Fast-Tracking Foreclosures Might Eliminate Dead Weight Losses

Along with a recent rise in bank owned real estate the foreclosure crisis drags on in the form of increasingly long timelines for completing the foreclosure process in judicial foreclosure states.  The period from first default notice to lender repossession in those states where the courts must sign off on the foreclosure or sheriff's sale, are frequently measured in multiple years.  In an article in the current issue of RealtyTrac's Housing News Report, Tom Fitzpatrick, an economist with the Federal Reserve Bank of Cleveland, says the problem is only getting worse.

Logically he says, with fewer foreclosure cases pending in the courts and fewer entering the system, one would expect to see foreclosures moving to completion faster than they were a year ago.  That however is not the case and he points to some possible culprits.  The foreclosure defense bar, those attorneys who defend homeowners in foreclosure cases, has increased in numbers since the foreclosure crises began.  Court supervised programs that mandate that borrowers and lenders discuss potential loan modifications or work out graceful exits for homeowners might also contribute to longer timelines.  But Fitzpatrick says each has existed in some places for a long time and the same pattern holds, foreclosure durations are still increasing.

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

Fitzpatrick references a Fed paper he wrote recently with colleague Kyle Fee about potential cost savings from a foreclosure fast-track for vacant properties in Ohio and Pennsylvania.  Because there was data on vacant properties in the pre-foreclosure inventory the authors were able to focus on an option for reducing "deadweight loss."  That is, when a homeowner has left a home, a protracted judicial process does not provide the protections for which it was designed.  Thus the additional cost of a judicial versus a non-judicial process has no corresponding benefit or is a deadweight loss.  The authors also wanted to know about the effectiveness of foreclosure fast-tracks for vacant properties that have come into being in recent years - what kind of benefits could these programs yield if they were fully effective?

To study the issue Fitzpatrick created three scenarios to estimate the effect fast track could have on the foreclosure timeline and the cost savings using an average carrying cost to lenders of $75 per day.  The estimates are ranges because the impact depends on which foreclosures were fast tracked and it is unknown which foreclosures were on vacant properties.  The first scenario applies fast track to the loans in Ohio and Pennsylvania that move fastest, the second applied it to loans closest to the average foreclosure duration in each state, and the third to a combination of fast and slow moving loans.

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

These savings do not take into account the negative impacts of protracted foreclosures to communities and local governments and how they might benefit from fast tracking.  These cost savings, Fitzpatrick says, are important because they illustrate that all stakeholders have something to gain from an effective fast-track law for vacant properties.

Fitzpatrick also explored what makes a fast-track law effective.  Most of those that have passed, he says, look good on paper but one has to understand the practices in individual states.  On the front end and effective program must be easy for lenders to use without infringing on homeowner rights.  In Indiana and Illinois Fitzpatrick says that new laws achieved a "laudable balance of creditors and homeowners interests" but the law is not easily usable by lenders and seem to have had little impact on foreclosure durations in either state.  Attorneys say that each law requires an evidentiary hearing "that takes about as much time as the fast-tracks would save."

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

Fitzpatrick says that a law can absolutely be crafted that will be effective in fast tracking vacant properties and tbe National Conference of Commissioners on Uniform State Laws is attempting to do this with the Home Foreclosure Procedures Act.  It is crucial that lawmakers incorporate data and feedback from practitioners, lenders, and consumer advocates in order to create laws that balance everyone's interests, address potential hurdles, and work in practice.  Each state will have its own bottlenecks and new ones can pop up at any time but Fitzpatrick is hopeful that the "deadweight losses communities, local governments, and creditors currently struggle with can be greatly reduced, if not eliminated."