When Judicial and Non-Judicial Lines Blur

Herb Blecher

In January 2010, at the peak of the housing crisis, national mortgage delinquencies topped out at 10.6 percent of all active loans. As we know, conditions have improved significantly since then. As of the end of May 2013, that number was 6.1 percent – representing a 43 percent decline from the peak.

However, as LPS has been reporting for years, there continue to be large differences in distressed inventory resolution between judicial and non-judicial states. The pace of recovery has clearly diverged between the two and is greatest when we specifically focus on those loans in foreclosure.

Even after years of continual improvement in the national foreclosure rate (now down 20 percent from its peak), judicial states still have foreclosure inventories that are more than three times the level of non-judicial states.

Back in January 2010, both judicial and non-judicial delinquency rates peaked at nearly the same level – 10.5 percent and 10.6 percent, respectively. What’s different is how things have progressed since that point.

Ranking the states by total non-current loans (delinquencies and foreclosures combined), we saw that six of the top 10 states at the peak of the crisis were non-judicial. As of May, only three non-judicial states remain on that list, and if we’re looking solely at foreclosure inventory, there’s just one: Nevada.

The root of the divergence is clearly constriction at the end-point of the process. In the last three years, the monthly percentage of inventory that goes to foreclosure sale in non-judicial states has averaged 3.5 times that of judicial states.

However, new legislation and court rulings in various states are exacerbating or overriding the basic judicial vs. non-judicial distinction.

Foreclosure notice and gavel

Consider New York and New Jersey – both judicial states – where foreclosure process requirements and penalties all but brought foreclosure sales to a halt. Since implementing these requirements in 2010, foreclosure sales in New York and New Jersey are 72 percent below what they were in January of that year. And while foreclosure rates in judicial states have declined about 3 percent since then (vs. a 44 percent drop in non-judicial states), New York’s and New Jersey’s have increased by 57 and 42 percent, respectively.

More recently, California, Nevada and Massachusetts – all non-judicial states – have implemented legislation or experienced court rulings that have likewise lowered the rate of foreclosure sales. The result is that these non-judicial states are now behaving more like their judicial counterparts.

The impact of these more recent changes has been less apparent to date. Still, foreclosure sale activity indicates that there is reason to believe that impact is on the horizon:

  • Nevada’s 2012 legislation requiring an affidavit from the lender prior to foreclosure has pushed foreclosure sales down 60 percent.
  • The 2012 Massachusetts Supreme Court ruling requiring lenders to prove ownership at time of foreclosure sale has resulted in an 80 percent drop.
  • California’s Homeowner’s Bill of Rights (implemented in January 2013) resulted in a 35 percent decline in foreclosure sales through Q1.

Clearly these new process changes have altered the previously established dynamic of the broad judicial vs. non-judicial distinction.

In addition to creating additional operational challenges for lenders, this makes assessing the recovery, estimating loan-level losses and evaluating future risk more challenging. Watching for any collateral impacts from these process changes – and tracking any new changes at the state level – will be critical to portfolio risk management in the post-crisis environment.

Herb Blecher
Senior Vice President, LPS Applied Analytics
Lender Processing Services

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