Foreclosures Take Time, A lot of Time

Plenty of ink has been spilled about the plight of struggling homeowners trying to fend off foreclosure while fighting with residential servicers that are unwilling to modify their loans. But this column won't be addressing that issue. Instead, I'll be focusing on the disadvantaged servicer.

During the housing boom, millions of Americans were taken advantage of by unscrupulous lenders and sold loans that would only stay current if the U.S. economy hadn't tanked and these mortgagors hadn't lost their jobs. Well, guess what? The economy indeed tanked, hasn't recovered a whole lot, and according to figures compiled by CoreLogic, residential foreclosures-based on the run-rate of the first quarter-will set a new record this year: 1.24 million units.

Servicers that are trying to help their delinquent customers are having mixed success with both their own loan modification programs and the government's HAMP effort. But at some point, if payments remain delinquent, a servicer is going to need to call a spade a spade and foreclose, which opens up a whole new can of worms. Going through the foreclosure process-as most any servicer can attest-isn't easy or cheap and it's getting more time consuming by the month. Rumors abound that in "judicial" states like Florida, it can take up to three years to foreclosure on a mortgagor. (A judicial state refers to taking a home by using the courts. Not all states require going through a judge.)

One vulture fund investor I know who's been buying troubled loans for almost three years said the foreclosure estimate for Florida is probably the worst-case scenario, but he fears it could become common place. "There are people [borrowers] out there who know how to play this game well," he said, requesting his name not be published. "I've seen enough of these that I can show you how to do it."

In an interview last week he laid out the steps it takes for a servicer to foreclose in Florida and how long each stage takes. In a somewhat long-winded answer to a question, he laid out the following: "You move to foreclose. They file a lawsuit. My attorney has to answer it. That can take at least a month. Then I have to serve them and that can take up to five months. First, I have to find them and there could be multiple parties involved. You might have to serve the renter."

He continued on, mentioning, "motions for summary judgment" in Florida, a process that, with the back-and-forth between attorneys, can last up to 12 months. This investor cautioned that even if he wins and moves to sell the house the homeowner can then file for bankruptcy protection, which drags the process on even longer. He added that even if he, the loan investor, wins the case he then has to evict, which can take up to four more months. "Then they have up to two weeks to move all their stuff out. But don't turn your back on them-they can lock the door on you."

This investor seemed resigned to the process and noted that he would rather modify loans (he has in the past) and work with borrowers. "You can cut their payments but that might only work for so long." He said he cut one borrower's payments by half, but the mortgagor never made a payment at all, which left him no choice but to foreclosure. In California one recent foreclosure took him 14 months.

Sam Khater, chief economist for CoreLogic, said he is aware that some states take longer than others when it comes to foreclosures, noting that judicial states definitely take longer. He also cautioned that because servicers have to deal with 50 states, potentially, there are 50 different sets of rules to deal with. "This screams for the need for a national foreclosure law," he said.

Khater, isn't advocating for such a move, but thinks a "hybrid approach might be in order" where state and local governments deal with certain issues and the feds with others. "But localities don't want their ability to deal with foreclosures crimped. They want flexibility." National servicers, of course, would rather deal with one set of foreclosure rules, rather than many.

Meanwhile, servicers and their attorneys are bracing for a whole new set of headaches in Nevada where the state just unveiled a new foreclosure mediation process for consumers. Based on a legal analysis of the rules done by Juliana Hofsommer, an attorney for Cooper Castle LLP, Las Vegas, the deck is stacked against the industry.

Before a servicer goes to mediation the firm might be required to submit documentation packages as large as 200 pages with the mortgagor filling out just three pieces of paper. In her analysis, Hofsommer writes, "How many trees have to die for a client to be in compliance with Nevada's mediation rules?"