year. Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory in June, compared to 1.5 million in June.
If parceled out evenly across the nation, that inventory could nearly double the number of completed foreclosures on the market for a year. However, inventories vary by state and market. “Judicial” states, where a court order is necessary to foreclose, typically take longer to process foreclosures and during the processing slowdown of the past two years, lenders concerned with liability issues moved even more slowly in judicial states.
Maryland happens to be a judicial state. It also passed a landmark foreclosure law in 2008 that significantly lengthens the foreclosure process from 15 days to approximately 150 days, by requiring a lender to wait 90 days after default before filing the foreclosure action and to send a uniform Notice of Intent to Foreclose to the homeowner 45 days prior to filing an action. Foreclosure activity in the Free State fell by 16 percent in the three months after the 2008 changes took effect and by 58 percent in the three months after a mediation law took effect in 2010, according to a state report. But sales activity and prices fell as well, according to the Washington Post.
Last October a new law took effect in Nevada that requires a lender to record a notarized affidavit of authority to foreclose that includes information showing that they have the legal right to exercise the power of sale, a measure designed to prevent Robosigning-related problems . In just three weeks, the number of noticed of default fell form 116 the month compared to 3,649 filings in September.
“With this constant interference from the government, they are putting shackles on the banks and holding everything back and then releasing the shackles, That artificially jerks the market around. Banks have a huge bottleneck to deal with. They’ll just cut prices left and right because they’re just competing with themselves,” Zolt Szorenyi, president of Lenders Clearing House Las Vegas, told Hubble Smith at the Las Vegas Review-Journal.
Now the numbers are in. Even though it is not a judicial state, Nevada in June ranked fifth nationwide in the size of its foreclosure inventory rate, which was 4.8 percent of all mortgaged homes in the state. ForeclosureRadar reports that Nevada Foreclosure Sales were down 14.6 percent in June over last month, and down 72.1 percent vs. June 2011 as a result of the new law. Notices of default plummeted last October as lenders reacted to the new law. REO’s have plummeted more than 61 percent in the past year. Time to foreclose has increased 24 percent in the past 9 months.
Maryland, rarely ranked in the same league as Nevada for foreclosures, has an inventory rate almost as high as Nevada’s, at 4.1 percent of all mortgaged homes in the state, well above tne 3.4 percent average for judicial states and sixth highest out of 24 states. Maryland’s inventory rate rose 1.3 percent during the year and over the past 12 months it has completed only 288 foreclosures. The Baltimore markets reports an inventory rate of 4 percent of all homes with a mortgage , and increase of 1.4 percent over the year.
Never has there been a better time to release the backlogged foreclosures onto the market. Interest in buying foreclosures has almost tripled among potential home buyers in the past two and half years, according to a recent survey by Move, Inc., and real estate agents report foot traffic is up among first-time buyers looking for bargains before prices rise and they miss the boat. Investors, who buy 20 percent of all existing homes these days, are hungry for deals (see Frozen Foreclosures Frustrate Buyers). Tight inventories caused by laws like those in Nevada and Maryland are driving up prices artificially and temporarily. Sales of foreclosures and short sales are down, not because demand is lacking but because supply is.
What will demand be like when the backlogged foreclosures finally come to market? In those states and markets where well intended laws have delayed processing, one thing is for sure. Those markets will remain in the shadow of the Foreclosure Era, with downward pressure on hone values that will keep poisonous negative equity high and could even induce additional foreclosures, even as neighboring states and markets move into recovery and a new normalcy.