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Procedural problems cut the rate at which homes are moved from foreclosure to REO in half during October and November, but the drop did not occur in judicial states alone, according to research from Barclays Capital. In October, several major lenders froze foreclosures when employees were found to be signing affidavits without reviewing the documentation, as required by law in 23 states. As a result, the rate servicers were able to move these properties through the process into REO status dropped 57% from the first 10 months of the year. It's the lowest rate BarCap has ever measured (see chart below). But states that do not have a judicial foreclosure system saw a 47% drop as well. "This is not surprising because a borrower challenge even in non-judicial foreclosure states effectively converts the foreclosure into a judicial foreclosure," BarCap analysts said. "In addition, the judicial scrutiny was not limited to judicial states. As such, it made sense for servicers to assess and fix their processes across all states." The largest decline came in New York, where the process nearly halted completely and the rate at which homes moved from foreclosure to REO dropped by 91%. New Jersey was the next closest with a 75% drop. The shortest decrease came in California, where the rate fell 35%. The rate in most other states declined by at least 50%. When BarCap broke the numbers down by servicer, it showed that most had drops, but the rate at Bank of America (BAC) slowed to a trickle, decreasing 95%. The next highest was Goldman Sachs' (GS) Litton Loan Servicing, which had a drop of 74%, followed by the JPMorgan Chase (JPM) decrease of 52%. The robo-signing scandal pushed as many as 250,000 foreclosures ahead to 2011, RealtyTrac said Thursday, which will elevate numbers to new heights by the end of the year. All servicers restarted foreclosures in October, but a new ruling in January from the Massachusetts Supreme Court may threaten any restarts since the robo-signing scandal. The ruling, which applies only to Massachusetts cases, stated that proper assignment of the mortgage note needs to be in place before a foreclosure can be initiated. BarCap warns not to put too much emphasis on a one ruling in a single state, as what works there may not work in other jurisdictions. But analysts concede the Massachusetts ruling may be bleeding over to New York trust law. BarCap said investors may be able to claim that they were only transferred an unsecured interest in the loans since the mortgage was not correctly transferred. If this is the case, investors could sue the trustee or originator for a breach and force them to buyback the loans. "Still, Massachusetts loans form only a small proportion of all loans," BarCap said. "Further, it is yet to be established that the transfers were not enough to assign the loan as per New York law, and further legal opinions are awaited." Analysts said the rate at which foreclosures are moved to REO may not return to normal for another several quarters. Some foreclosures will need to be refiled, but it should not be a significant amount. If the worst happens, though, and widespread issues are found throughout the process and foreclosures are not allowed to carried out, the damage could mean frozen home sales and new lendng nationwide, according to BarCap. "The implications of lenders' not being able to foreclose on defaulted loans would affect their willingness to lend and the rates charged to borrowers," analysts said. "In an environment in which the administration is trying to wean the housing market off taxpayer support, this could be even more devastating to home prices and, as a result, could nudge legislative action to ensure that any valid foreclosures are allowed to proceed while keeping checks and balances in place." Write to Jon Prior. Follow him on Twitter: @JonAPrior

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