naked capitalism

A story that has increasingly become a fixture in the mainstream media is “It takes X [surprisingly large seeming number] days to foreclose.” The implications of X being a really big sounding number is of course that it is taken to mean that Deadbeats Are Living Rent Free For An Ungodly Amount of Time. This in turn incenses the respectable sorts that are offended at the idea that irresponsible neighbors are getting a break to which they are not entitled.

The premise behind this reaction is wrong. The assumption is that a combination of overloaded courts plus Bad Borrowers Gaming the System is responsible for the length of the process. The reality is more complicated. First, in judicial foreclosure states, and even in a lot of non-judicial states, foreclosure is not a speedy process even in normal times. Second, the assumption is that borrowers are not paying while foreclosures are grinding forward. As many victims of HAMP mods can attest (see here for one example), borrowers in HAMP trial mods were almost without exception told to ignore foreclosure related notices. In fact, as the servicer was processing the trial mod, it was also moving ahead with the foreclosure (and remember, quite a few people were falsely told they had to be delinquent to qualify for a HAMP mod). Unbeknownst to most HAMP participants, if they did not get a “permanent” mod, their lowered trial mod payments would be deemed to be delinquent, and they would be expected to make up the shortfall plus late fees. Thus these borrowers would be treated as having defaulted when they had been making payments and got trapped by the program’s design. Similarly, Adam Levitin and Tara Twomey wrote:

….servicers are not incentivized to maximize the net present value of a loan, but are instead incentivized to drag out defaults until the point that the cost of advances exceeds the servicer‘s default income. In other words, servicers are incentivized to keep defaulted homeowners in a fee sweatbox, rather than moving to immediately foreclose on the loan.

What the popular press accounts miss (or choose not to include) is not just that a lot of the delays are driven by the servicers, who are not only out to maximize their fees, but also avoid showing losses on second liens and home equity lines of credit. Both considerations argue for delay. But on top of that, this discussion of “averages” misses that they are mixing apples and oranges. There are foreclosures that are moving forward (and remember, “normal” foreclosures timetables are often not fast, particularly in judicial foreclosure states) and ones that will probably never happen. What happens when you throw in delinquencies where the time to foreclosure is infinity because the servicer can’t prove the trust has standing to foreclose, and no one is willing to incur the risk that they get caught trying?

That concern is not theoretical in New York, New Jersey, and Nevada. Each state, via different mechanisms, now has measures in place that are effective deterrents to filing questionable or even unverified foreclosure documents. The result? Foreclosures have come to a near dead halt in those states. For instance, in New York, pre a certification requirement, state-wide foreclosures were almost always in the 100 to 200 a day range. Now the normal daily volume is five or fewer.

In a recent post, in Florida, a state which has not seen any toughening of legal procedures but is widely reported as having long foreclosure timetables, Michael Olenick describes a widespread pattern of servicer foot dragging:

• Foreclosure defense lawyers have clients who have not paid their mortgage in years, but face neither a foreclosure nor even a negative mark on their credit report. I recently received a call from a man who said he had not paid his $1.6 million mortgage in two years but his servicer has not foreclosed, and he faces no derogatory information on his credit report; he was frustrated because he is retired and just wants to move to a cottage. This phenomenon, which apparently isn’t rare, might explain why shadow inventory reports that rely on credit reports to extrapolate shadow inventory are often dramatically lower than these calculations.

• Every year the Republican dominated Florida legislature introduces legislation to speed along foreclosures, and every year the legislation fails. I personally believe this legislation to be both immoral and arguably illegal. However, it is impossible to believe this bank beholden governmental body is willing to repeatedly bite the hand that feeds them .. unless their master makes it quietly clear that they do not actually wish to accelerate liquidations but cannot publicly admit as much.

• It is common for foreclosure mill lawyers to argue for delays in selling a home when nobody is representing a borrower. Judges, who want to clear their dockets, will rail at bank lawyers about the age of the case even while bank lawyers argue for yet another delay, while the other table — where the borrower, the defendant, is supposed to sit — is empty.

• Bank-instituted delay tactics are not limited to Florida. Not long ago I spent the day with Sean O’Toole, CEO of foreclosureradar.com. Sean knows the foreclosure world and his data is, literally, the best in the Western states he covers. He noted the same effect in CA; lender-initiated delay after delay after delay selling a home. In CA, after three delays both parties must approve a further delay but Sean said banks routinely file stipulated delays when, in fact, borrowers just want to literally move on.

• There is the well-known tendency of servicers to “lose” paperwork, where borrowers beg for mortgage modifications, short-sales, or deeds-in-lieu. These delay tactics — rather than just answering “no” to a request — make sense in this context because leaving a house in foreclosure limbo, forever, is the only solution that delays the inevitable balance sheet busting write-offs.

Attorney Lynn Szymoniak in her Fraud Digest has done a small scale study in Florida that she intends to expand. Her initial results indicate that the “time to foreclosure” numbers used for Florida are exaggerated. Note that Palm Beach County is considered to be pretty typical for the state:

How many days does it take to foreclose in Florida?…

Realty Trac provides the statistics in most stories. Realty Trac reported in January, 2012, that in Florida it took an average of 806 days to complete a foreclosure, the third longest time in the nation. New York reportedly took the longest to foreclose – 1,019 days and New Jersey was second at 964 days.

An examination of actual foreclosure cases in Palm Beach County does not support the Realty Trac findings. In this study, all of the cases filed by a major forecloser, Deutsche Bank National Trust Company (“DBNTC”), in December, 2009, were examined. DBNTC filed 170 new cases in December 2009.

Of the 170 cases, 76 cases (43.5%) remained open as of January 15, 2012.

54 of the cases were closed with entry of a final judgment of foreclosure.

40 of the cases were voluntarily dismissed by DBNTC. In many cases, a voluntary dismissal indicates the parties have reached a settlement. In foreclosures, it is also common for a bank to dismiss when the file is being transferred to another firm, a very common occurrence.
Of the cases with voluntary dismissals, the average time from filing to dismissal was 342 days.

Of the cases closed with a final judgment of foreclosure, the average number of days from the initial filing to the closing of the case was 345 days. A few cases continue long after the entry of a final judgment of foreclosure, because of post-judgment motions to re-open or set aside the final judgment. In such cases, the actual sales date was used as the end date.
Of the 94 resolved cases, 58 (62%) were resolved in less than one year.

In many of the open cases, there had been very little effort by the banks to move the case to a final resolution. It was not unusual to find open cases where there had been no docketed activity for over six months, and there were numerous cases where there had been no docketed activity for over one year.

When a foreclosure is completed, and the home sold, it is often sold for less than half of the amount of the original loan. The median sales price for existing homes in Palm Beach County fell from $406,800 in June, 2005 to $183,700 in November, 2011. A trustee may actually benefit, in the short term, from prolonging the foreclosure process because the final realized loss does not have to be reported to investors until the sale, thus allowing the trustee to delay the inevitable bad news to the investors. The servicer certainly benefits as the average servicer fees for servicing a loan in foreclosure are often three to five times the fees for servicing a performing loan.

There were a few hard-fought cases, with discovery disputes appearing regularly on the docket. In such cases, these disputes often involved delays by the banks in responding to discovery requests by the homeowner/defendants, particularly where the banks were asked to produce trust-related documents such as the Pooling and Servicing Agreement from the trust or original loan documents. Many of the cases involved Affidavits of Lost Notes and Lost Mortgages. The delays were caused by the plaintiff/bank.

Her report sets forth all the loans in question if you’d like to have a look for yourself.

But consider the implications: homeowners fighting foreclosures is not a major source of delay. Instead it is the servicers’ lethargy, inability to prove standing, desire to maximize fees rather than do what is best for investors, and efforts to preserve the value of their second liens that are major contributors and in most cases the main drivers of “delays”. Yet the media has taken up the bank flattering line that the problem is really an overloaded court system and scheming borrowers. But urban legends die hard, and I suspect this one will prove to be frustratingly durable.