Fraudulent foreclosure practices, a.k.a. “robo-signing,” uncovered now nearly two years ago, opened a new wound in the foreclosure crisis that was in the process of healing.
At big bank mortgage servicers and in courts in many states, the foreclosure process ground to a halt, and the pipeline of delinquent loans swelled to historic levels. Lawsuits abounded and lengthy settlement negotiations on all levels of government began.
Nearly two years later, the foreclosure mechanism is just starting to move again.
Foreclosure starts, the first phase of the process, rose nearly 12 percent in May month-to-month, according to a new report from Lender Processing Services. Foreclosures sales, when the property goes back to the bank or to a bidder at the courthouse steps, rose 10 percent.
The ramp-up, while still way off the volumes of 2010 (pre-robo-signing), is largely due to the $25 billion settlement reached early this year between 49 state attorneys general and the nation’s largest mortgage servicers.
“The most significant impact of the settlement to date may have been the clarification of foreclosure standards for servicers,” according to a new report from Fitch Ratings. “The clarity has helped reduce some prior uncertainty as servicers waited for the final settlement terms. This may be reflected initially in increased foreclosure initiation rates, which rose to roughly 12 percent of delinquent loans in June. This is the highest figure since first half-2009.”
There is still, however, a huge disparity between foreclosure processing in states requiring a judge (judicial) and those that do not (non-judicial). On average it takes 274 days to foreclose on a property in largely non-judicial California, while it takes over 600 days to foreclose in judicial New Jersey (numbers from ForeclosureRadar and RealtyTrac).
The foreclosure rate in judicial states is now 2.5 times the rate in non-judicial states, according to LPS.
“It is worth noting that the average year-over-year decline in non-current loans for judicial states is less than one percent, whereas in non-judicial states, it’s down 7.1 percent,” LPS’s Herb Blecher noted.
Californiaboasts one of the fastest foreclosure timelines in the nation, which is helpful given that it has the highest volume of distressed loans in the nation. That may, however, be about to change.
Last week the California state legislature passed two bills purported to protect homeowners. They prohibit dual tracking, which is when the bank tries to modify a loan while at the same time going forward with a foreclosure. It also requires mortgage servicers prove to borrowers, in documentation, that the lender has the right to foreclose. Fraudulent foreclosure affidavits would result in civil penalties.
Many of these requirements are also part of other previous settlements with the banks, and some large lenders claim they’re already doing them. Critics, however, argue that the new regulations (the governor is expected to sign the bills this week) would make it harder to enforce foreclosures and slow down the process.
On another front, some local California officials are trying to invoke eminent-domain powers to modify mortgages that are underwater (when the borrower owes more than the home is currently worth).
Eminent domain can be invoked when a property is deemed to be a blight on the community and the seizing of it would be good for the general public. Critics say it’s a stretch legally and could put yet another roadblock in the foreclosure process.
Still advocates say it’s a way to avert foreclosures and stabilize hard-hit California communities, some of which are declaring bankruptcy.
It all comes down to consumer protections versus a speedy recovery to housing. Whether it’s lenders trying to save borrowers from foreclosure through modifications and principal reduction, or laws trying to protect borrowers from faulty foreclosure processing, or inventive ways to change what is owed on a mortgage, the plain fact is that many borrowers simply cannot afford the homes they are in.
The majority of the 5.5 million properties whose mortgages are either delinquent or already in the foreclosure process will end up on the auction block.
There is a strong argument that the housing market needs to heal itself before it can grow again, no matter how painful that healing process may be. Clearly American consumers were not well-protected during the historic housing boom, nor during the ensuing bust. Laws needed to be changed, and banks needed to be held accountable and punished for fraudulent practices.
The question now is: When do we step back and let the wounds of this crisis heal?