No Return to Normal for Mortgage Litigation

The Fourth Quarter 2012 Litigation Index shows 934 litigation cases were reported in 2012, up 15% compared to 2011. Image: ThinkStock

At least one insider sees no return to a normal level of mortgage litigation for the foreseeable future.

Litigation is gradually decreasing, says Christopher J. Willis, a partner at Ballard Spahr, but those who expect the mortgage related litigation rate to wind down alongside the national foreclosure and delinquency rate need to take a second look at the data.

The author of a white paper that analyzes the Mortgage Daily’s litigation index warns that data suggest “foreclosure activity is converting into litigation at a higher rate.”

Data reported since 2007 when the index started show “the current magnitude of mortgage litigation is still higher than any of the numbers at hand,” Willis wrote.

The Fourth Quarter 2012 Litigation Index shows 934 litigation cases were reported in 2012, up 15% compared to 2011.

Index findings indicate that while litigation activity in the mortgage industry is dwindling down, “there are signs it could remain above historic levels as foreclosure, investor and regulatory litigation persists,” Willis said.

During the last two quarters of 2012, however, the trend reversed as the 223 cases reported in the fourth quarter marked a roughly 5% decline compared to third quarter, and 15% lower than the record 264 cases in the second quarter of 2012.

Willis warns that while “it is tempting to link the decrease in overall litigation numbers with the decline in foreclosures and mortgage delinquencies,” it does not appear to be the case.

The foreclosure litigation category in the index increased by nearly 30% in 2012 compared to 2011, but foreclosure litigations represent over 50% of the cases reported. Plus in this category the index is double the increase for the overall index during the fourth quarter.

Loan modification litigation cases also reached the highest level in seven quarters, followed by investor litigation at a five-quarter high.

The six highest total litigation index numbers so far were reported in the last six quarters based on data gathered between 2007 and the third quarter of 2011. And since the index was initiated as the foreclosure crisis began the litigation database offers statistically significant information.

“The accumulated weight of continued publicity, governmental enforcement actions and evolving theories of liability for mortgage servicers are all contributing to this trend," Willis wrote.

It means that, even though mortgage delinquencies and foreclosure numbers are moving in a lower direction, “the level of foreclosure- and delinquency-spawned litigation may continue to persist at its current high levels."