Fast-Tracking Foreclosures Might Eliminate Dead Weight Losses

Along with a recent rise in bank ownedrnreal estate the foreclosure crisis drags on in the form of increasingly longrntimelines for completing the foreclosure process in judicial foreclosurernstates.  The period from first defaultrnnotice to lender repossession in those states where the courts must sign off onrnthe foreclosure or sheriff’s sale, are frequently measured in multiple years.  In an article in the current issue ofrnRealtyTrac’s Housing News Report, TomrnFitzpatrick, an economist with the Federal Reserve Bank of Cleveland, says thernproblem is only getting worse.</p

Logically he says, with fewer foreclosurerncases pending in the courts and fewer entering the system, one would expect tornsee foreclosures moving to completion faster than they were a year ago.  That however is not the case and he points tornsome possible culprits.  The foreclosurerndefense bar, those attorneys who defend homeowners in foreclosure cases, has increasedrnin numbers since the foreclosure crises began. rnCourt supervised programs that mandate that borrowers and lendersrndiscuss potential loan modifications or work out graceful exits for homeowners mightrnalso contribute to longer timelines.  ButrnFitzpatrick says each has existed in some places for a long time and the samernpattern holds, foreclosure durations are still increasing. </p

Another possibility that is mentioned isrnthat lenders may walk away from low-value properties before the foreclosure is completed.  While this does happen and while it isrndevastating for affected communities, these walkaways make up on a small andrngeographically concentrated share of the market.</p

Fitzpatrick references a Fed paper hernwrote recently with colleague Kyle Fee about potential cost savings from a foreclosurernfast-track for vacant properties in Ohio and Pennsylvania.  Because there was data on vacant propertiesrnin the pre-foreclosure inventory the authors were able to focus on an optionrnfor reducing “deadweight loss.”  That is,rnwhen a homeowner has left a home, a protracted judicial process does notrnprovide the protections for which it was designed.  Thus the additional cost of a judicial versusrna non-judicial process has no corresponding benefit or is a deadweightrnloss.  The authors also wanted to knowrnabout the effectiveness of foreclosure fast-tracks for vacant properties thatrnhave come into being in recent years – what kind of benefits could thesernprograms yield if they were fully effective?</p

To study the issue Fitzpatrick createdrnthree scenarios to estimate the effect fast track could have on the foreclosurerntimeline and the cost savings using an average carrying cost to lenders of $75rnper day.  The estimates are rangesrnbecause the impact depends on which foreclosures were fast tracked and it isrnunknown which foreclosures were on vacant properties.  The first scenario applies fast track to thernloans in Ohio and Pennsylvania that move fastest, the second applied it tornloans closest to the average foreclosure duration in each state, and the thirdrnto a combination of fast and slow moving loans.</p

If loans are moving quickly and arernfast-tracked the foreclosure durations would be minimally affected, 8 daysrnquicker in Ohio and nine in Pennsylvania for a cost savings of about $24rnmillion in each state.  For therncombination scenario the time reduction would be 43 days in Ohio and 20 inrnPennsylvania for cost reductions of $129 million and $54 million respectively. </p

These savings do not take into accountrnthe negative impacts of protracted foreclosures to communities and localrngovernments and how they might benefit from fast tracking.  These cost savings, Fitzpatrick says, arernimportant because they illustrate that all stakeholders have something to gainrnfrom an effective fast-track law for vacant properties. </p

Fitzpatrick also explored what makes arnfast-track law effective.  Most of thosernthat have passed, he says, look good on paper but one has to understand the practicesrnin individual states.  On the front endrnand effective program must be easy for lenders to use without infringing onrnhomeowner rights.  In Indiana and IllinoisrnFitzpatrick says that new laws achieved a “laudable balance of creditors andrnhomeowners interests” but the law is not easily usable by lenders and seem tornhave had little impact on foreclosure durations in either state.  Attorneys say that each law requires anrnevidentiary hearing “that takes about as much time as the fast-tracks wouldrnsave.”</p

Another issue is that bottlenecks in thernforeclosure process can arise in unexpected areas.  He cites Ohio where there is a large drag onrnthe process at the back end where it can take several months (an average of 125rndays but nearly a year in some counties) from the time the foreclosure auctionrnis authorized until it is held and then another three to six months for therndeed to be recorded by the sheriff in the lender’s name.  </p

Fitzpatrick says that a law canrnabsolutely be crafted that will be effective in fast tracking vacant propertiesrnand tbe National Conference of Commissioners on Uniform State Laws is attemptingrnto do this with the Home Foreclosure Procedures Act.  It is crucial that lawmakers incorporate datarnand feedback from practitioners, lenders, and consumer advocates in order torncreate laws that balance everyone’s interests, address potential hurdles, andrnwork in practice.  Each state will havernits own bottlenecks and new ones can pop up at any time but Fitzpatrick isrnhopeful that the “deadweight losses communities, local governments, andrncreditors currently struggle with can be greatly reduced, if not eliminated.”

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.