FORECLOSURES are taking significantly longer in states where lenders must go through the courts, and the delay may or may not be good for borrowers, depending on their circumstances. But some researchers say that dragging the process out hurts society at large.
About half of the 50 states have judicial foreclosure systems. The housing market crash so bogged down the systems in New York and New Jersey that foreclosures there have routinely dragged on for two or three years; their timelines are among the longest in the country. The national average, which factors in nonjudicial states, is about one year, according to RealtyTrac, which monitors foreclosures nationwide.
The sluggish process has caused a backlog of loans in foreclosure and is slowing the housing market recovery in judicial states, says Michael Fratantoni, the vice president for research and economics at the Mortgage Bankers Association. As of the end of the third quarter, according to the association, 6.6 percent of all loans were in foreclosure in judicial states, compared with 2.4 percent in nonjudicial states.
A study released last summer by researchers at the Federal Reserve Banks in Boston and Atlanta found that the longer properties languish in delinquency or under a bank’s ownership, the greater the negative effect on the value of surrounding properties.
“The best outcome is to prevent the foreclosure,” said Paul S. Willen, an economist and policy adviser at the Boston Fed. “But if it’s clear that can’t be done, it’s in society’s interest to get the foreclosure done as soon as possible.”
In a separate study last year, Mr. Willen and his colleagues question the basis for giving borrowers more time to try to fix mortgage problems. The study found that avoiding foreclosure was no more likely for borrowers subject to either judicial foreclosure, or laws forcing lenders to wait 90 days before beginning foreclosure proceedings, than it was for other borrowers.
Consumer advocates agree that foreclosures are taking too long in some states. High concentrations of vacant properties have taken a heavy toll on certain neighborhoods, said Michael D. Calhoun, the president of the Center for Responsible Lending in Washington. “We agree that borrowers should be considered quickly for loan modifications,” he said. “They’re more successful if they’re done early on.”
But in his estimation, the delays aren’t a result of the protections provided to consumers under the judicial process, because the court process has worked fine in “normal times.” The problem now, he said, lies with the mortgage servicers. “We had a servicing system that was totally overwhelmed by the housing boom and even more so by the housing crash,” Mr. Calhoun said. “The backlog is due to servicer errors and lack of capacity.”
Communication gaps are also a factor, says Mark S. Cherry, a lawyer who represents borrowers in the state-sponsored foreclosure mediation program in New Jersey. His clients must sometimes return to mediation sessions five or six times before finally getting a loan modification. “Persistence breaks resistance,” he said.
Courts, too, have been overwhelmed. In New Jersey, a typical year brings about 24,000 residential foreclosure filings; in 2009 and 2010, annual filings surpassed 60,000.
The courts have since had time to adjust, especially because lenders have halted the processing of thousands of old cases while they work with federal regulators on improving their practices, said Kevin M. Wolfe, the assistant director of the Civil Practice Division of New Jersey’s Administrative Office of the Courts.
New foreclosure cases are moving much more quickly, and there is no backlog, Mr. Wolfe said. The average time for foreclosures filed this year is 6.4 months.
By the time lenders begin processing those old cases, the court should be far better prepared, he said, adding, “We’re not going to be caught up short this time.”