For years, the
housing bust
has had a huge impact on the economy. Yet four years on from the
worst of the financial crisis and with recent evidence of a
modest but measurable upturn in home prices
, you'd think that we would already have put the biggest wave of
mortgage foreclosures behind us.
Instead, we've seen foreclosures rise dramatically in certain
parts of the country, with New York, New Jersey, and Connecticut
seeing particularly big jumps in foreclosures. The New York
metropolitan area led the nation with a 69% increase in filings
related to the foreclosure and repossession process, even as much
of the rest of the country saw declines. All this raises an
important question: Will the foreclosure crisis ever end?
A slow-motion train wreck
At first glance, it seems ridiculous that we're only now seeing a
big jump in foreclosures in certain parts of the country. After
all, five of the biggest mortgage lenders in the country --
Bank of America
(
BAC
) ,
Wells Fargo
(
WFC
) , Ally Financial,
JPMorgan Chase
, and
Citigroup
(
C
) -- have already
settled allegations of misbehavior in handling
foreclosures
. In other words, in some places, the foreclosure process got
done so quickly that there was time for homeowners to file
complaints, state attorneys general and regulatory agencies to
gather evidence, and for the long process of litigation to go far
enough to lead to a settlement.
But to understand how certain parts of the country could
really just be getting started with their biggest waves of
foreclosures, you need to take a look at the laws governing
foreclosures
. In particular, two different frameworks for repossessing a home
have a lot of differences, with one method requiring a whole lot
more time than the other.
How to foreclose on a home
In simplest terms, the foreclosure process falls into two
categories: judicial and non-judicial. Under states that
recognize non-judicial foreclosures, lenders typically give
notice of a default in various public forums, including through
newspaper publications and postings at local offices where
property deeds are recorded. After various waiting periods
go by during which the borrower can take steps to get out of
default, the next step is to give notice of a future foreclosure
sale, sometimes also known as a trustee sale if a deed of trust
is involved. Once the sale takes place, usually by auction and
typically requiring immediate cash payment, the lender takes the
proceeds and the buyer gets a deed to the property that transfers
the title out of the name of the defaulting borrower.
Judicial foreclosures are typically a lot more complicated. As
the name suggests, judicial foreclosure requires court
intervention, with opportunities for filings, hearings, legal
notifications with ample waiting periods, and other
time-consuming requirements. Lenders have to pay legal fees for
attorney representation and show evidence of their right to
foreclose on the property in question. With borrowers having far
more opportunity to make counterarguments about the foreclosure
and to engage in delaying tactics, judicial foreclosure can take
a long, long time.
What the law says
One big reason that foreclosures are only now starting to spike
on the East Coast is that many Eastern states, including the
three mentioned above, require some form of judicial foreclosure.
By contrast, California, Nevada, and several other hard-hit
states with massive numbers of foreclosures in recent years allow
non-judicial foreclosure methods. In particular, the length of
time it takes for a typical New York foreclosure process to get
done is quickly approaching three
years
, whereas New Jersey is well over the two-and-a-half-year
mark.
Moreover, the spike in foreclosure activity could mean a new
wave of claims against
Genworth Financial
(
GNW
) ,
Radian Group
(
RDN
) , and other players in the mortgage insurance industry. Only
once foreclosures finally make it all the way through the system
is it possible to determine once and for all what their liability
will be.
As impatient as everyone is to make the housing bust history,
the overhang of foreclosures could still take a long time to get
sorted out. That's bad news for the neighborhoods affected by
these proceedings, at least in the short run, but it has to
happen before the housing market can return to some semblance of
normality.
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Fool contributor Dan Caplinger owns warrants on Wells Fargo
and JPMorgan Chase.You can follow him on Twitter @DanCaplinger.
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