Judicial foreclosure vs lender behavior

To understand how foreclosures affect lender behavior, Brian D. Feinstein, professor at the University of Wharton, wrote a dissertation called “State Foreclosure Law: A Neglected Element of the Housing Finance Debate.” Feinstein explores the impact that foreclosures have on borrowers, lenders, and policymakers.

Research indicates that foreclosures alter lender behavior in ways that benefit borrowers, while preserving regulatory objectives. Feinstein says lenders are cautious about loan approval decisions and offer fewer subprime loans in states with foreclosures. Also, borrowers are not billed at higher rates because of the costs imposed on lenders by foreclosures.

Benefits for borrowers

Mandatory foreclosures are advantageous for borrowers because judicial oversight requires lenders to meet all foreclosure requirements. The extra time spent on legal proceedings helps borrowers stay in their homes longer. The costs of mandatory foreclosures for borrowers are questionable, Feinstein said. Foreclosures also provide a legal forum for borrowers to dispute predatory loans and they also serve as a transfer payment,

Disadvantages of judicial foreclosures

According to one estimate, foreclosures cost an average of $ 3,112 in judicial foreclosure states, but only $ 2,269 in other states, he said. It further notes that only 21 percent of borrowers were represented by legal counsel at any time during the foreclosure process, and only 24 percent of borrowers even filed a response. The brief points out that judicial foreclosures take much longer than non-judicial foreclosures, leading to vacant properties.

Rick Sharga, Executive Vice President, Carrington Mortgage Holdings, said DS News that “zombie properties tend to proliferate in states that have a judicial foreclosure process, in which foreclosure proceedings must work their way through the court system. Regulations in these states have sometimes extended the lockdown process beyond 1,000 days. At the height of the crisis, such foreclosures could sometimes last up to 1,300 days in states like New York and New Jersey. Metro areas with the most zombie seizures include New York, Newark-Jersey City, Philadelphia, Chicago, Miami, and Tampa-St. Petersburg.

Lender behavior

Feinstein also looked at the behavior of lenders in 14 pairs of neighboring states where one has imposed foreclosures and the other has not. The analysis found that lenders are less likely to approve mortgage applicants in foreclosure states than they are in non-judicial states.

Approved applicants have been found to be less likely to be offered risky products in states that impose judicial foreclosure. The analysis also noted that approved applicants with lower socioeconomic status are even less likely to be offered risky products in court foreclosure states. Overall, judicial foreclosure requirements are associated with an approximately 2.1% to 2.8% reduction in the likelihood of loan approval and, subject to loan approval, a reduction of 0.2 to 1.0% of the probability of being offered a subprime loan, he revealed.

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