California has more than three times as many loans that are 90-plus days delinquent or in foreclosure as New Jersey, yet at the current pace of foreclosure sales, it would take New Jersey almost eight times longer to work through its inventory.
For the past five years, it's been the norm for foreclosure inventories to be at or close to all-lime highs. But recently, the process of completing foreclosures and clearing that inventory has varied significantly from state to state, and in ways that could have equally significant impacts on regional housing markets.
The pool of distressed loans has naturally progressed from being a problem of new delinquencies to serious delinquencies to today's foreclosures. Barring a repeat of increasing new delinquencies, the next stage of working through the crisis involves moving many of these loans to real estate-owned (REO). Of course, additional loss-mitigation programs may keep some of these borrowers in their homes; at the time of this writing, there's talk of both new modification efforts and government refinancing programs.
Given the potential impact of large numbers of REO properties on regional home prices and economies, which could in turn drive a new cycle of delinquencies, it's relevant to ask whether it's better to "rip off the Band-aid" and process loans rapidly, clearing the pipeline more quickly, or whether a slower process would allow for the market to digest the distressed properties and protect home prices.
Process bottlenecks have not been uncommon. High rates of serious delinquency or foreclosure can be artificially inflated by external factors unrelated to the performance of the loans themselves. These have generally fallen into one (or in some cases both) of the following categories:
* Delays due to evaluating loans for, and executing on, loss-mitigation programs or;
* Delays due to ensuring proper process and documentation.
Loss mitigation has historically impacted the process earlier on, with servicers delaying referral to attorney or suspending foreclosures in order to evaluate loans for modification or other workout. While such efforts continue, seriously delinquent inventories have cleared to the point that this no longer stands as a significant obstacle in the process.
In 2009, loans deteriorating more than 90 days delinquent outnumbered foreclosure starts by a factor of more than 5:1; today that ratio is down to about 2:1.
On the other hand, the second item has been the main focus of the industry...