If anyone says foreclosures are tapering down, ask them for proof. If they give you “proof” ask them what they’ve been smoking. ~ PCQ
Third Quarter 2013 Statistics. Here is the link to the Q-Law third quarter foreclosure charts based upon numbers provided weekly from First American Title Company. For comparison, attached here are the first quarter charts and here are the second quarter charts.
As we know, all of the Big Banks made an abrupt 180 degree turn last summer, after the double whammy they took, compliments of the Niday decision and Senate Bill 1552. So to avoid the continued drubbing they were taking in court for their non-judicial foreclosures, and avoid having to look their borrowers in the eyes with mandatory mediation, they went postal judicial. That is, they cancelled all of their pending non-judicial sales,[1] and started over again by filing their foreclosures in court.
Here’s my immediate reaction to the 3Q numbers: Newsflash! Foreclosures are not decreasing significantly.[2] In judicial filings alone – which is where the action is, the number of new filings tell the story.
- Clackamas County – 1Q = 339; 2Q = 454; 3Q = 437
- Multnomah County – 1Q = 585; 2Q = 737; 3Q = 744
- Washington County – 1Q = 383; 2Q = 576; 3Q = 447
Based upon the numbers alone, it would appear that foreclosures have increased over the year – not decreased. As I mentioned in footnote 1, the Big Banks cancelled their non-judicial sales scheduled for the last half of 2012. So, the January 2013 judicial filing numbers may include the formerly cancelled non-judicial sales. But if that is true, what are we to make of the size of the second and third quarter judicial filings? One would have thought that the first quarter of 2013 would have been artificially inflated, i.e. consisting of the regular flow of judicial filings plus the formerly non-judicial filings. After that, the numbers should have settled back to fewer filings, not more. Time will tell. If the 4th quarter numbers drop significantly, it may give us a hint that the flow of foreclosure filings is starting to ebb. But if they do not moderate, it means that 2014 will be more of the same.
The Pig Through the Python. Here is another take on what these statistics are telling us about foreclosures in the Tri-County area: They are moving at a snail’s pace. Picture this:
- Once a file is referred to a law office for foreclosure, someone, likely a paralegal, must open the file and order a title report from the title insurance company, so they can properly identify all of the defendants to name in the foreclosure. This way, at the end of the process, the property is either returned to the bank, or to the highest bidder at the sheriff’s foreclosure sale, stripped clean of any other claims, including the borrower’s.
- Then someone has to figure out where to serve all of the defendants, which could include lien claimants, the IRS, homeowner associations, and one or more junior lenders holding security interests in the property. Of course, sometimes the most difficult task is to locate the borrower, if they have moved out of town or out of state. If they cannot be located, service must be effected through “publication,” a process involving getting court approval [after a showing that the attorneys have conducted a diligent search] to place a series of notices in a newspaper of general circulation, reciting the identity of the missing borrower(s), and the fact of the lawsuit. After the expiration of a specific period of time, the defendant is deemed to have been “served,” and due process has been met.
- Only after service has been effected upon all named defendants, can the foreclosure begin in earnest. As noted on the face of the summons, which is attached to the complaint, the person or entity served has 30 days to file an “appearance.” If they do not, the bank attorneys can take a “default” against them, thus permitting the court to enter a judgment, giving the bank the relief sought. After the judgment is entered, the property must be advertised in a newspaper of general circulation for 30 more days. Thereafter, a sale date is arranged with the county sheriff’s office, the house is posted with a notice and the defendant is served with it proclaiming the date of sale. That notice must precede the sale date by at least 28 days.
- Unless waived by the borrower, he or she has a mandatory 180-day right of redemption following the sale – i.e. he or she can repurchase the property by paying the amount paid at the sale.
If the judicial process described above applied only to the borrower(s), it would be one thing. But invariably, the title insurance report includes everyone with any conceivable interest in the property, including unknown “persons in possession” which might be tenants or squatters.
Moreover, the county courts have rules about how long a complaint can go unanswered. As mentioned above, the summons tells defendants they will be defaulted if they don’t file “an appearance” within 30 days of the date of personal service. However, getting all the necessary paperwork together and getting every named defendant served can take months. Usually, it cannot be accomplished within the time permitted by court rules. That means the bank attorneys must ask the court for an extension of time, before seeking a default. In some instances the court will simply dismiss the foreclosure complaint, forcing the attorneys to start all over again.
So what this all means is that no matter how quickly the banks can refer cases to their foreclosure attorneys,[3] it is like a pig being swallowed by a python – very slow and painful to watch. And the statistics show this. Of all the foreclosures, each of the quarterly charts show the percentage of those that have actually gone to final judgment, i.e. ready for sale:
- Clackamas County – 1Q = 10%; 2Q = 13%; 3Q = 12%
- Multnomah County – 1Q = 9%; 2Q = 12%; 3Q = 14%
- Washington County – 1Q = 11%; 2Q = 16%; 3Q = 13%
At these rates, if no other foreclosures were filed, it would still take almost a year to clear out existing foreclosure inventory. And when the six month right of redemption is factored in, it means that it would take another half year, just to get the foreclosed property back into the market.
What Does This Say About Housing Price Trends? Well, if I’m trying to sell my home, and I have some equity, I will have to consider what other comps, i.e. comparable listings and sales, are telling me. If I want to list for $300,000, will buyers be interested? Yes, if there are a limited number of comparable homes available for $300,000. No, if the banks are selling comparable homes for $250,000.
The point is this: As long as foreclosures continue to return properties to the marketplace at discounted lender REO prices, the marketplace will remain artificially depressed. Right now, housing inventory in the Portland-Metro market is at historic lows, keeping prices inflated. If it is true – and we don’t know for sure, because the banks aren’t talking – that the banks are controlling the spigot, fearful of flooding the market with REOs, that might help.
Conclusion. Back to the topic at hand – are foreclosures tapering off? It does not appear so. And what is most distressing is the fact that for the Big Banks, at least, judicial foreclosures in the Tri-County area are taking a year or more. While we don’t know if the federal government’s law forgiving the income tax on debt cancellation will be extended into 2014, it seems likely. But 2015? That seems less likely. Yet for every borrower who is sued in foreclosure in 2014, there is a real possibility that the actual sale will not occur until 2015. If so, and the forgiveness law is not carried over into 2015, it could mean that borrowers who receive a 1099-C in that year, may have to pay income taxes on the “phantom income.”
[1] And true to form, rather than tell folks their non-judicial sales were being cancelled, the Big Banks said nothing. On the scheduled day of the sale, the trustee simply didn’t call the sale. The result was predictable. Many borrowers, believing that the process was finally completed and they could move on, did so, only to find out 6+ months later, when the process server knocked at their door, that the bank was now suing them in court over a foreclosure they believed had already occurred. And for those living in condos or townhomes with HOA dues, they learned they were still personally on the hook for them, since they had stopped paying after the date of the scheduled non-judicial sale. Neat, huh? Is it any wonder the Big Banks are so roundly reviled? Dale Carnegie’s book, “How to Win Friends and Influence People” apparently wasn’t on the required reading list at the Big Bank Training School For Avarice & Greed.
[2] It is correct that the 3Q stats for Washington County did drop significantly. But there may be an explanation for that, it is hard to know. Washington County has been very stingy in permitting foreclosure lawyers get extension after extension to complete their paperwork. It is possible that the reduction in filings may reflect nothing more than the lawyers taking more time to get their paperwork together in that county – rather than filing first, and then trying to collect everything necessary to complete the foreclosure.
[3] This is not to say the Big Banks are all that anxious to foreclose. In many instances they are not. This is not because the milk of human kindness flows through their already hardened hearts, but because if they are acting solely as a servicer [and not the owner] of the loan, the longer a non-performing loan stays in the pool, the longer they get paid. And servicing non-performing loans is much more profitable than servicing performing loans. Thus, the compensation motive acts as a disincentive for big servicers to actually be more efficient. Great business model, huh?
