States like Arizona recover faster from housing bust

Arizona and states like it that allow for foreclosures without judicial involvement or a heavy paperwork load for foreclosures have come through the housing bust much faster than states with those, according to new research from the W. P. Carey School of Business at Arizona State University.
So the country’s housing market is finally starting to recover, and states like Arizona are leading the way, according to Andra Ghent, an assistant professor of real estate at ASU.

“The laws across states use different legal theories as the basis for mortgages, and they balance the rights of creditors and borrowers very differently,” said Ghent. “The variations started early in America’s history, and they’re not really based on economic reasons, but they’re still having a major influence on what’s happening now with the housing market.”

Key issue are: Some states require judicial involvement in foreclosures, while others don’t. Some states require a massive amount of paperwork, including the original promissory note, for a lender to foreclose. Some states require a longer redemption period when a borrower can be behind on payments before a foreclosure can occur.

 Many states that don’t require judicial involvement or tons of paperwork have already run through the bulk of their foreclosures and are finally seeing rising property values, Ghent said. That’s because the flood of cheap, foreclosed properties onto the market has stopped.
Arizona is one of the states in which the damage happened relatively quickly, and there’s no longer a big backlog of foreclosures to go through the process. Phoenix-area home prices have been rising dramatically since last fall.

 “The key is quick resolution of the situation,” said Ghent. “For example, if a state requires a longer period before foreclosures can happen, then that generally means the homes deteriorate more as the borrowers realize they’re going to have to leave and stop taking care of the property. This is bad for the neighbors and the property values.”

 Ghent doesn’t see much renegotiation leading up to the foreclosures but rules allow for drawing out the situation.
“New York and Florida, for example, have very slow foreclosure processes,” Ghent said. “Properties can sit around without any maintenance for two to four years while they work their way through the maze, before they finally get a new owner.”

 Ghent also doesn’t think that making more foreclosures go through the judicial process will help prevent problems like robo-signing. That’s where some lenders didn’t properly review all the individual details of the cases or follow all of the required procedures.

“In most of those cases, the borrowers were really behind on their payments and would eventually have lost the homes, anyway,” Ghent said.“ Fraud is unacceptable, but it was also a case of sheer volume. If those particular states had required less paperwork, that’s what might actually have helped prevent more robo-signing.”
Ghent emphasizes that getting rid of the patchwork of different state laws would ultimately benefit the housing market as a whole.

“Can you imagine how much money, time and resources we could save, if we didn’t have 50 different sets of laws, paperwork and legal-expertise requirements Again, there appears to be no real economic reason for the differences. Many of these laws date all the way back to the 1800s, and some were changed just after the Great Depression,” she said

Overall, Ghent has one big message for those who can influence the process in the future.

“Nobody pays attention to mortgage laws for 50 to 60 years at a time,” she says. “They only examine these laws after a major event, so the time to change is now.”