Quicker Foreclosures Mean Quicker Recovery

In states where foreclosures are processed quickly, the housing recovery also moved quickly compared to those states where foreclosures have languished in the courts, according to a new study.

Pro Teck Valuation Services, a national appraisal firm, found that of the largest 30 U.S. metropolitan areas, the bottom performers were all in so-called judicial states – states where every foreclosure must go before a judge before completion. By contrast all of the top ten performing mortgage markets were in non-judicial states, with eight of them in California.

“Two years ago much of the bad news was centered on California, a non-judicial state. Foreclosures were driving down prices and there were high REO discounts,” said Tom O’Grady, CEO of Pro Teck Valuation Services in a press release. “But banks moved swiftly to cut losses, peak foreclosure activity came and went, and many markets are now on the rebound. In fact, eight of our top ten metros for this month are in California.”

When the housing bubble burst back in 2007, the nation was hit hard with wave after wave of foreclosures. Overly-inflated markets like California and Florida experienced especially high default rates as homeowners couldn’t keep up with their mortgage payments. The difference in the two states’ recoveries seems to be almost entirely due to the amount of government involvement required. California does not require courts to get involved whereas Florida does. The result is that lenders have been able to offload their inventory of foreclosures much faster while Florida still has a backlog.

“It’s hard to sustain a market turnaround when 25-50% of sales are foreclosures. When foreclosures represent a significant share of total sales and their discounted prices pull down the prices of non-distressed sales, it is known as the ‘contagion effect.’ This month, that’s what is happening in our bottom ten metros, which also happen to be in judicial states,” said O’Grady. “Even though other market fundamentals are looking good, such as recent price appreciation and shrinking inventories, foreclosures are still playing a major part in holding these real estate markets back. A stable market cannot return until foreclosures play a less active role in the market.”

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on November 29th 2013 in Mortgage News

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