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February 28th, 2012

Foreclosure rate falls as system slows

by Peter Miller


Foreclosure Exit SignThe national foreclosure rate fell at the end of 2011, news that will come as a relief to many.

According to the Mortgage Bankers Association, 4.38 percent of all loans outstanding were in the foreclosure process at the end of the fourth quarter. That’s down 0.26 percent from a year earlier.

The picture is not so rosy for all forms of financing, however. Specific foreclosure levels looked like this:

  • Prime mortgages overall: 3.28 percent
  • Subprime loans overall: 14.45 percent
  • FHA mortgages: 3.54 percent
  • VA mortgages: 2.37 percent

Foreclosure totals could be far higher

What these numbers do not show is that a large number of foreclosures have been delayed. If the financing system was functioning as it should then the foreclosure totals would be far higher.

“States with non-judicial foreclosure systems are seeing the backlog of foreclosures clear more rapidly and are down to an average rate of 2.8 percent,” said Jay Brinkmann, the MBA’s chief economist. In contrast, the percentage of loans in foreclosure in the judicial system states has hit an all-time high of 6.8 percent, almost two and a half times higher than rate for non-judicial states.”

In other words, in states where lenders must go to court, the foreclosure process has been slowed by the necessity of having to prove that the lender owns the note and has not been paid.

Sometimes slower is better

The new robo-signing agreement between five major bank servicers and 49 states will also slow the system–but protect borrowers against false claims and lenders against the consequences of inadequate record keeping.

According to law firm Ballard Spahr’s Mortgage Banking Group, under the new agreement, “information in foreclosure affidavits must be personally reviewed and based on competent evidence.” Such language is getting at the issue of robo-signing and making the practice of quickie foreclosures very difficult.

Prior to 2011, it appeared that large numbers of foreclosures were based on foreclosure affidavits that were completed without a full review. For instance, 60 Minutes has reported that in one case a document company allegedly hired an employee to forge up to four thousand foreclosure affidavits per day.

There are several simple, yet important pieces of information in the foreclosure affidavit that should be personally reviewed, and the foreclosure process requires more than a computer print-out (because data entered into a computer system can be wrong) and a clerk to complete such documents. There ought to be someone who thoroughly reviews the actual documents and has the ability to know when there is or isn’t a problem.

Improvements could lead to reduced costs

Will the quest for accurate foreclosures raise mortgage rates? If anything, there should be a reduction of loan costs. Here’s why:

If we make the system better there will be fewer wrongful foreclosure claims. That’s good for mortgage investors who don’t want foreclosures and it’s certainly good for homeowners who do not want to unfairly lose a house. And while a better system may take more time, look at the chaos that could have been prevented with a slower system.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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