Mortgage laws vary state by state creating a convoluted process that is stalling a full housing recovery, a new study from the W.P. Carey School of Business at Arizona State University said this week.
The study suggests states with relatively short foreclosure processes have since moved on from the housing crisis, while states with foreclosure delays and long, drawn out processes make it more difficult for housing to recover from the downturn.
The differences are obvious to Andra Ghent, who spearheaded the academic study at Arizona State.
Some states use the judicial foreclosure process, where a court approval is required, while others require non-judicial foreclosure procedures, said Ghent, an assistant professor at the W.P. Carey School of Business.
Other states require a great deal of paperwork, including the original promissory note, while different jurisdictions enforce a longer redemption period for the borrower who falls behind on payments.
Michael Waldron, an attorney with Ballard Spahr, says conflicting laws in various states is nothing new, but rather historical in the U.S.
"This isn't a new issue; it's not unique," he told HousingWire. "This has been the way that foreclosure laws have been addressed."
He added that on the state level "there has been a divide between the judicial and nonjudicial foreclosure states." However, he added, "when a system is taxed or stressed, it tends to highlight the various systems or laws and it certainly escalates what some would view to be weaknesses or stress points of anyone system over the other."
Generally, the trend is that foreclosures take much longer in judicial foreclosure states, while non-judicial foreclosure states have a more streamlined process.
Ghent in her report says states like Arizona that don't require the involvement of courts have already moved through their backlog of foreclosures and are well into a housing market recovery despite being one of the hardest hit sand states.
Over the course of the past year, the Phoenix market experienced a sharp uptick in home prices, sparking reports of significant market improvement.
"The key is quick resolution of the situation," said Ghent. "For example, if a state requires a longer period before foreclosures can happen, then that generally means the homes deteriorate more as the borrowers realize they're going to have to leave and stop taking care of the property. This is bad for the neighbors and the property values."
The states of New York and Florida continue to experience slow foreclosures, Ghent added. In some cases, properties can end up hanging around for two years, cutting into property values and leaving entire neighborhoods distressed, the professor suggested.
Ghent indicated that now may be the time to consider a nationwide adjustment to foreclosure laws, so parties are not dealing with 50 different sets of state laws and paperwork in dozens of states.
"Can you imagine how much money, time and resources we could save, if we didn’t have 50 different sets of laws, paperwork and legal-expertise requirements?" she asks. "Again, there appears to be no real economic reason for the differences. Many of these laws date all the way back to the 1800s, and some were changed just after the Great Depression."
But Michael Waldron sees it as somewhat of an uphill battle, pitting the rights of state legislatures and laws against the desire for a federal solution that streamlines the process.
"You would really need to put together a system that takes into account all of the nuances of the various geographies and the interests of the various states," Waldron said. "That's not to say it cannot be done; it's just viewed, at least up until this point, as something that wasn't really worth tackling."
Waldron has heard noise of a desire for a national system or some type of coordination of mortgages laws across the U.S. But he adds, "to some extent, you are faced with a view that we have already gotten through perhaps the most difficult part of this and implementing this would be herculean and it probably wouldn't be able to be implemented for several more years to come."