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Foreclosures Slowed by Well-Meaning Legal Reforms

Nevada’s foreclosure-reform law was meant to instill confidence in the housing market, ensuring potential buyers they would have a clear title as resolution of the robo-signing scandal dragged on.

Foreclosure Sign
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Foreclosure Sign

Instead it has had the unintended consequence of delaying the market from clearing.

Since Nevada’s law went into effect in October 2011, the time it takes to foreclose has increased 37 percent, reaching an all-time high last month of 464 days, according to a new report by ForeclosureRadar.

Nevada’s law makes it a felony for a party to foreclose on a property without first legally proving that it holds the mortgage. That raised the bar for foreclosures to move forward. The California legislature is debating a similar measure as part of a legislative package called the “Homeowners Bill of Rights.”

These laws only delay a recovery, said Sean O’Toole, CEO of ForeclosureRadar.

"I completely get why folks are mad at both the banks and the situation," O'Toole said. "However, stopping foreclosures will lead to a much longer economic recovery, increased blight, fewer jobs, lower property tax receipts, and fewer opportunities for new homebuyers and investors.”

Kathleen Day of the Center for Responsible Lending said the California bill is only fair.

“This bill doesn’t do anything but say you don’t confiscate people’s property without due process of law,” Day said.

More than 2 million borrowers in California owe more than their home is worth, according to CoreLogic. That increases the risk of foreclosure, which O’Toole said is the big issue.

"The real problem is negative equity, and the only thing stopping foreclosures will accomplish is insuring that we are stuck with the negative equity problem for far longer than necessary," O'Toole said.

But some think providing homeowners with greater protections, including stopping a foreclosure when a borrower is in the modification process, could actually speed up a recovery by keeping people in their homes.

“The fact that foreclosures take however many days is not a problem of the legislature, it’s the problem of the banks,” said Kevin Stein, associate director of the California Reinvestment Coalition.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.