Let’s run though a quick refresher of judicial versus non-judicial foreclosure. Each state sets their own foreclosure laws and procedures. They generally, with a few variations, are either based on non-judicial or judicial practices.
Non-judicial Foreclosure – In states with non-judicial foreclosure, a deed of trust is held, and a default triggers a demand for payment from the trustee. The courts are not involved in this contractual arrangement. In non-judicial states, foreclosures move along more quickly with this more efficient process.
Judicial Foreclosure – In states using judicial foreclosure, a default triggers an attorney’s involvement and a filing with the court. The court reviews the documentation and process with the purpose of protecting the rights of the borrower before they lose their home.
I’m not concerned with arguing the value of either over the other. However, a recent report from Freddie Mac is indicating that judicial foreclosure is causing more NAREI workshop problems in many cases than the value it brings to the borrower or the process. After the housing and mortgage crash, a lot of new laws were put into place with the stated goal of improving the process and protecting homeowners in danger of losing their homes.
While these new laws may have helped overall, they seem to have clogged the process in some cases, mostly in judicial states. Recent studies show that the added delay involved in judicial review is on average 180 days. The average non-judicial process from default through disposition is 390 days. It’s 570 days on average in judicial states.
The delay can be either helpful or go the other way, usually dependent on what the homeowner decides to do. For those who want to keep their homes, this delay gives them more time to investigate programs or take actions to bring their mortgage current and avoid foreclosure. For those who decide it’s hopeless or they want to move, the tendency is to live there as long as possible while deferring maintenance. The homes end up in worse condition in this situation.
Costs of foreclosure are higher in judicial states. The delays increase time-related costs, such as care and security of the properties. They also result in lower sale costs due to the condition of the properties after sitting there without maintenance for longer.
Another negative impact is on neighborhoods. These homes sitting longer, often empty, are blights on the neighborhood and depress home values. It’s not likely that we’ll see states switching from one method to the other. Investors in judicial states are seeing more opportunities to buy foreclosure homes. They are mostly fix & flip or fix to hold, as their conditions are inferior. So, the savings in the purchase price are offset to some extent by rehab costs.
Freddie Mac states that these delays drag out the housing crisis healing process, and that more effort should be put into balancing protection for homeowners with repairing the damage from the housing crisis more quickly.
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