Along with a recent rise in bank owned
real estate the foreclosure crisis drags on in the form of increasingly long
timelines for completing the foreclosure process in judicial foreclosure
states. The period from first default
notice to lender repossession in those states where the courts must sign off on
the foreclosure or sheriff's sale, are frequently measured in multiple years. In an article in the current issue of
RealtyTrac's Housing News Report, Tom
Fitzpatrick, an economist with the Federal Reserve Bank of Cleveland, says the
problem is only getting worse.
Logically he says, with fewer foreclosure
cases pending in the courts and fewer entering the system, one would expect to
see foreclosures moving to completion faster than they were a year ago. That however is not the case and he points to
some possible culprits. The foreclosure
defense bar, those attorneys who defend homeowners in foreclosure cases, has increased
in numbers since the foreclosure crises began.
Court supervised programs that mandate that borrowers and lenders
discuss potential loan modifications or work out graceful exits for homeowners might
also contribute to longer timelines. But
Fitzpatrick says each has existed in some places for a long time and the same
pattern holds, foreclosure durations are still increasing.
Another possibility that is mentioned is
that lenders may walk away from low-value properties before the foreclosure is completed. While this does happen and while it is
devastating for affected communities, these walkaways make up on a small and
geographically concentrated share of the market.
Fitzpatrick references a Fed paper he
wrote recently with colleague Kyle Fee about potential cost savings from a foreclosure
fast-track for vacant properties in Ohio and Pennsylvania. Because there was data on vacant properties
in the pre-foreclosure inventory the authors were able to focus on an option
for reducing "deadweight loss." That is,
when a homeowner has left a home, a protracted judicial process does not
provide the protections for which it was designed. Thus the additional cost of a judicial versus
a non-judicial process has no corresponding benefit or is a deadweight
loss. The authors also wanted to know
about the effectiveness of foreclosure fast-tracks for vacant properties that
have come into being in recent years - what kind of benefits could these
programs yield if they were fully effective?
To study the issue Fitzpatrick created
three scenarios to estimate the effect fast track could have on the foreclosure
timeline and the cost savings using an average carrying cost to lenders of $75
per day. The estimates are ranges
because the impact depends on which foreclosures were fast tracked and it is
unknown which foreclosures were on vacant properties. The first scenario applies fast track to the
loans in Ohio and Pennsylvania that move fastest, the second applied it to
loans closest to the average foreclosure duration in each state, and the third
to a combination of fast and slow moving loans.
If loans are moving quickly and are
fast-tracked the foreclosure durations would be minimally affected, 8 days
quicker in Ohio and nine in Pennsylvania for a cost savings of about $24
million in each state. For the
combination scenario the time reduction would be 43 days in Ohio and 20 in
Pennsylvania for cost reductions of $129 million and $54 million respectively.
These savings do not take into account
the negative impacts of protracted foreclosures to communities and local
governments and how they might benefit from fast tracking. These cost savings, Fitzpatrick says, are
important because they illustrate that all stakeholders have something to gain
from an effective fast-track law for vacant properties.
Fitzpatrick also explored what makes a
fast-track law effective. Most of those
that have passed, he says, look good on paper but one has to understand the practices
in individual states. On the front end
and effective program must be easy for lenders to use without infringing on
homeowner rights. In Indiana and Illinois
Fitzpatrick says that new laws achieved a "laudable balance of creditors and
homeowners interests" but the law is not easily usable by lenders and seem to
have had little impact on foreclosure durations in either state. Attorneys say that each law requires an
evidentiary hearing "that takes about as much time as the fast-tracks would
Another issue is that bottlenecks in the
foreclosure process can arise in unexpected areas. He cites Ohio where there is a large drag on
the process at the back end where it can take several months (an average of 125
days but nearly a year in some counties) from the time the foreclosure auction
is authorized until it is held and then another three to six months for the
deed to be recorded by the sheriff in the lender's name.
Fitzpatrick says that a law can
absolutely be crafted that will be effective in fast tracking vacant properties
and tbe National Conference of Commissioners on Uniform State Laws is attempting
to do this with the Home Foreclosure Procedures Act. It is crucial that lawmakers incorporate data
and feedback from practitioners, lenders, and consumer advocates in order to
create laws that balance everyone's interests, address potential hurdles, and
work in practice. Each state will have
its own bottlenecks and new ones can pop up at any time but Fitzpatrick is
hopeful that the "deadweight losses communities, local governments, and
creditors currently struggle with can be greatly reduced, if not eliminated."