Recent academic research have faulted the judicial foreclosure laws for the lengthy timelines and the adverse impact on the housing market.
“The laws across states use different legal theories as the basis for mortgages, and they balance the rights of creditors and borrowers very differently,” explains Assistant Professor of Real Estate Andra Ghent of the W. P. Carey School of Business in a recent papercalling for a unified regime. “The variations started early in America’s history, and they’re not really based on economic reasons, but they’re still having a major influence on what’s happening now with the housing market.”
An earlier research paper in December 2011 by Federal Reserve Officials found that these borrower-friendly laws delay but do not prevent foreclosures.
More recently, however, research at Federal Reserve of Boston has found that foreclosure mediation efforts adopted by a handful of states including New York and New Jersey have seen some success.
“For homeowners, the home is the biggest investment they have. It is not surprising that states want to make sure that all steps are taken to ensure that they remain in their homes,” said the Fed’s Tracy.
“Many systems work well under normal circumstances when they are not stressed. But it is difficult to scale up in rare situations when there is a huge demand on resources and this is a resource-intensive process,” he said in response to critics of the process.
Todd Soloway, a real estate attorney with Pryor Cashman, says that while the majority of the borrowers do end up losing their home to foreclosures anyway, the courts ensure a sounder financial system. “The judicial process puts the onus on bankers to make sure everything is in order. Ultimately it would benefit both the borrower and the lender. It will not only keep the borrower in their homes, but also force lenders to be more responsible in their lending.”
Others argue that the delays in foreclosure process have actually helped the housing market by slowing the foreclosure frenzy on the part of banks. “Banks were competing to foreclose the fastest. Now the market is more resilient,”says Peter Ticktin, of Ticktin Law Group that uncovered the robosigning scandal in Florida. “Maybe we have greater costs and time, but there are more people in their homes, less inventory to depress the markets and the law is sacrosanct.”
— Written by Shanthi Bharatwaj in New York.