Delinquent borrowers are beginning to see a bright side to foreclosure -- they can stay in their homes, often living rent-free as courts and banks bat around their cases for months if not years.
As of last November, it took a mortgage lender an average of 646 days to process a foreclosure and reclaim the property, according to recent data from LPS Applied Analytics, a mortgage and loan processing service firm. That compares with 394 days as of Nov. 2009 and 251 days in January 2008.
Housing analysts and lenders agree that one of the main causes of the hold-up is simply the sheer volume of post-2008 housing crash defaults overwhelming mortgage lenders and servicers—the companies to whom borrowers directly pay their loans. Currently, between 4.5 and 6 million homes are either in foreclosure or 90 days past due on paying their loans, according to estimates from Mark Dotzour, chief economist and director of research at Texas A&M University’s Real Estate Center.
But there are other factors: It’s become much more difficult for lenders to reclaim properties as foreclosed homeowners have become more emboldened. Rather than packing up and leaving their homes, many of these delinquent mortgage holders are seizing on recent legal and marketplace trends to fight back in court while remaining in their homes. According to figures from the law firm Patton Boggs, foreclosure litigation cases rose 26 percent in the second quarter of 2011, more than doubling from one year earlier, and reaching the highest level since the firm began indexing cases in 2007.
“Not only are consumers getting savvier on fighting back and protecting themselves, but in many cases, we actually have people who are sort of gaming the system now,” said Rick Sharga, Executive Vice President of Carrington Mortgage Holdings. Sharga says he has come across increasing numbers of delinquent borrowers intent on defaulting. “These are borrowers who aren’t interested in loan modification, short-sales, or negotiating settlements—they’re mostly interested in not paying until the foreclosure is over,” he said. In many cases, the borrower is completely off the hook on making payments during and after a foreclosure since mortgage loans are non-recourse, meaning the lender is only legally entitled to collect the property, and the borrower has no personal financial liability.
To be sure, not all foreclosed homeowners pursue these bold strategies, and many do in fact want to stay in their homes and make their loan payments, said Jonas Jacobson, a Boston attorney who represents foreclosed homeowners. “These homeowners are not malcontents scrubbing off the man….Everybody I work with says the same thing to me: ‘I want to pay my mortgage, but the banks won’t modify my loan,’” he said.
Jacobson says bank disorganization and inability to follow through on loan modification promises are to blame for the foreclosure lags. “The bottom line is that people are staying in their houses because the banks do not have their crap together and are falling all over themselves.”
What is clear, however, is that the 2010 “robo-signing” scandal did open delinquent homeowners’ eyes to the prospect that banks had taken shortcuts with their mortgages. During 2010, banks nationwide were caught ordering employees sign hundreds of foreclosure documents and affidavits a day without verifying that the information was correct.
The finding led federal regulators to allow millions of foreclosed homeowners to have their cases reviewed in court. To date, very few foreclosure rulings have been reversed, but the exercise has gobbled up mortgage lenders’ time and resources, said Celia Chen, a senior economist with Moody’s Analytics who specializes in housing. “It did slow down new foreclosures because servicers took extra bandwidth to make sure everything was signed perfectly,” she said.