Why a foreclosure takes forever and ever
Blame courts? Blame servicers? Blame borrowers themselves? Yes, yes and yes. Here's why foreclosures can take hundreds of days to sort out.
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Six hundred days. That's the average time mortgage loans in foreclosure in New York have been delinquent.
That's the longest average in the nation, but not by much, according to LPS Applied Analytics, a research firm in Jacksonville, Fla. Loans in foreclosure in Florida, New Jersey, Hawaii and Maine have been delinquent more than 500 days, on average, while home loans in California and Nevada have been delinquent 461 and 427 days, respectively. In the two speediest states, Nebraska and Wyoming, loans in foreclosure are delinquent by an average of 358 days. (Bing: What's the U.S. average for foreclosure length?)
Those statistics raise a question: Why do foreclosures take so long?
Some states use a judicial foreclosure process. The causes of delays in the 23 judicial-foreclosure states include backlogged courts, antiquated systems and judges' schedules, says Shari Olefson, an attorney with Fowler White Boggs in Fort Lauderdale, Fla., and author of "Foreclosure Nation," a book about the subprime-mortgage crisis.
In one case, Olefson says, "We went down for the hearing and the judge said, that morning, 'You are moved to (another) judge,' and we went to that judge, and the earliest hearing date he (had was in) April."
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The problem may be most severe in Florida, which largest foreclosure volume in the country, says Rick Sharga, senior vice president at RealtyTrac, a foreclosure-information service in Irvine, Calif. The backlog in Florida has been so severe that the state has set up separate courts and brought in retired judges to handle foreclosure cases.
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Government officials and agencies cause delays through temporary moratoriums, mandatory mediation sessions and loan-modification or assistance programs such as the federal Home Affordable Modification Program.
Mortgage servicers, the companies that process monthly loan payments, have been equally ill-equipped to handle the large volume of foreclosures. While it may seem counterintuitive, they have reasons to drag their feet:
- Servicers' philosophies and directives are "constantly in flux," Olefson says. One may need to raise cash to meet regulatory guidelines, while another may have too much unsold real estate on its books. Staid corporate cultures and high staff turnover contribute to slow decision-making.
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- Servicers don't want to take on the legal and financial responsibilities of owning more homes. As soon as the foreclosure is complete, the lender "immediately assumes liability and carrying costs," Sharga says. These costs include property taxes, casualty insurance, repairs and maintenance, and homeowner-association dues.
- Lenders are loath to write off losses on unpaid loans. "Foreclosure typically isn't making a profit," Sharga says. "It's minimizing a loss. It's hard to get the (investors) who own the notes excited about spending more money to execute a foreclosure. Ironically, the longer these things take, the more it costs."
- Lenders securitized and sold many of their loans to investors, whose objectives may conflict. One investor may want to foreclose quickly and take the cash, Sharga says, while another might want to keep the loan and pressure the borrower to resume payments. Disagreements lead to process paralysis.
- Lenders may be especially unwilling to negotiate settlements with borrowers who own expensive homes and are believed to have fraudulently hidden other assets in overseas bank accounts, Olefson says. "The banks are a lot less likely to settle because their feeling is that (the borrower) has assets somewhere or will have assets," she says.
- A rumor, true or not, that the Federal Deposit Insurance Corp. may take over a lender can cause disruptions and delays, Olefson says. Lenders, investors and borrowers tend to think they'll get a better loan-workout deal if the government agency steps in, but that's a "complete misconception," she says. (Bing: Find information on the most recent 'failed banks')
Years ago, foreclosures usually were uncontested, but today, homeowners are more likely to hire a foreclosure attorney to stall the outcome, Olefson says.
"Foreclosure used to be a one-sided deal," she says, "but now, we have borrowers' defense counsel out drumming up business."
Bankruptcy and other court filings can delay a foreclosure, but these actions may be costly for the borrower. Default interest, force-placed insurance, property taxes and legal fees can all end up on the borrower's account and may be subject to a deficiency judgment in some states.
"Until that summary judgment is issued, and there is a foreclosure sale, the borrower is responsible," Olefson says.
Borrowers who want to speed up a foreclosure often are out of luck. Unless the lender will approve a short sale or accept a deed in lieu of one, the process must move forward along its long, slow course.
With the economy in the tank, jobs hard to find, and real estate prices at or near bottom, you have to wonder why the lenders foreclose at all. Forelcosure won't help the economy, and a lot of good people, unemployed or self employed and not earning what they historicall have earned, WILL pay once things turn around.
Meanwhile, all of the modification programs require that the borrower be able to make the new payment, and so the borrower simply doesn't qualify for the modification.
None of it makes any sense at all.l