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For years, the housing bust has had a huge impact on the economy. Yet four years on from the worst of the financial crisis and with recent evidence of a modest but measurable upturn in home prices, you'd think that we would already have put the biggest wave of mortgage foreclosures behind us.
Instead, we've seen foreclosures rise dramatically in certain parts of the country, with New York, New Jersey, and Connecticut seeing particularly big jumps in foreclosures. The New York metropolitan area led the nation with a 69% increase in filings related to the foreclosure and repossession process, even as much of the rest of the country saw declines. All this raises an important question: Will the foreclosure crisis ever end?
A slow-motion train wreck
At first glance, it seems ridiculous that we're only now seeing a big jump in foreclosures in certain parts of the country. After all, five of the biggest mortgage lenders in the country -- Bank of America (NYSE: BAC ) , Wells Fargo (NYSE: WFC ) , Ally Financial, JPMorgan Chase, and Citigroup (NYSE: C ) -- have already settled allegations of misbehavior in handling foreclosures. In other words, in some places, the foreclosure process got done so quickly that there was time for homeowners to file complaints, state attorneys general and regulatory agencies to gather evidence, and for the long process of litigation to go far enough to lead to a settlement.
But to understand how certain parts of the country could really just be getting started with their biggest waves of foreclosures, you need to take a look at the laws governing foreclosures. In particular, two different frameworks for repossessing a home have a lot of differences, with one method requiring a whole lot more time than the other.
How to foreclose on a home
In simplest terms, the foreclosure process falls into two categories: judicial and non-judicial. Under states that recognize non-judicial foreclosures, lenders typically give notice of a default in various public forums, including through newspaper publications and postings at local offices where property deeds are recorded. After various waiting periods go by during which the borrower can take steps to get out of default, the next step is to give notice of a future foreclosure sale, sometimes also known as a trustee sale if a deed of trust is involved. Once the sale takes place, usually by auction and typically requiring immediate cash payment, the lender takes the proceeds and the buyer gets a deed to the property that transfers the title out of the name of the defaulting borrower.
Judicial foreclosures are typically a lot more complicated. As the name suggests, judicial foreclosure requires court intervention, with opportunities for filings, hearings, legal notifications with ample waiting periods, and other time-consuming requirements. Lenders have to pay legal fees for attorney representation and show evidence of their right to foreclose on the property in question. With borrowers having far more opportunity to make counterarguments about the foreclosure and to engage in delaying tactics, judicial foreclosure can take a long, long time.
What the law says
One big reason that foreclosures are only now starting to spike on the East Coast is that many Eastern states, including the three mentioned above, require some form of judicial foreclosure. By contrast, California, Nevada, and several other hard-hit states with massive numbers of foreclosures in recent years allow non-judicial foreclosure methods. In particular, the length of time it takes for a typical New York foreclosure process to get done is quickly approaching three years, whereas New Jersey is well over the two-and-a-half-year mark.
Moreover, the spike in foreclosure activity could mean a new wave of claims against Genworth Financial (NYSE: GNW ) , Radian Group (NYSE: RDN ) , and other players in the mortgage insurance industry. Only once foreclosures finally make it all the way through the system is it possible to determine once and for all what their liability will be.
As impatient as everyone is to make the housing bust history, the overhang of foreclosures could still take a long time to get sorted out. That's bad news for the neighborhoods affected by these proceedings, at least in the short run, but it has to happen before the housing market can return to some semblance of normality.
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