Why do some homeowners hang on for years in a home they can't afford, while others seem to lose their home with just a couple of missed payments? The answer lies largely in where you live, experts say.
Laws regulating the foreclosure process vary from state to state. Some, such as Texas, allow lenders to auction the property just 21 days after the notice of public sale.
Meanwhile, homeowners in New Jersey or New York could have more than a year to raise money, refinance or sell their place, thanks to a slow court system.
This discrepancy in timing can make all the difference to troubled borrowers looking to escape a ballooning payment, experts say -- especially those with a large equity stake or a house in a consistently hot market such as New York.
Enough time to sell?
Indeed, for one Brooklyn couple represented by Prudential Network of Homes agent Vincent Martinez, several months of missed payments haven’t put their home on the auction block.
The couple, who are divorcing, got in over their heads with an adjustable-rate mortgage. Although they are substantially behind and the bank is so backlogged it may take a month to get someone there to approve a recent offer, New York's slow process will leave enough time for them to sell their property before the bank can take it back. "It's not really in the court system yet," Martinez says. "I'm hoping to have it closed by Christmas."
Meanwhile, in Texas, it can be hard for agents to sell a foreclosure property before public auction -- especially if payments have been missed, says real-estate agent Ed Gonzales of Michael Berry Properties in Houston.
"It takes longer to sell these properties (than conventional listings)," he says, given the huge number of properties on the market and the difficulties of dealing with lenders and investors. "It's never soon enough," for most people calling him about their distressed properties.
Courts slow the process
Some of the states with the shortest foreclosure timelines are Georgia, Louisiana, Mississippi, Minnesota, New Hampshire and Colorado. In those states, the average time to actual foreclosure is 60 days from notice of default, compared with the national average of four months, according to Alexis McGee, president of foreclosureS.com and author of "The ForeclosureS.com Guide to Making Huge Profits Investing in Pre-foreclosures without Selling your Soul."
These states have a nonjudicial or deed-of-trust system of foreclosure, which allows a lender to foreclose on a property without court approval when a homeowner gets behind on his mortgage and the deed of trust moves into default.
In New York, New Jersey and elsewhere on the East Coast, the mandate is judicial foreclosure, which takes much longer. Under this type of state law, no power-of-sale clause is included in the contract, so lenders must take the borrower to court and get a court order to foreclose.
With civil cases backlogged for more than a year in many areas, homeowners in judicial foreclosure states often have ample time to enlist an agent and sell their home, or find new financing. In some extreme examples, owners have lived payment-free in their homes for several years, says Michael Krein, owner of Nevada Real Estate Services, which has a division specializing in foreclosures.
In Florida, McGee notes, the courts are running about two years behind on judicial foreclosures.
In markets that are still holding their own, such as New York City, these longer lead times have even given some owners the opportunity to hold out for the right price, says Martinez, who specializes in selling foreclosure properties.
For lenders, the long foreclosure timeline in some states means more red ink, as the missed loan payments and court costs stack up. "It actually discourages some of the lenders," says attorney Judon Fambrough, at Texas A&M's Real Estate Center. "With a bigger risk on the other end, the underwriting standards tend to be harder," he says, which makes getting a loan harder for buyers in those markets.
Complicating matters are right-of-redemption clauses. These clauses allow homeowners in many states to buy the house back for the amount of the note plus interest, McGee says.
In states such as New Jersey, this right expires just a few days after a sale. In Minnesota or Alabama, the previous owner has up to a year to buy it back, causing headaches for new buyers or investors if they don't get the previous owner to waive this right.
The market matters
A long foreclosure process is no guarantee that owners can sell their house and avoid foreclosure. In parts of the Rust Belt where many foreclosures are lingering on the market, another four months might not give an owner enough time to move the property, even at a discounted price, agents say.
And in hot markets such as California, Nevada or Florida, where real-estate values shot up quickly before cooling, many recent buyers are stuck with a note worth much more than their house, says James Gaines, an economist and colleague of Fambrough's at the Real Estate Center. "They can't afford to pay a 6% real-estate commission and come out whole," he says.
Also, if the mortgage has been securitized or sold on the secondary market, finding someone with the authority to agree to a short sale could be difficult, Gaines says.
Fambrough and others say many foreclosures can be avoided if people call their lender and try to work something out before they miss a payment. Most lenders, he says, don't want to incur the costs of the foreclosure process.
And many are actually waiting a bit longer than the state requires, Gaines says, just so they can give buyers a better shot at keeping their home.
"The practical reality," he says, "is that it will probably take them a month or two" to act. And, he says, if the borrower is working actively to do something about his debt and can prove it, often he can get them to delay or freeze the foreclosure process until paperwork is received and a modification worked out.
The first two calls homeowners in trouble should make are to their lender's loss-mitigation department -- not collections -- and to a local real-estate agent who can figure out how much their house will sell for and how long it would take, says Rick Sharga, vice president of marketing for foreclosure listings firm RealtyTrac.
"As soon as you get your notice" of default, Sharga says, "you are behind the eight ball."
