Lenders are increasingly using the courts to foreclose on delinquent homeowners in states where it's not required to reduce the risk of falling afoul of new protections.
In the first quarter, banks filed 2,348 court notices in nonjudicial states, which don't require court involvement, according to data compiled by Irvine, Calif.-based mortgage data provider RealtyTrac Inc. That compares with only seven notices in the first quarter of 2013. The shift to the courts comes after laws were passed in states such as California and Hawaii that give consumers new tools to fight foreclosure, said RealtyTrac Vice President Daren Blomquist.
"Going through the judicial process now protects lenders," said Thomas Lawler, a housing consultant and former chief economist at Fannie Mae. "Even though it takes longer, all sorts of eyes starting with the judge's will reduce the likelihood of mistakes and potential liability under new foreclosure laws."
The courts are emerging as an alternative way for lenders to move the remaining shadow inventory of foreclosed homes to the market. Banks have almost 500,000 homes in foreclosure that haven't been sold, according to Blomquist. About 10% of these "limbo" properties are listed for sale, and more than half are occupied by a former homeowner or tenant, RealtyTrac estimates.
Housing price gains have been decelerating after a 23% overall advance in the past two years ago, according to data from the S&P/Case-Shiller index. Borrowing costs are increasing, with average mortgage rates for a 30-year fixed loan rising to 4.41% last week from 3.54% a year earlier, according to Freddie Mac.
Last year's "rapid" price increases should give way to "moderating gains" in 2014, David Blitzer, chairman of the S&P/Case-Shiller index committee, said on March 25. Twelve cities in the 20-city composite gauge had monthly declines in January.
Foreclosure filings have plunged across the U.S. amid the price rebound fueled by low borrowing costs and investor purchases. Default, auction and repossession notices totaled 341,670 in the first quarter, down 23% from 2013 and the lowest in almost seven years, according to a RealtyTrac's first-quarter foreclosure report released today.
In February 2012, the $25 billion settlement by the biggest banks after regulators probed their mortgage practices applied to past wrongdoing such as the use of faulty paperwork in home seizures, said Ethan Handelman, vice president for policy at the National Housing Conference. Laws passed since then cover future violations by lenders and specify tough new penalties, he said.
California's Homeowner Bill of Rights, in effect since January 2013, subjects lenders that file unverified foreclosure documents to fines of as much as $7,500 per loan and enforcement by state licensing agencies. It also gives borrowers authority to "seek redress of material violations" of a newly enacted set of homeowner protections, according to an online summary.
The language is vague enough to convince banks that pursuing foreclosure through a court process offers more certainty and less risk, according to Blomquist. That's especially the case for expensive California homes in foreclosure, he said.
"The judicial process is a known quantity, and any legal issues can surface on the front end," Blomquist said in an interview. "It's safer than being sued and having onerous damages applied after the fact."
California homes in judicial foreclosure as of April 4 had an average value of $623,736, a 54% premium over the $404,378 average value for all distressed properties statewide, RealtyTrac data show.
Neighborhoods in Beverly Hills, La Jolla near San Diego and Orange County's Aliso Viejo were among the top five ZIP codes in California where court filings jumped in the first quarter. More than a quarter of homes now under judicial review in the state had values of at least $750,000, the data company said.
Oregon homes under court purview had a value of $273,001, or 14% above the average for all foreclosures. In Nevada, such homes were valued at $209,565, representing a 4.5% premium.
California led the spike in court filings with 1,376 in the first quarter, an increase from one a year earlier, RealtyTrac data show. Hawaii followed with 410 such filings, up from zero, and Oregon climbed to 343 from six. Texas, Nevada, Washington and Wyoming also had gains in judicial filings.
Courts are typically bypassed in 26 states and the District of Columbia where lenders foreclose by sending delinquency notices to borrowers and recording defaults at the county level, Lawler said. That's cut distressed inventory in those states and allowed for a quicker price rebound compared with the 24 judicial states with automatic court review of repossessions, he said.
The surge in court foreclosure filings, which began to gain steam in December and accelerated in the first quarter, may be part of new market assessments by banks as investors prepare for higher mortgage rates, said Handelman.
"It may be more the result of real estate fundamentals in certain places where banks are using different calculations," Handelman, based in Washington, said. "This may be the latest 'wait and see' as they try to figure out the right time to take repossession."