Delinquent mortgage squatting time set new record in 2011
Foreclosures don’t take forever, but they certainly do take a very long time. Foreclosure used to be a deterrent to prevent borrowers from becoming delinquent on their loans. Now that the process takes so long, the prospect of two years of free housing is actually becoming an inducement for strategic default.
Published: Thursday, 1 Dec 2011 — 9:30 AM ET
By: Diana Olick
CNBC Real Estate Reporter
Foreclosures are setting new records again, this time not in their overall numbers, but in the time it is taking for all of these properties to be processed through the legal system. The average loan in foreclosure has now been delinquent a record 631 days, according to a new report from Florida-based Lender Processing Services.
631 days. That is quickly approaching two years. The process is supposed to take about six months, not two years. How many people have been induced to strategically default because the know they can get two years of free housing? Why would anyone struggle if they know the rewards for not paying?
The after effects of the so-called “robo-signing” foreclosure paperwork scandal, now more than a year old, continue to plague states which require these cases to go before a judge.
The differences in processing times are blatant when you compare judicial versus non-judicial states. Non-judicial state foreclosures inventories are less than half those of judicial states, and foreclosure sale rates in non-judicial states are four to five times that of judicial states.
Judges are starting to ramp up the process.
That’s good to hear. If the paperwork is in order, the process should go forward unimpeded.
Bank repossessions actually surged in October in many judicial states, up 48 percent in New Jersey and up 73 percent in Indiana month-to-month, according to RealtyTrac. Still the backlog is still enormous. Overall foreclosure inventory is at an all-time high, 4.29 percent of all active loans, according to LPS.
“The discrepancy will go on in perpetuity, as there always has been a difference between judicial and non-judicial timelines,” said Kyle Lundstedt, managing director of LPS Applied Analytics. “Even prior to the worst of the crisis, loans were 4-5 months more delinquent in judicial states at time of foreclosure sale. The number today is more like 8 months, but will return to the 4-5 month difference depending on when and how fast foreclosure sales occur.
A record-high inventory of foreclosures in process does not bode well for the near future of the housing recovery. All those distressed properties will sell at a deep discount, likely bringing down the prices of surrounding homes.
Remember how real estate bulls used to claim the shadow inventory predictions were doom and gloom? Well, we are about to find out because this inventory is working its way out of the shadows and on to the MLS. All the predictions of the housing bears will come true.
They will also add to already historically high existing home inventories, while demand is still weak. While there is considerable investor demand for distressed properties, new foreclosures are still outnumbering foreclosure sales by over 3:1. In addition to the “robo-signing” delays, we are now beginning to see the effects of ineffective loan modifications.
Loan modifications were always a delaying tactic. Banks kicked the can down the road, but now we are back at the can again. Will banks try to kick it again and permit more squatting?
Repeat foreclosures made up nearly 45 percent of new foreclosures in October. Of the 2.1 million modifications since the start of 2008 more than 10 percent were in foreclosure with another 27.4 percent delinquent 30 or more days, as of the end of the third quarter of this year, according to the Office of the Comptroller of the Currency.
I don’t see how loan modification programs can be viewed as anything other than a complete and total failure.
Lundstedt said foreclosure moratoria, process/documentation reviews, evaluation for loss mitigation and bankruptcies make up the rest of the repeat foreclosures.
As the mortgage market continues to work through the backlog of troubled loans, looking forward, loans originated in 2010 and 2011 are now the best performers on record, thanks to tighter credit requirements.
Of course that begs the question: Did the pendulum swing farther than necessary to the conservative side? Is underwriting now unnecessarily restrictive?
No, it hasn’t. Loan standards haven’t gotten strict enough until new loans stop going bad. Loan standards are designed to weed out those people who will default and fail to pay back their loans. Until loan standards accomplish their primary function, they have not become strict enough.