Legislating Disaster in Nevada and Maryland: Good Intentions Gone Wrong


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.

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


    • John,

      Certainly, in the case of the new Nevada law. Not so the Maryland law, whcih was passed in 2008.

      If you’re saying there’s plenty of blame to go around, I couldn’t agree more. Unfortunately folks who are blameless are the ones paying the price–the homeowners of Nevada, Maryland and several other states I didnt mention like Florida where more than 300,000 foreclosures are still tied up in court.

      Thanks for your comment.


  1. Steve

    I have been watching this situation unfold since the BiggerPockets event in Denver. I see all the noise about demand and supply imbalances but I think it is fake. I suspect we will be talking double dip by the end of the year as the bottle neck loosens.

    Real Estate Investing is never boring

    Great Article

  2. Mike:

    Your point is well-taken and I know that you are not the only who feels that way. For one thing, it’s SOOO hard to get straight up data on the number of foreclosures stuck in the pipeline due in part to laws like those I wrote about.

    I guess we’ll find out in time. All those properties are going to have to go somewhere at some point.

    Thanks for your comment.


  3. Great post, Steve. We have both judicial and non-judicial foreclosures in Hawaii, although the latter makes up the vast majority — except when they’re put into a moratorium as has been the case the past year. It’s really bottlenecked the system out here and while inventory has shrunk and prices climbed a bit, the properties will have to be sold at some point, just like you say. Many insiders also think we’re about to get whacked around the corner and this glimmer of hope of a rebound will be quickly snuffed out.

    Either deal with the problem now or deal with it later — those homes will have to be put out on the market at some point.

  4. Great post Steve!

    As an investor in Las Vegas, it was quite crazy to see how quickly the market shifted once 2011 ended and 2012 began. It is terrible to artificially inflate the market and I have been waiting on the sidelines for the most part waiting for REO to come back again. Do you think the inventory will flood again or do you think hedge funds will start snapping them up? In terms of RE recovery, I originally thought the market will come back in 5 to 7 years but now I am thinking 7 to 10.

    • Leon, thanks for the comment. Your question is the $64,000 one.

      Regarding foreclosure inventories, I think many lenders, particularly Wells and Citi, started raising the flood gates as early as Q4 2011. Others followed, and they are cherry picking their inventories to market those which pose the least threat of litigation under Robo-gates, including chain of ownership and MERS. If properties are in pre-foreclosure, they are talking to owners about short sales, especially now that foreclosure losses are running as high as $100,000. However, the rate that properties are trickling out through auction sales and short sales is being matched by the rate of new foreclosure starts, which have picked up since the AG agreement was signed, leaving us with an inventory of seriously delinquent to auction about 150 percent of all the foreclosures completed last year. One of the reasons the lenders agreed to the AG settlement was the establishment of industry-wide processing standards that would offer an implicit level of liability protection against future litigation. Potentially, these could be employed on pre-foreclosures in the pipeline. The bad news is that it looks like they won’t be ready until sometime early next year.

      So, I think that completed foreclosures will slowly increase until standards are ready, at least at a pace to keep up with starts, which are slowly declining. It’s certainly in the lenders’ interest to avoid dumping and take advantage of today’s demand.
      Demand is being driven by two factors. First-time buyers finally smell the coffee and trying to buy before prices go up more. Investors are seeing the writing on the wall and doing the best deals they can as discounts and inventories shrink in many big time foreclosure markets.

      The entry of hedge fund money into the market ups the ante all around. Yes, they will increase demand even more, for wholesales all the way to the courthouse steps. I also think they will find that the rental returns they expect won’t materialize on the scale they expect. Two points. First, they probably don’t know that the single tenant is not the twenty-something single Millennials who populates apartments. They are mostly families, many displaced by foreclosure, who want to return to homeownership. Second, both SFRs and multifamily rentals face oversupply as the most massive apartment construction boom of a generation goes on line. The hedge fund guys remind me of first-time buyers. They are going to miss the best deals and the best rental market.

      Bottom line is that foreclosures are going to be around for years to come but the Foreclosure Era is coming to an end. Barring another major recession, we’re not going to see the discounts and the inventories of distress sales that we have seen over the past five years. Some hedge funds may do well but they will increase demand but end up paying the price on the other end with vacancies. I am also not convinced they have the property management issue solved; there are no advantages of scale in SFR management. Every study I have seen convinces me that homeownership values are still strong and deeply seated (see Boston Fed Study: Homeownership Values Unchanged Among Most Americans in Real Estate Economy Watch. We are not going to be a “rentership” society as one of them proclaimed in a news release last week. I think hedge funds are late to the party. They will pay more than individual investors who know their markets. They will pay more for property management and realize smaller returns than they are projecting, and I suspect most are anticipating a payday will come in the form of a market for securitized ex-foreclosures similar to mortgage backed securities. That is still in the talking stages.

      Back to your question. Inventories of distress sales will slowly decline over the next two years but the backlog will remain high until new processing standards are I place. The state laws I wrote about in this article and in judicial states generally will extend this process in Nevada and homeowners will pay the price. That’s particularly the case in Nevada, which imposes nasty penalties for processing errors. Hedge funds may add to an already healthy demand but their true impact has yet to be seen, and could include downward pressure on rents in markets where they are active. A lot depends on how the excess inventory comes into local markets. If leading lenders should list large numbers of REOs and short sales in a short time frame, the market will have a harder time absorbing the hit and home values will fall until the market is stabilized.

  5. Maryland also has the PHIFA laws which have severe penalties for dealing with homeowners in foreclosure.

    The rate of FC sales is up significantly this year, but Fannie and Freddie are doing most of the buying.

    One of the forms of robo-signing that took place here was law clerks sign documents as if they were the lawyer. The followup letters the lawyers added to the file stating they didn’t realize they shouldn’t have someone else sign their name stating they personally certify the information is true were comical.

  6. Hey Steve,

    Thanks for a extremely detailed response and your assessments have been really helpful!
    Yes I do hope once the banks get caught up they will start letting go more inventories. A lot of investors here in Vegas that I know are sort of waiting for a second flood before getting more aggressive.
    I agree with your thoughts on how hedge funds and I do wonder how they will play out. Even with their challenges the returns are still very good for them to get into. Certainly their involvement is going to make it a lot harder for me to get better deals and find good tenants. But you are right there are opportunities out there since the hedge fund guys have a very laser focused in what they want to invest in.
    As an investor I do hope that market prices will stay distressed longer as I have more time to invest but the again, I feel like the recent legislation has definitely set the market back for awhile and I think it actually hurts homeowners more than it helps.
    Keep up the great work!

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