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Judicial States Will Lag Behind Recovery: Capital Economics

While the housing market is starting to show signs that it is strengthening, for some states, recovery still seems to be in the very distant future. According to a report from ""Capital Economics"":http://www.capitaleconomics.com/, one factor that will determine the speed of recovery for individual states is the type of foreclosure procedure used.

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""While the national housing market is in the early stages of a recovery, many of the judicial foreclosure States which are struggling to clear their backlog of foreclosures will lag behind,"" said Paul Diggle, author of the report and property economist for Capital Economics.

The ""Mortgage Bankers Association"":http://www.mbaa.org/default.htm (MBA) categorizes 21 states as judicial and 29 as non-judicial. In a judicial state, lenders must go through the courts to pursue a foreclosure whereas in a non-judicial state, lenders can foreclose on a property without court approval.

Since lenders in judicial states have to go through the courts first, this leads to a lengthier process when pushing foreclosures through the pipeline, leading to a higher number of homes in foreclosure inventory.

The effect of the buildup of foreclosure inventory can lead to lower home prices for those states. Capital Economics pointed to FHFA data which revealed the differences in home prices between judicial and non-judicial states.

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The research firm stated that based on numbers from FHFA's fourth quarter home price index, in judicial states, prices decreased 0.3 percent quarter-over-quarter and dropped 2.3 percent year-over-year compared to non-judicial states, which posted a 0.3 percent quarterly increase and a yearly decrease of 1.6 percent.

""We think that differences in foreclosure procedures will continue to affect State-level house price trends, with non-judicial States outperforming. After all, as foreclosure pipelines are brought down to healthier levels in non-judicial, high burn-through States, supply conditions can more rapidly tighten to the point that they support price growth,"" the report stated.

Whereas in judicial states, Capital Economics stated that ""the trickle of foreclosures onto the market over a much longer period will continue to keep supply conditions relatively loose.""

MBA recently reported in its first quarter 2012 delinquency survey that foreclosure inventory in judicial states is 6.88 percent, while in non-judicial states, it's only 2.77 percent.

In response to the data, Michael Fratantoni, MBA's VP of research and economics, in a release said, ""The problem continues to be the slow-moving judicial foreclosure systems in some of the largest states. While the rate of foreclosure starts is essentially the same in judicial and non-judicial foreclosure states, the percent of loans in the foreclosure process has reached another all-time high in the judicial states.""

Rob Pitingolo, research assistant with the ""Urban Institute"":http://www.urban.org/, emphasized that it’s not the judicial process itself that is the problem, and explained in states such as Florida, the reason why there’s a backlog of foreclosures is because of a lack of resources.

Florida has re-hired retired judges to help the courts manage the high number of foreclosures.

Pitingolo added that the judicial process is designed to protect borrowers by preventing fraud and allowing more time for homeowners to work with their lenders.

About Author: Esther Cho

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