Lenders need 13 months on average to foreclose in a judicial state, more than twice the six months it takes in a nonjudicial state, according to research from Standard & Poor's
The timelines and processes between the two systems became more pronounced in the foreclosure crisis and recent robo-signing scandals. Overwhelmed with volume, servicers and law firms are under investigation for allegedly signing affidavits by the thousands without reviewing documentation as required by the 21 judicial states and the District of Columbia.
"In both judicial and nonjudicial states, the foreclosure timeline has increased above historical levels over the past two years. In particular, the relationship between the length of the foreclosure process in judicial and nonjudicial states has generally remained constant at approximately twice as long on average," S&P analysts said. "However, in absolute terms, the difference in foreclosure timelines has become more pronounced."
Standard & Poor's studied a set of mortgages in foreclosure that were pooled into residential-mortgage backed securities between 2000 and 2007.
From 2002 through 2008, the average foreclosure took eight months in a judicial state and four months in a nonjudicial one. As the timelines increased after the crisis, so has the backlog. The amount of loans in foreclosure at 18 months and yet to be resolved is more than three times higher in judicial states.
New York had the highest percentage of mortgages still in foreclosure after 18 months, at about 58%. Among the nonjudicial states, Arizona had the lowest at roughly 11%.
"This (difference) could be due to the strict mediation required before a foreclosure can proceed in New York," Standard & Poor's said.
Analysts found no evidence to support the claim that judicial states produce more modifications.
"On an issuance-adjusted basis, loan modifications in judicial states were only slightly more common than in nonjudicial ones," analysts said. "For the more recent vintages, which have seen most of the loan modifications, we consider the difference minimal."
Unless the government announces a new program that requires modifications, volumes will likely decline as the pool of eligible borrowers dwindles, according to Standard & Poor's.
For servicers, analysts found "a high degree of correlation" between increased foreclosure timelines and higher losses on those loans. Increased interest and legal expenses on loans that remain unresolved in the courts, and fewer improvements on homes that actually make it to foreclosure, pushed loss severities higher in judicial states.
Recent legal issues
with robo-signers and the validity of Mortgage Electronic Registration Systems
to transfer its interest in a mortgage also will push foreclosure timelines higher.
"In our opinion, one thing seems evident: The spike in litigation involving mortgage foreclosures, especially against mortgage servicers, is delaying foreclosure activity and increasing costs," analysts said.
As for those holding RMBS bonds, foreclosure timelines may not be a bad thing. In the near-term, the transactions with lower concentrations of mortgages in judicial states should perform better, according to Standard & Poor's. But as home prices creep upward, loans that spend the longest time in foreclosure will benefit the most.
"Longer foreclosure timelines could be beneficial to RMBS bonds in the event that housing prices begin to trend upward," analysts said. "Potentially higher liquidation values could be realized when a home is sold (as a result of the increase in home prices), and this could reduce the loss severity compared with an earlier liquidation of the loan."
Write to Jon Prior
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