The settlement, agreed to by the nation’s five largest mortgage lenders, is expected to speed up the foreclosure process by providing stricter guidelines for the banks to follow when repossessing homes.
Most foreclosures have been in limbo since fall 2010 following the so-called robo-signing scandal, when banks allowed employees to sign off on thousands of foreclosure documents a month with little verification. Lenders hit the pause button on foreclosures because they “were afraid that anything they did would be under a microscope,” said Eric Higgins, a professor of business at Kansas State University.
As a result, borrowers who were seriously delinquent on their loans have been able to stay in their homes for months, or even years without making a single payment. Nationwide, the average time it takes to foreclose on a home — from the first missed payment to the final bank repossession — stretched to 370 days during the first quarter, almost twice as long as it took five years ago, according to Daren Blomquist, the marketing director at RealtyTrac.
In some states, delinquent borrowers have been squatting in their homes much longer. In Florida, the average time was 861 days, and in New York it was 1,056 days — close to three years. “Perhaps a million foreclosures could have been pursued last year but weren’t,” said Rick Sharga, executive vice president for real estate investment company, Carrington Holdings.
But that’s all about to change, he said. “We’re going to see an increase in the speed of foreclosures and a higher number of foreclosure starts.” In fact, there are indications that the pace of foreclosures are already starting to pick up.
While overall foreclosure activity was down during the first quarter, filings were up 10% in the 26 states where foreclosures must undergo court scrutiny, according to RealtyTrac. It was in these judicial states that the processing of foreclosures slowed the most following news of the robo-signing scandal, said Blomquist. Many banks in these states stopped filing foreclosures unless they were extremely confident it would pass muster in the court. (In non-judicial states, foreclosures are reviewed by a trustee, which is a third party such as a title company and less likely to parse every legal document).
But now lenders can move more confidently, said Brandon Moore, RealtyTrac’s CEO.
In the judicial state of Indiana, for example, foreclosure filings were up 45% year-over year. And in Florida, they were up by almost 26%, according to RealtyTrac.
“The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen — both in terms of new foreclosure activity and new short sale activity,” Moore said in a statement.
The resulting flood could bring home prices down even further — yet another impetus for the banks to clear out their foreclosure pipeline as quickly as possible, said Kansas State’s Higgins.
Then, industry thinking is, the housing market would be able to get back to normal and home prices could eventually find their true value. Some industry analysts, such as the chief economist for listing site Zillow, Stan Humphries, are predicting that could happen as soon as the end of the year. Zillow estimates that home values nationwide will fall another 3.7% by the end of 2012, and that price will likely bottom out by early 2013. But, don’t hold your breath. We’re talking about 3 million homes in foreclosure, about to be in foreclosure or about to be bank-owned. I suspect this rush of inventory overhang will knock another 15% off the market, and the bottom won’t be seen until 2014. This is in keeping with Merrill-Lynch‘s earlier forecast just prior to the $26B banking free ride deal. So, if anything it could be 2015 before we hit true bottom. Hold onto those checkbooks, folks, there’s much more to come.