For homeowners in Washington, D.C., Maryland and dozens of other jurisdictions, it's getting harder and harder to lose a home to foreclosure — even if the owner has not made any mortgage payments.
That is what Jeffrey Fisher has noticed in his 38 years as a foreclosure attorney for banks in the Washington area. At the height of the housing crisis, he was selling about 40 foreclosed properties a month in the District, he said, but business has slowed to a trickle. In fact, he has sold only three foreclosed housing properties in the city since the Saving D.C. Homes from Foreclosure Act went into effect a few years ago.
For some, the virtual freeze on foreclosures is a good policy that helps struggling homeowners stay put in the wake of the worst economic downturn since the Great Depression. But many real estate professionals are concerned that delaying the inevitable has slowed the housing market's healing process and could backfire when those inevitable foreclosures hit the market.
On average, it takes more than 1,000 days to foreclose on a home in the District and 531 days in Maryland, according to RealtyTrac. The national average is 414 days.
"The bottom line is, D.C. is shut down for foreclosures," said Mr. Fisher, principal of The Fisher Law Group PLLC in Upper Marlboro. "There's a real evil when the process takes too long. Perhaps the owner of the property wanted that foreclosure to go through so he could get a fresh start, perhaps he's moved out, perhaps the neighbors are having to deal with a foreclosed house sitting vacant next to them with the grass growing."
Inside the Beltway, the real estate market in Virginia — where the average time to foreclose is one-tenth of what it is in the District, is primed to rebound this year, but a "backlog of foreclosures" in Maryland and the District could add uncertainty to the market and keep down home values.
Virginia's real estate market took a beating during the housing crisis. Foreclosure numbers were high, and many families lost their homes. But the market now appears ready to move on.
Homeowners in Maryland and the District have a long way to go before they recover lost ground and housing values from the Great Recession. Foreclosure rates were kept artificially low by local governments, but their policies could come back to haunt them.
Delaying the inevitable
Foreclosures litter the housing market with cheaper homes, which in turn drag down the values of neighboring properties. If a buyer can snatch a foreclosure for half the price, why pay more?
"We're starting to see the consequences of kicking the can down the road when it comes to foreclosures," said Daren Blomquist, vice president at RealtyTrac. "While it may have helped some people avoid foreclosures, for many it just delayed the inevitable, and now we're seeing those foreclosures start to come through the pipeline, which is going to be bad for the housing market."
For some homebuyers and real estate investors, however, the dynamic can be positive.
"The combination of lower housing prices and incredibly low interest rates will make it a great environment for buyers in the foreseeable future," said Bruce Whitehurst, president and CEO of the Virginia Bankers Association. "It's painful for anybody who has a home that's not worth what they bought it for, but there's no question it's a good time for buyers."
The rate of foreclosures nationwide has declined from its peak in 2009 and 2010. According to CoreLogic's National Foreclosure Report, the number of foreclosures ticked down 3 percent to 56,000 in December compared with the previous month and fell 21 percent compared with December 2011. That is still a far cry from the average of 21,000 foreclosures per month before the housing crisis began.
RealtyTrac's 2012 annual survey counted foreclosure filings on 1.8 million properties in 2012, down 3 percent from 2011 and more than 36 percent below the 2010 peak of 2.9 million properties.
Scandals involving lax bank practices helped spark a decline in foreclosures nationwide that began in 2011. A national pause in foreclosure actions followed, and the nation's biggest lenders agreed to servicing standards that made it even tougher to foreclose.
Maryland and Virginia rank in the middle for foreclosure rates. Maryland has the 20th-highest foreclosure rate among all states and Virginia has the 27th-highest, according to RealtyTrac. The tracking firm said late last week that national foreclosure rates dipped again, in part because laws that took effect in California's giant market put the brakes on foreclosures.
But states that delay the pain may be making it more intense down the road.
"Do you want to rip the Band-Aid off, or slowly pull it back?" Mr. Blomquist asked. "The Virginia approach is ripping the Band-Aid off, and the Maryland and D.C. approach is slowly pulling it off."
Through the first half of 2010, an average of about 5,800 households each month received foreclosure notices, according to RealtyTrac.
To protect against the rising tide of foreclosures and to cushion the blow to the state economy, Maryland churned out "aggressive legislation that gave homeowners more time to avoid foreclosure," Mr. Blomquist said.
The legislation required lenders to give homeowners an additional 45-day notice before starting the foreclosure process.
These policies, in effect, created a moratorium on foreclosure activity. Through October, the average number of Maryland homeowners receiving foreclosure notices plummeted to about 1,700 each month.
Catching up to the market
The problem is that many of those foreclosures eventually catch up to the market. When that happens, home values begin to fall.
"Slow foreclosure laws keep a damper on the housing market recovery because it takes so much longer for the foreclosures to be resolved," Mr. Whitehurst said. "It's a very, very tough situation for anyone to have a home foreclosed on them, and no one takes that lightly, but if a foreclosure is inevitable, slowing it down is not really good for the housing market."
Maryland is starting to see that. In November and December, the average number of homeowners who received foreclosure notices rose to about 2,500 a month.
"We've been expecting the other shoe to drop," Mr. Blomquist said. "The foreclosures are not brand-new homeowners getting into trouble. It's homeowners who have been struggling for a few years."
In the District, it's a similar story. Foreclosure numbers dropped off after local government officials enacted the 2011 law that required lenders to offer mediation to homeowners facing foreclosure.
Through the first 10 months of 2010, the District averaged 234 foreclosures per month, according to RealtyTrac, but after the policy went into effect, the average dropped to about 20 per month — the lowest number of total foreclosures, and the second-lowest foreclosure rate in the nation.
In CoreLogic's report, the District also saw the lowest number of total foreclosures with just 89 foreclosures completed in 2012.
Unlike Maryland, the foreclosure numbers are still low, Mr. Blomquist said. But, sooner or later, he said, the District will follow the same path as Maryland.
"It's honestly surprising to us how long those numbers have remained low in the District," he said. "I don't think foreclosures can be delayed indefinitely."
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