Courts Are Delaying Foreclosures

Courts Are Delaying Foreclosures

Miami, FL – . The recent suspensions of foreclosures by four major companies that service mortgages
compound a problem that had existed for years in states where foreclosures are handled
by the courts.

In the 23 states in which foreclosures must be approved by a judge, the process takes
longer than in states where courts are not involved, and some economists say it’s among
the factors delaying a housing rebound.

One comparison widely cited: In California, where judges don’t handle foreclosures,
the housing market appears to have hit bottom a year ago and has been bouncing back.
In Florida, where foreclosures go through the court system, prices keep falling, and
foreclosure inventory continues to rise.

On Friday, Bank of America Corp. announced it would suspend foreclosure sales in all
50 states. That follows the bank’s earlier suspension of tens of thousands of foreclosures
in the states that handle foreclosures through the court system, a move also taken by
GMAC Home Mortgage, Inc., a unit of Ally Financial Inc.,
and J.P. Mortgage Chase & Co.’s home-loan unit.

Meanwhile, several state attorneys general, as well as members of Congress,
are calling for an across-the-board foreclosure moratorium on foreclosures to sort out
alleged irregularities in foreclosure documents submitted by the banks.

Obama administration officials said such a move risked worsening the housing crisis
because foreclosures account for such a large share of all home sales. "Stopping that
process could have significant impacts on prolonging the housing recovery,"
said David Stevens, the commissioner of the Federal Housing Administration. Mr. Stevens.

White House adviser David Axelrod on Sunday questioned the need for a moratorium, saying that valid foreclosures with accurate documents should go ahead. "Our hope is this moves rapidly and that this gets unwound very, very quickly,” he said on CBS’s "Face the Nation"

Richard Cordray, Ohio’s attorney general, said Sunday that as many as 40 state
attorneys general across the country intend to open an investigation of lenders and
servicers to figure out the scope of the problems with foreclosure documents.

While it remains unclear how long the foreclosure process will be stalled,
economists say any delay is bad for the housing market long-term. "Foreclosures are being delayed with good intentions, to protect consumers, but it’s really just delaying the inevitable," says John Burns, a real estate consultant in Irvine,Calif. "They’re delaying the eventual housing recovery."

A report released last month by RealtyTrac, which tracks foreclosures,
found that foreclosures sales amounted to an average of 24% of all home sales
during the second quarter of this year, which totaled about 248,000 homes.
In Nevada, one of several western states that was hard hit by the housing downturn,
foreclosure sales comprised 56% of all sales activity.

"Before all the bank suspensions and the robo-signers, we were headed for some big price declines in the fourth quarter. But now, in a place like Florida, in the short term, this will stabilize prices, because there won’t be this bubble of supply hitting the market all at once," says Ivy Zelman, a housing analyst at Zelman & Associates in Cleveland.

While slowing foreclosures could have some positive benefits—stabilizing prices in the short term—economists argue that the vast majority of borrowers in trouble ultimately lose their homes, and the delays and interventions do more harm than good.

Florida and California have led the nation in foreclosures since the housing crisis began and both saw average home prices drop more than 50% between 2007 and 2009.

But while the percentage of mortgages in foreclosures continues to rise in Florida, it is falling in California.

Mark Zandi, chief economist of Moody’s Analytics, said that price recoveries in states is closely tied to the length of the foreclosure process and has pressed for a standardization of foreclosure laws at the federal level to expedite the process.

The judicial process isn’t the only determining factor. California’s economy is more diverse than Florida’s and real estate, long term, has always been a stronger bet in California, which explains why buyers would pounce once prices declined.

Data prepared for The Wall Street Journal by LPS Analytics shows that the time it takes for a borrower to go through the foreclosure process nationally has steadily climbed in all states in the past five years, and now takes an average of 478 days, up from 302 days in early 2005.

In Florida, the average foreclosure now takes 573 days. In California, the average is 457 days, though many take less than 120 days.

"We’re seeing a mess and we’re seeing a process that takes anywhere from nine months on the short end to two or three years," said Peter Murphy, president of Tampa, Fla.-based Home Encounter LLC a realty firm.

He says that in the last week, as the documents issue unfolded, he saw 15% of all foreclosure-sales listings of bank-owned homes yanked from the market. "I would expect that if we didn’t have the judicial process, we’d be either right at the bottom, or we’d be bumping along the bottom getting ready to recover."

 Consumer advocates say the judicial process gives consumers a better chance to work out their problems. But Florida’s court system is so overwhelmed with foreclosures that last year it began calling judges out of retirement to handle hundreds of foreclosure cases a day in a forum that became known as the "rocket docket."

Economists argue the efforts are wasteful because in the large majority of cases, borrowers have already turned over the keys to the home and walked away from their loans. Others stopped paying because, they said, defaulting was the only way to get their lender to consider a loan modification.

Matt Johnson, a 37-year old preacher and schoolteacher who now lives in Tampa, Fla., bought a $250,000 home in Gainesville at the height of the market in 2006. He defaulted three years later, hired a lawyer, failed to sell the house and hasn’t made a mortgage payment in thirteen months. The home is vacant, awaiting repossession.

In California, when a homeowner defaults, the lender sends a notice, then must wait 90 days before scheduling a trustee sale of the house. The trustee sale must occur at least 21 days after it is scheduled, meaning that the quickest California foreclosures can take 111 days after default.

Samuel Kuoha, a 63-year old retired police officer and karate instructor, lost his home in El Cajon, Calif., in less than four months after defaulting on the $450,000 mortgage, which he refinanced in 2004 into a subprime loan, with payments that reset from $2,800 to nearly $5,000 per month. He says instead of serving him with papers, about 100 days after he defaulted, a bank representative gave him 30 days notice to move out.

"Next thing we know, some guy walked up to the door, and told my wife that they now owned the home, that they had bought it on the courthouse stairs," he said. Mr. Kuoha has since moved to Arizona, where he rents a house from a friend.


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