Regional housing markets in Maryland, Massachusetts, New Jersey, and New York are having a harder time rejoicing in the recovery streak that other states have been experiencing since last year. The glut of pending foreclosures and its effect on the housing market is throwing a wrench in the engine of national recovery, and it is coming down to a battle between title and lien theory states.
Judicial Versus Non-Judicial
According to a recent CNBC article by Diana Olick, in most title theory states where non-judicial foreclosures are practiced, the pace of the recovery has been significant; to wit: Arizona, California and Michigan. By virtue of their title theory statutes, jurisdictions that do not allow mortgage borrowers to establish a security interest in their properties do not generally require a foreclosure to enter the judicial system. This means that borrowers who default on their mortgages can be quickly removed from their homes in a non-judicial foreclosure proceeding.
In lien theory states such as New York, borrowers hold title to the property along with the mortgage lender throughout the term of the loan. A foreclosure in lien theory states must be filed in civil court, and a judge will rule over the proceedings. Judicial foreclosures provide borrowers with due process, but they also create a sizable backlog of court proceedings after housing markets collapse.
Backlogs for Decades
According to data compiled by mortgage analytics and servicing firm Lender Processing Services, it may take five decades for the New York State Unified Court System to get through its current massive foreclosure docket. New Jersey is faring slightly better in this regard as it would take 40 years for courts in the Garden State to turn their foreclosure dockets back down to normal levels.
While the court systems in judicial foreclosure states are fighting an uphill battle, some of their non-judicial counterparts are seeing legislation efforts that may slow them down as well. A rushed and deceitful foreclosure in Nevada, for example, could result in criminal charges filed against the plaintiffs. This new law has put Silver State banks in check, and foreclosure pipelines in Nevada have doubled in the last eight months since the law was enacted.
There is also California's new Homeowner Bill of Rights, which allows borrowers to turn a non-judicial foreclosure into a lawsuit. Such laws are designed to discourage deceptive and duplicitous tactics among banks that want to take possession of properties secured by defaulted mortgages, but they are also slowing down the recovery.
Foreclosure filings and mortgage delinquencies are still piling up in judicial states, a fact that worries housing analysts. Median home prices continue to rise and inventories are diminishing even as foreclosures still hang heavily in the air, but there are glimmers of hope. In Florida, the state with the highest foreclosure rate, regional housing markets such as Miami are truly booming. Prices in Miami have been on the rise for the last 14 months, and real estate agents are pressing local banks into tapping their distressed portfolios and allowing short sales.