Longer foreclosure process prolonging housing market pain

Daren Blomquist, vice president, RealtyTrac

As published in Scotsman Guide's Residential Edition, March 2012.

Foreclosure filings were reported on 1,887,777 U.S. properties in 2011, a decrease of 34 percent from 2010, according to the RealyTrac 2011 Year-End Foreclosure Market Report. Foreclosure activity in 2011 was 33 percent below the 2009 total and 19 percent below the 2008 total.

The report also shows that 1.45 percent of U.S. housing units (one in 69) had at least one foreclosure filing during the year, down from 2.23 percent in 2010, 2.21 percent in 2009, and 1.84 percent in 2008. Total U.S. foreclosure activity and the U.S. foreclosure rate in 2011 were both at their lowest annual level since 2007.

So is it time to declare the foreclosure crisis over? Unfortunately, no.

These dramatic drops in foreclosure activity may be artificially inflated because of foreclosure processing delays triggered by the robosigning controversy that occurred around the beginning of fourth-quarter 2010.

It took an average of 348 days to complete the foreclosure process on U.S. properties this past fourth quarter, up from 336 days in third-quarter ’11 and 305 days in fourth-quarter ’10. The length of the average foreclosure process has increased 24 percent from 281 days in third-quarter ’10, when lenders began to re-evaluate foreclosure procedures in earnest after the robosigning scandal hit.

Looking at data on the state level, the average foreclosure process in New York has increased 37 percent during the same time period. This past fourth quarter, foreclosed properties in New York took an average of 1,019 days to complete the foreclosure process — the longest of any state.

New Jersey documented the nation’s second-longest average foreclosure process at 964 days, and Florida had the nation’s third-longest average foreclosure process at 806 days. Foreclosure activity in these states declined more than 60 percent from 2010 to 2011. All three states with the longest foreclosure timelines employ the judicial foreclosure process.

These astronomically long timelines translate into a dysfunctional foreclosure process that is dealing inefficiently with the glut of distressed properties weighing down the housing market. Although longer timelines are buying distressed homeowners more time, they also are prolonging the journey toward a robust housing market recovery.

There were strong signals in the second half of 2011 that lenders are beginning to selectively push through delayed foreclosures — at least in some markets. For example, default notices starting the foreclosure process hit a 15-month high in California this past October, increasing that month on a year-over-year basis for the first time after 22 consecutive months of annual decreases in defaults.

Even in Florida, where the foreclosure process is among the longest in the country, default notices have begun to rise out of the doldrums — increasing on a year-over-year basis this past November for the first time after 19 consecutive months of annual decreases. Florida defaults increased on a year-over-year basis for the second straight month in December.

We expect this trend to be repeated in more markets throughout this year as lenders slowly but surely push through batches of deferred foreclosures that they believe can stand up to the increased scrutiny now focused on foreclosure documentation and procedures. This may mean foreclosure activity in 2012 will increase from the artificial trough of 2011 in most markets, although we don’t expect it to return to the peak of 2010.

When the housing market has finally absorbed this backlog of distressed properties, we’ll be much closer to declaring the foreclosure crisis truly over. 

Daren Blomquist is vice president at RealtyTrac. With RealtyTrac since 2001, he is the company’s primary media spokesperson and expert on foreclosure statistics and trends. Blomquist is managing editor of the Foreclosure News Report and creates foreclosure market and sales reports cited by thousands of media outlets. He interfaces with the Federal Reserve, U.S. Senate Joint Economic Committee and Banking Committee, U.S. Treasury Department, and numerous state housing and banking departments. Reach him at daren.blomquist@realtytrac.com.