Written by Jack Broad
It’s been a while since my last article. I’ve been fully tied up with client requests and projects. In any case, let’s get down to business.
In this article, I want to convey some thoughts about foreclosure timelines. What they are and how they can impact various market participants. Recently I performed an analysis of state-level foreclosure timelines. Here’s some of what I found.
The biggest fact that jumps off the page about timelines, especially foreclosure timelines, is the HUGE disparity that exists from state to state. For example, we restricted our study to those loans that have fully completed the foreclosure process within the last year and found that the average number of months before the borrower’s right to title in their home is extinguished is:
Fastest Foreclosure States (listed alphabetically)
State #Mths
Alabama 2.34
Arkansas 3.08
DC 2.70
Georgia 2.58
Maryland 2.79
Michigan 3.22
Missouri 2.06
New Hampshire 2.88
Tennessee 2.15
Texas 2.85
Virginia 1.89
Maybe that’s not such big news but compare it against the following list of the slowest foreclosure states
Slowest Foreclosure States
State #Mths
Delaware 6.92
Florida 6.13
Iowa 8.54
Illinois 7.28
Indiana 7.23
Kentucky 7.34
Louisiana 6.19
Maine 8.83
New Jersey 7.51
New York 7.05
Ohio 8.03
Pennsylvania 7.10
Vermont 8.39
Holy Smoke!! What a difference! Why is this important to know about?
Does anyone see an almost distinct regional influence in the above? For example, most of the New England states are in the slowest group. While Southern states (except Florida) tend to be more in the fastest group. Why on earth would states like Georgia, Alabama, Texas and Virgina be, what appears to be, almost fanatically fast when it comes to getting people out of their homes when states like NJ, NY, PA, FL do it in a, comparatively, leisurely frame of mind. For anyone in foreclosure, it usually is a pretty stressful situation. You know, maybe you feel a bit degraded and wonder how could things have gotten so bad – all that kind of thinking. Whether it’s a fast process or a slow one – you’re generally caught up in a situation that feels like “something has gotten out of control” in ones own life. But let’s continue to look at this a bit more dispassionately for a moment.
As far as foreclosure timelines go, SLOWER is definitely better for the borrower. It’s obviously worse for the lender because they don’t get to recoup any of their money for a much longer period of time. For the sake of this example, let’s say that a person who becomes delinquent on their mortgage is NOT PAYING at all – in other words, the person isn’t even paying a little bit of money – just nothing being paid to the lender at all. This is the usual state of affairs when a person becomes delinquent. Additionally, it should be known that the person is not able to be evicted or thrown out of their house, at least until the foreclosure process has been completed (and, strangely, in some states not even then). So how much money does a person “save” by not paying their mortgage. For purposes of some simple math, let’s make a ballpark estimate of a $200,000 loan size and an average mortgage rate of 8%. Keep in mind that some states like California have a much higher average loan size.
Let’s say that Pete lives in Missouri and he goes 30 days delinquent (1 missed payment), then 60 days delinquent (2 missed payments) and then the lender gets the foreclosure process started on Pete. According to the above Pete can stay in his house for another two months. This adds up to a total of 4 missed payments. So let’s see:
$200,000 * 8% = Annual mortgage payment of approximately $16,000. That’s approx a monthly payment of 1,333.33 (these figures are not exact but close enough to get this point across)
So 1,333.33 * the 4 months Pete got to skip out on his mortgage payment and he ends up “saving” $5,333.32 in interest.
But if Pete lives in New York, he saves $12,000.00 – an additional $6,666.67! So basically he’s living RENT FREE for at least 9 months (at least 2 in Pre-Foreclosure and another 7 during the actual foreclosure process itself).
In Maine (almost 9 months in foreclosure), Vermont (8.4) and Ohio (8) he saves even more money by not paying.
Now let me make it very clear that I’m not advocating to people that they not live up to their financial obligations. Definitely not, but the point I’m making here is: “How come there’s so much disparity from state to state?” I know the typical answer is that foreclosure laws and timelines are statutory, meaning they are created by state legislatures. How is that possibly right? Is it fair that a guy up in Michigan, who may have been laid off due to the meltdown of the auto industry there – he gets only 3 months of foreclosure process before he’s given the boot, whereas a guy who works on Wall Street and who’s living in NJ and who just got the can because of the mortgage market meltdown – he gets to not pay his mortgage for 7.5 months. If the guy in NJ has a much higher loan amount he will save even more money because of this.
Or how about in Texas where the PRE-foreclosure timeline is only 2 months. 2 missed payments and they rush you, (guns ablazing I guess) into foreclosure. Other places, it’s 90 days at a minimum. But not the lone star state of Texas. 2 missed payments and you’re in foreclosure. Consider yourself “corralled” by the foreclosure “lasso”. Then two months later, you’re out on the street. In fact, in Texas they have a lovely name for the date each month when they do their foreclosures – it’s called “Texas Tuesday”. Isn’t that cute? Tell that to the guy who’s getting shoved out of his house, while the guy up in Delaware has about another 5 more months before he gets the official boot. That additional 5 months gives a person a lot more time to try to figure out an alternative solution. Call his friends, relatives, look for a 2nd or 3rd job. Whatever! He at least has more time during which to solve his problem. He also “saves” much more money by simply not paying his mortgage. These “fast foreclosure states” barely give someone any time to think – let alone solve their financial problems and they’re OUT of the house.
Once a person is in foreclosure, their credit is basically shot to hell anyway, so why try to pay at all? Add to this the fact that the housing market has depreciated so fast recently – which has caused many borrowers to have zero or negative equity (the house is worth less than the mortgage they’re paying) that it’s now become a “bad financial transaction” for the borrower. Again, I’m now looking at this in a “dispassionate” dollars and cents way. What do you think a trader on Wall Street would do with a “bad trade” he’s gotten into? Hopefully, he’d get the hell out and FAST so as to stop losing money. And to hell with whether the borrower’s credit is bad. Credit (FICO for example) can be rebuilt in time. In the meantime, stop paying the damn mortgage and push that money towards something else. Set aside that money for rent for after you officially don’t own the house any more. Save it to be able to pay for gas for the winter. How about maybe using that “saved” money for the very basic necessity of survival – FOOD for the kiddies. Compare food and shelter to whether your credit score is good and I’m pretty sure I’d know which way people are gonna bounce on that decision if they have to exercise their “option” not to pay anything at all towards their mortgage. The guy can’t be put in jail for not paying his mortgage in this day and age – so he’s not worried about ending up behind bars because of not paying. The threat of “debtor prison” is long gone in this country.
As an aside, my father, who retired to Vermont just told me that he’s had to pay 8,000 towards heating oil for his house for the coming winter because of the rising prices of gas – he’s trying to head off the rising price by paying now at a specific price because if he waits until the winter, lord knows how high the price is going to be – so he’s trying to save money by buying now.
I must emphasize that I am NOT advising anyone to actually do the above. I’m just giving what I think are some of the thought processes that may go through a borrower’s mind. Lenders have got to be mighty worried about the current state of rising delinquencies in the overall mortgage market place.
Timelines increasing
Three other factors can work to INCREASE the timelines beyond what I’ve described above.
First of all, my understanding is that if a person is in foreclosure and declares bankruptcy it puts, at least for a few months, a “stay” (stops the process) on the foreclosure process. Obviously this is going to increase the amount of time the person is living “rent-free” (so to speak). I’ve heard stories of people declaring bankruptcy, stopping the foreclosure process. Coming out of bankruptcy, then the foreclosure process starts again. Then the person declares bankruptcy again which stops the foreclosure process again. And so it goes. You can think “isn’t that a scam?”. Maybe, but maybe not. The individual is permitted certain activities in our society and that is one way to do it. In the meantime you get to stay in your house without paying a dime. As Don King used to say: “Only in America.” Actually, it probably exists in other countries but I digress…
Secondly, in some states, even after the foreclosure process has been completed, you are not allowed to even evict the person before a certain amount of time has elapsed. What!! You’re kidding right? It’s true. Let’s say you’re an investor and you’re hungry for foreclosure sales because you think you’re going to get a great deal by paying a really low price for some house that’s in foreclosure. So you go to the foreclosure sale at the right time and bid on the house and voila!! You’re the lucky winner. Your bid was higher than anyone else’s. Your bid was even LESS than the full amount that was owed to the original lender AND the lender accepted your bid. Great deal right? Um… Hang on a second… The house you bought is in the lovely state of Vermont. Guess what? The person still gets to live in the house RENT-FREE and LEGALLY for another 6 months!! THEN you can start eviction proceedings (which might take a bit of time if the guy decides to hole up in his house with supplies, ammo and a few wonderful guns). You’re kidding right? This is a joke right? Nope, no joke. You cannot even start eviction proceedings until the full 6 months have gone by. Also, the person is still living in that house. During that time you can drive by the house and look at it wistfully if you want – people might look at you a bit strangely. Not only that but if the borrower were to actually come up with all the monies he owed – he could pay off the bank and reclaim the house. Oh my god. What a nightmare. You’re livid. You’re now gnashing your teeth and busting up the furniture in your house instead of drinking Crystal. Yup – you made a bad trade (as they say on Wall Street). This period of time after the foreclosure sale where the original borrower can still stay in the house is known as the “redemption rights” period. Not all states have it but you’d best make sure before you get suckered into buying some “great” piece of real estate only to find out you don’t actually own it yet.
One other strange fact is that, of the slowest states given earlier, only Michigan has a “redemption rights” period (6 months). This makes the rest of the slower states even more egregious in their “rush to get people out of their houses.”
Thirdly, case loads. As the U.S. descends into uncharted real-estate economic territory, foreclosures are rising fast. What’s that going to do with the legal and court systems responsible for pushing all these foreclosures through. Think of that poor Texas sheriff who now has to sell 100’s of properties on his “Texas Tuesday”. He’ll probably have to come up with a “Texas Wednesday” and “Thursday” and “Friday”. Hell maybe even a “Texas Fortnight”. Somehow that doesn’t evoke much sympathy from me. Poor sheriff – 2 months delinquent. Into foreclosure for another 2 months and onto the streets with your rear end. He’s so stressed by all the additional foreclosures he’s having to deal with. Awww. Poor guy. But seriously, don’t you see the “log jam” on the horizon? Actually, it’s closer than the horizon. Lordy, it’s RIGHT HERE on our doorstep. That does agree with the results I’m seeing in the data. In other words the timelines ARE increasing – but not quite as much as I would have thought … yet.
At this point, my ability to be dispassionate has just about gone into orbit and I’m left in a state of complete “flabbergast” (if there isn’t such a word, I’m officially declaring there is one now).
If my parents or my brother and his family ever have trouble in Vermont, it appears they’ve got not only 8.4 months of average foreclosure timeline, but then have another 6 months redemption rights period. If they spent 4 months being “merely delinquent” before the foreclosure process kicked in, then that’s 18.4 months of rent-free living. Let’s throw a bankruptcy somewhere in there and maybe the Vermont legislature wanting to help people out by extending the Vermont statutory foreclosure timelines. Man-o-man. Who would have thought that possible? We’re looking at maybe 2 years of rent-free living man. Of course, I think ammo and survival supplies are probably unnecessary even though Vermont was a famous gun state historically speaking. I’m also pretty happy about the fact I live in Florida.
At this point, I no doubt need a disclaimer for cya purposes (or is it cma purposes?): Obviously, you should always consult an attorney and your financial advisor.
What I definitely would advise people to do though is NOT to get suckered into companies who, knowing the above, will try to get you to do what I’ve described above and then charge you some percentage of what you’ve “saved” by simply not paying your mortgage. To me, that’s simply taking advantage of people’s fear and non-comprehension and is a pretty unethical practice at best. When you have the ability to pay, you really should live up to your financial obligations. After all, you signed on the dotted line. If you can pay, do so.
Okay, so at this point we’re probably in agreement that it’s a pretty unfair situation for such disparity to exist between the states. What should be done about it? Some states are attempting to increase their foreclosure timelines such as Massachusetts and Colorado. Try searching on Google for “foreclosure timelines” and you’ll be able to confirm most of what I’m talking about here.
I understand the idea of permitting each state to handle its own destiny but it almost forces people to know about these issues before even moving into a particular state. Maybe the federal government should step in and say: “Too much complexity. Too un-standardized from one state to the next. Too much disparity and unfairness. Here’s how it’s going to be.” In this case, I personally think it would be a good thing to standardize the processes and procedures surrounding timelines. I have a 1500 page tome of a book from the US Foreclosure Network which gives state by state descriptions and details (by lawyers unfortunately) that is simply amazingly complex. Trying to sort through that morass of information is one of the more difficult and somewhat unpleasant things I’ve studied in recent memory. To my mind, there’s simply no reason for it to be that complex.
What’s amazing to me is I have seen almost nothing about the disparity I talk about above in the financial press. How could some of these simple observations be missed – if someone knows of some sources where this is talked about please let me know.
It should be noted that we also studied the PRE-foreclosure timelines on a state level and as you’d expect, in general, it averages between 2-4 months (30 – 120 days) before someone is herded on into foreclosure. But some states (such as Texas mentioned earlier in this blog) average on the low side of even the pre-foreclosure figure. I mean what’s the big rush Texas? (I’m not really expecting Texas to actually answer this question, but thought I’d give it a try anyway.)
To my mind this article gives information about one of those things where “truth is stranger than fiction”. Anyone else have experience with this? If so, I would really welcome your thoughts.
Sounds like it’s a good time to invest with companies that specialize in rental properties.
Coming Next: “REO” (real estate owned) timelines
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