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New foreclosures may be back to nearly normal, but the mess from the epic housing disaster in the last decade is far from gone. Bank repossessions, the final stage of the foreclosure process, jumped 66 percent year over year in the third quarter of this year, according to RealtyTrac, a foreclosure sales and analytics company. It's the largest annual rise ever recorded in bank repossessions by RealtyTrac. More than 123,000 homes went back to the bank in just three months.
"In states such as New Jersey, Massachusetts and New York, a flood of deferred distress from the last housing crisis is finally spilling over the legislative and legal dams that have held back some foreclosure activity for years," said Daren Blomquist, vice president at RealtyTrac. "That deferred distress often represents properties with deferred maintenance that will sell at more deeply discounted prices, creating a drag on overall home values."
New York and New Jersey have the longest foreclosure timelines in the nation. In both states, foreclosures can take well more than three years. New Jersey has a formidable judicial process, as well as a strong voice in nonprofit housing activists working with distressed homeowners. Those combined to keep the foreclosure process at a snail's pace, until now. Banks have finally reached a point where they can push foreclosures forward, having streamlined all the extra paces required by laws and court rulings.
"Additionally, more nonbank lenders who purchased nonperforming loans over the past couple years are moving forward with foreclosure, having passed the foreclosure moratorium of six to 12 months required by many of these purchase agreements," said Blomquist.
With the backlog finally moving, New Jersey now has the nation's top foreclosure rate, just beating Florida, which was once the poster child for the housing crash and which also has a judicial foreclosure process. Foreclosure activity in the Garden State is more than twice the national average. New foreclosures there are falling, but bank repossessions jumped 351 percent from a year ago. Atlantic City now boasts the highest metropolitan foreclosure rate. Trouble in the local casino economy now is causing more new foreclosures, but the bulk of the bank repossessions are on homes that were in default well before that.
While states like Michigan, Texas and Washington are also seeing increases in foreclosure activity, their numbers are far closer to normal levels. Foreclosure starts historically speed up between September and November before holiday moratoria set in.
"The third-quarter increases are a sign that the foreclosure market has settled into a normalized pattern close to or even below precrisis levels, and in those states the overall housing market should easily absorb the additional foreclosure activity with little impact on home values," added Blomquist.
Foreclosure activity in formerly hard-hit states, like Arizona and California, is falling. Those states had much swifter systems for processing foreclosures, and investors helped to put a floor on home prices. In New Jersey in August home prices were still higher than a year ago, but just barely, up 2 percent from a year ago according to CoreLogic. Compare that to national gains of 6.9 percent.
Now, with a slew of distressed properties hitting the market in the East, home prices could be under further pressure. Investors, apparently, are not there yet in force the way they were in the West.
"There are so many of them coming so quickly that investor demand hasn't kept pace with the new supply. That will probably change," said Rick Sharga, executive vice president at Auction.com, a real estate auction company.
A lot of the properties, added Sharga, are either still occupied or not suitable for owners yet. They will need to be rehabbed before they're worth anything. Also, companies like Auction.com, which investors follow, are not a part of the auction process in those judicial states, because auctions are usually done by local county sheriffs.