Foreclosures Continue to Trend Down

On Wednesday, data released by RealtyTrac, the leading online marketplace of foreclosure properties, showed that foreclosure filings fell to a 40-month low in April. Last month, a total of 219,258 properties were slammed with notices of default, auction or repossession, reflecting a drop of 9% from the prior month and 34% from last year.

Foreclosures have tumbled owing to delays in processing as the lenders are facing inquiry for flawed paperwork and faulty procedures. Since the lenders are taking much longer to act against defaulting homeowners, foreclosure processing is getting delayed. Moreover, delays also occur at the time of repossessions.

In the first quarter of 2011, the overall time to complete the foreclosure process (from initial issuance of default notice to final repossession by banks) was reported to be an average of 400 days as against 340 days in the prior-year quarter.

According to the report, a total of 10 states – California, Florida, Arizona, Michigan, Nevada, Illinois, Texas, Georgia, Ohio and Colorado – accounted for more than 70% of the overall foreclosure activity in April.

During the month, foreclosure decline was lower in the judicial states, where documents need to be filed with the court, as against the non-judicial states, where no such filing is required.

The first step in the foreclosure process, issuance of default notice, dipped 14% sequentially and 39% year over year to 63,422 properties. Moreover, rate of bank repossessions, the final stage, fell 5% from the prior month and 25% from April 2010 to 69,532 properties.

According to the report, servicers are currently taking a cautious approach towards the foreclosure processes and trying to put in place a new system to deal with home loan failures. Though foreclosures are declining, they are surely going to bounce back once the mortgage servicers get out of the legal hassles. However, this is likely to take a decent time as a huge backlog needs to be cleared out.

In September-October last year, JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Ally Financial Inc. temporarily suspended foreclosures across the country, following the detection of faulty foreclosure paperwork. Flaws in documents resulted primarily from the use of “robo-signers”, who sign hundreds of documents everyday without verifying the decisive information.

Following the detection of critical deficiencies related to the foreclosure process, U.S. bank regulators along with the state attorney generals (AGs) were gearing up to take actions against mortgage servicers including JPMorgan, BofA, Ally Financial Inc., Wells Fargo & Company (WFC) and Citigroup Inc. (C). But the initiatives were dramatically held back by an inter-group bickering over the strictures of a defrayal.

Finally, on May 10, U.S. mega banks decided to pay as much as $5 billion to settle the shortcomings related to the foreclosure process. These banks are willing to cough up the amount to address the claims made by the federal and state officials for their mortgage foreclosure malpractices.

Also, in mid-April, the regulators announced an agreement, according to which the 14 largest mortgage servicers, including JPMorgan, BofA, Citigroup and Well Fargo, would review all the foreclosed loans from 2009 and compensate the losses caused by the foreclosure mess.

Whatever the settlement deal might be, it would definitely take quite long to overcome the foreclosure crisis. Additionally, falling home prices, weak housing sector as well as pressure on the lenders and servicers to provide more time to the borrowers to work out new payment program will likely lead to further delays in foreclosures.

So this is perhaps not the time to relax and believe that foreclosures will continue to fall. Instead, it would be wise to gear up for an exceptional rise in foreclosures over the next several quarters.

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