A growing share of foreclosures in states with a judicial process is slowing the pace of foreclosures that enter the market.

In the beginning of 2007, about 45% of foreclosures were in judicial states. In June, that figure stood at 62%. Analysts at Bank of America Merrill Lynch(BAC) say this is a result of not just delays from the attorneys’ general settlement early in the year, but also greater efficiency in the disposition of foreclosures in nonjudicial states.

The foreclosure process can take several years to complete in judicial states. About half of loans in foreclosure in those states have not made a payment in more than two years, according to Lender Processing Services (LPS).

Twenty-four states have a judicial process, including Florida, New York, New Jersey and Illinois. The longest process is in New York, where it takes 1,019 days, followed by New Jersey at 964 days and Florida at 806 days.

While processes vary by state, it takes notably less time to process a foreclosure in non-judicial states such as California, Georgia, Arizona and Michigan.

“The housing market is further along in the healing process in the non-judicial states,” housing analysts at BofAML say. “There was a big bubble and bust in both California and Arizona, which was driven by speculation and overbuilding. The markets struggled with soaring delinquencies and foreclosures.”

Over the past three years, these nonjudicial states aggressively cleared the bad loans, which meant dealing with price declines. This also created more volatility in these states. Analysts cite Phoenix as an example, where home prices climbed 80% during the bubble from 2004 to mid-2006 and then tumbled 55% through 3Q 2011. After clearing a large portion of foreclosure inventory, prices are now rising.

In contrast, judicial states such as New York, New Jersey and Illinois did not have big housing bubbles. From the peak, prices fell 26% in New York and 37% in Chicago. They did not have particularly high delinquency rates relative to the bubble states, but yet there is still a large foreclosure pipeline to clear.

“The bottom line is that, with a growing share of foreclosures in judicial states, the process will remain slow,” BofAML says. “We should not expect foreclosures to shock the market, but we should expect them to remain a steady headwind.”



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