Editors Note: This article was originally featured in the July edition of DS News.
Perhaps it was more than coincidence that a successful postapocalyptic television series began the year after the Great Recession ended. AMC’s zombie show “The Walking Dead” has become incredibly popular, but zombie homes, which still dot and blot cities across the country years after the housing downturn and foreclosure crisis, are most certainly not.
“With houses in permanent limbo, whether a zombie title or a blight-and-vacancy issue, it drives down property vaues and it destroys local government’s ability to maintain basic services because the revenue is not there anymore,” said Ohio State Rep. Jonathan Dever, a Cincinnati-area attorney who has worked on both sides of foreclosure cases and introduced a fast-track foreclosure bill in 2016. “It affects our schools, our neighborhoods, and is devastating for families, too.”
CoreLogic reported nearly 7.8 million foreclosures from 2007 through 2016, with the peak coming in January 2011. The state of Florida experienced a foreclosure rate of nearly 12.5 percent in June of that year. By comparison, the national foreclosure inventory rate was 0.8 percent in March 2017, down from 1 percent a year earlier, according to the property analytics firm.
Who benefits from a foreclosure system that negatively affects so many parties? The revived housing market means not only fewer foreclosures, but also a chance for all industry players to improve process flow and apply lessons learned from the Great Recession.
With new regulatory requirements, changes in costs and challenges from homeowner associations, the foreclosure market is constantly evolving. Stephen Hladik, partner at The HOF Law Group located north of Philadelphia, emphasizes the importance of establishing a better dialogue between the public and private actors to forge a process that serves the greater good. On the other hand, he points out that cities and other municipalities have become “much more aggressive” in pursuing lenders and servicers for fines and the often-exorbitant costs related to foreclosure properties, even before the lender takes title to a property.
“Unfortunately, outdated foreclosure laws can leave these homes vacant and vulnerable for years, fostering the spread of community blight,” says Robert Klein, Chairman and Co-founder of Community Blight Solutions in Cleveland, Ohio. “As long as these properties remain vacant, they contribute to a self-perpetuating cycle of blight and instability in the community. Houses that stand empty suffer structural damage from weather and climate changes, and vacant properties are hubs for crime, drug activity, and [are susceptible to] fires and become havens for squatters.”
A State of Foreclosure
Is yours a judicial or nonjudicial state? The answer can mean a difference of 280 days on average in the foreclosure process, according to Fannie Mae.
“I often jokingly tell my clients that ‘judicial’ is a Latin word meaning really slow foreclosure,” Hladik said.
Klein said that, in general, states that use mortgages conduct judicial foreclosures and states that use deeds of trust conduct nonjudicial foreclosures. The most problematic stage in the foreclosure process can be the sometimes three or four years it takes in judicial states to get the required court action on a foreclosed home. Absence certainly does not make the heart grow fonder in the foreclosure process.
“The longer properties remain vacant, the greater the chance problems will occur, including vandalism, crime, and lower property values,” said Klein, whose company focuses on two main initiatives: fast-tracking foreclosure legislation and replacing with clear polycarbonate boarding the unsightly and ever-present plywood on vacant and abandoned properties.
Hladik added, “While most counties in Pennsylvania move foreclosure cases, the judicial process certainly adds to the timeline involved.”
Pennsylvania’s foreclosure inventory peaked in August 2012 when unemployment reached 8.3 percent. CoreLogic reported that the Quaker State’s foreclosure inventory was down to 1 percent in March, which reflects a year-over-year decrease of 0.3 percentage points. Prior to fourth quarter 2015, Pennsylvania’s foreclosure timeline of nearly 2.25 years, measured from the date the borrower last paid the sale, was 36 days greater than the average for judicial foreclosure states, according to Fannie Mae data.
Hladik notes that such states—New Jersey and Delaware—are other examples. They still have longer foreclosure timeframes, but cases are “certainly” moving faster through the former’s foreclosure process than before. Also, lenders, servicers, and investors are stepping up.
“On a local level, lenders and servicers are more accurate in their valuation assessment of properties, and thus have better calculated upset bids at the public foreclosure sales,” Hladik said. “Also, we see more [foreclosed homes] being sold to third parties at those sales. This is good: it means less properties in REO management and that investors are fixing these properties up and reselling them. A rehabbed property is better for the whole neighborhood.”
Another factor pumping the brakes on Pennsylvania’s foreclosure process is the increased number of contested foreclosures. “They can literally take a few years to get to trial,” Hladik adds.
Hladik calls Pennsylvania very diverse, with 67 counties and “almost 67 different methods of conducting foreclosure sales. The main challenge in foreclosures is the costs involved these days. With the deposit to schedule a sheriff’s sale increasing from anywhere to $3,000 to $4,000, the cost has gone up enormously.”
The Pennsylvania State University graduate puts the cost spotlight on Philadelphia, where the city runs the gas, water, and sewer utilities. When a property goes to sale and the lender takes it back, it must pay all past-due taxes, water, sewer, and gas costs before obtaining the deed to the property. “This cost can be thousands of dollars and often can equate to the value of the property itself,” he said. “Foreclosure sales in Philadelphia can prove incredibly expensive.”
As a result of foreclosure costs approaching or equaling the value of many abandoned properties, lenders may decide not to foreclose, which only exacerbates the city’s blight problem.
As Stern & Eisenberg, P.C.’s lead attorney for Maryland, Virginia, and the District of Columbia, Kevin Hildebeidel has his expert eye on various backlogs in different states and other municipalities. For example, D.C. courts are concerned about approximately 3,000 foreclosure cases still on the docket after being inadvertently stalled between 2010 and 2012. In downstate New York, 80,000 outstanding cases not surprisingly draw substantial focus.
“One would think that in a truly up market, some of these houses would regain equity and therefore, owners might be inclined to cash out,” says Hildebeidel. “Unfortunately, the length and complexity of judicial foreclosure proceedings still gives borrowers the upper hand when it comes to delay and costs. Many appear to prefer staying in the house effectively ‘rent free’ during the pendency of the case.”
The system breakdown goes further than judicial versus nonjudicial to types of judges, elected or appointed. Hildebeidel maintains that the former are not inclined or even “loathe” to order any kind of adequate protection payments or equitable payments to balance the scales in this stalled scenario.
“Until this can be accomplished, a large number of cases may continue to linger in the judicial and particularly the elected judicial states,” he added.
Although a bill is presently pending before the state legislature, Pennsylvania does not have a statute providing for streamlined foreclosures of vacant or abandoned properties. Hladik notes that the time and cost involved in foreclosing a vacant property exceeds that of an owner-occupied property. “This is because the lender must obtain orders for special service of process and also must publish notice of the foreclosure, thus escalating time and cost,” he added.
The second major geographical difference, other than the judicial versus nonjudicial state foreclosure setup, is seasonality and weather, according to Jerry Rowell, Managing Director of Assurant Field Services. Vacant properties require higher levels of preventative maintenance and, therefore, tend to have increased risk exposure.
“Thirteen out of 21 predominantly judicial foreclosure states are located primarily on the East Coast and northern tier,” Rowell said. “The seasonal weather extremes in those states cause challenges to the industry when maintaining vacant properties. Examples of this are freezing winters and humid summers where conditions can seriously damage or cause hazards to properties.”
Lessons from Losses
Positive things arose from the foreclosure crisis, as well they should—some gain ought to come from the considerable pain. Lenders and servicers are much better equipped in loss mitigation and borrower assistance, according to Hladik.
“More than 20 counties in Pennsylvania have adopted mediation programs, and the early intervention in the foreclosure process has assisted many borrowers,” Hladik said. “These types of programs simply did not exist more than 10 years ago.”
Hildebeidel reminded that another hard-hit aspect of the housing crisis was the image and reputation of lenders and servicers. “The pendulum of public opinion has swung very far against them,” said Hladik. “But, for the most part, they kept doing business, which means they kept paving the way, so to speak, to the American Dream of homeownership, which is on sound footing once again.” And to support Hladik’s point, those mortgage companies didn’t stop at business as usual.
“Robust loss mitigation processes exist for homeowners who find themselves in financial difficulties and the processes are working well for most of the participants,” Hildebeidel said. “This safety net should be counted as a very positive development.”
The industry trauma and resulting regulatory response has also led to better data and workflow management.
“The review of foreclosure complaints and documentation and verification of chains of assignments and perfected endorsements of notes is much better than previously,” Hladik said. “The records maintained by lenders and servicers are better and the information communicated to attorneys on files has improved.”
Lenders and servicers are definitely running tighter ships, although many will argue that, from a regulatory standpoint, the improved document controls amount to a small positive in the face of the very big burden in time and expense. Costs involved with foreclosures continue to rise.
Hildebeidel raises the question of statutes of limitations challenges a full decade after the start of the housing crisis. He reports that some states such as Maryland have changed or attempted to change statutes specifically to try to prevent aged debt collection. Case law continues to address the due, default, and “accelerated” status of loan payments and how statutes of limitations apply to the different conditions.
“It should be noted that continued challenges and tightening of statutes of limitations has the somewhat perverse effect of hastening the movement of defaulted loans into the foreclosure process and perhaps abrogating long loss-mitigation processes in favor of more immediate action and resolution,” stated Hildebeidel. “There is no immediate remedy for such an unintended consequence, only the continuing process of educating and explaining to judges and elected officials.”
Caroline Reaves, CEO of Mortgage Contracting Services, sees an increased need for property registration as more municipalities require loan servicers to register properties attached to loans in default.
“It used to be servicers might be required to renew a registration or update it annually,” said the CEO of the more than 30-year-old national mortgage services company based in the Dallas-Ft. Worth metro. “Now, many municipalities require multiple updates to a registration based on the status of the loan and the property. If any updates are missed, it is possible for the penalties to amount to $100,000 on a single property.”
Becoming more and more expensive, registration fees are based on the length of time the property has been vacant or foreclosed and, in some cases, can amount to $5,000 a year, Reaves reported.
“Another trend we are seeing involves bond fees, which are becoming increasingly popular with municipalities and can be as high as $25,000 per property,” she explained. “In some cases, only a portion of that money is refunded once the servicer is no longer responsible for the loan.”
Recent legal precedent has the potential to dramatically shorten some foreclosure processes, according to Hildebeidel. An Eleventh Circuit Court ruling last year after a Florida bankruptcy court appeal held that a debtor who surrenders a residence in bankruptcy must withdraw opposition to state foreclosure actions as the surrender signifies abdication of such rights and claims. The debtor’s failure to abide by the apparent surrender amounted to breaking their commitment to the bankruptcy court and an abuse of the whole process. This decision will continue to tie bankruptcy and foreclosure more closely together, Hildebeidel asserted, although other jurisdictions, including Hawaii, have already dissented.
Not only a mortgage, bankruptcy, title, and real estate tax sale legal expert, Hladik also served as Deputy Attorney General in the Harrisburg office of the Pennsylvania Bureau of Consumer Protection. He sees promise in the economic, institutional, and legislative momentum with regard to the current foreclosure system.
“Legislation being enacted across the country that can streamline the foreclosure timeline on a vacant or abandoned house benefits many different stakeholders: the lender, the neighborhood where the property is, as well as the municipality that relies on that property for tax revenue,” said Hladik.
Diane Bowser, Executive Vice President, Special Servicing, at Houston-based Selene Finance, said the words “speed,” “expedite,” and “foreclosure” don’t typically go together, and can even feed the “dangerous perception” that the servicer is doing something wrong. However, the new expedited foreclosure process on confirmed vacant properties in Ohio, Maryland, New York, and New Jersey do offer a welcome light in a previously dark part of the housing industry.
“How often do you see a solution that makes all parties happy? Hopefully, we see this practice picked up by even more states,” she added.
Rep. Dever, sponsor of successful fast-track foreclosure legislation that became law in October of last year in the judicial state of Ohio, says good policy speeds up the process while blending together the needs of the property owner, lender, and local communities. The complexity of the foreclosure system is daunting — there are multiple parties and “various states of legal limbo,” from city-owned properties to land banks to sheer zombie titles to other shades of gray — but the major and multifaceted costs demand full focus and effort.
“Many people realized that the system was broken at so many different levels,” Dever said. “When these properties get abandoned, it doesn’t take very long before they become less valuable and more complicated and expensive to fix up. We had to do something, specifically when most of these cases would end up in court for years at a time without resolution.”
Unprecedented economic forces triggered horrific joblessness and millions of foreclosures during the downturn. The toll the recession took on people across the country perhaps clouded another dark side, the wave upon wave of abandoned homes that flooded a wholly inadequate foreclosure system.