Judicial Foreclosure vs. Lender Behavior
Industry Update
November 29, 2018
Source: DS News
Additional Resource:
Wharton School/University of Pennsylvania (State Foreclosure Law: A Neglected Element of the Housing Finance Debate)
To understand how judicial foreclosures affect lender behavior, Brian D. Feinstein, Professor at Wharton University, authored a brief titled “State Foreclosure Law: A Neglected Element of the Housing Finance Debate.” Feinstein explores the impact that judicial foreclosures have on borrowers, lenders, and policymakers.
The research indicates that judicial foreclosures alter lender behavior in a way that is beneficial to borrowers, keeping regulatory goals intact. Feinstein states that lenders are cautious about loan-approval decisions and offer fewer sub-prime loans in states with judicial foreclosures. Furthermore, the borrowers are not charged with higher rates as a result of costs imposed on lenders by judicial foreclosures.
Benefits to Borrowers
Mandatory judicial foreclosures are beneficial to borrowers as judicial supervision compels lenders to meet all requirements to foreclosure. The extra time consumed in court proceedings helps borrowers stay in their homes for a longer period. The costs of mandatory judicial foreclosures to borrowers are debatable, Feinstein said. Judicial foreclosures also provide a legal forum for borrowers to contest predatory loans and it also serves as a transfer payment,
Disadvantages of Judicial Foreclosures
By one estimate, foreclosures cost an average of $3,112 in judicial foreclosure states but only $2,269 in other states, it indicated. It further notes that only 21 percent of borrowers were represented by counsel at any point during the foreclosure process, and only 24 percent of borrowers even filed an answer. The brief points out that judicial foreclosures take substantially longer to complete compared to nonjudicial ones, leading to vacant properties.
Rick Sharga, EVP, Carrington Mortgage Holdings, told DS News that “ Zombie properties tend to proliferate in states that feature a judicial foreclosure process, wherein the foreclosure proceedings have to make their way through the court system. Regulations in these states have sometimes extended the foreclosure process beyond 1,000 days.” At the peak of the crisis, these foreclosures could sometimes drag on for as long as 1,300 days in states such as New York and New Jersey. The metropolitan areas with the most zombie foreclosures include New YorkNewark-Jersey City, Philadelphia, Chicago, Miami, and Tampa-St. Petersburg.
Lender Behavior
Feinstein also examined lender behavior in 14 pairs of neighboring states where one state-mandated judicial foreclosures and the other did not. The analysis revealed that lenders are less likely to approve mortgage applicants in judicial-foreclosure states than they are applicants in non-judicial states.
Approved applicants were found less likely to be offered subprime products in states that mandate judicial foreclosure. The analysis also noted that approved applicants with lower socioeconomic status are even less likely to be offered subprime products in judicial foreclosure states. Overall, judicial foreclosure requirements are associated with an approximate 2.1–2.8 percent reduction in the likelihood of loan approval and, conditional on loan approval, a 0.2–1.0 percent reduction in the likelihood of being offered a subprime loan, it revealed.
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