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How Does New York and New Jersey's Foreclosure Backlog Affect You?


New York and New Jersey Foreclosures

Across the country, home prices are on the rise and home sales numbers are up, which means the housing market in many states has now stabilized, and could be on the way to a full recovery. But in New York and New Jersey, a backlog of foreclosures has slowed the recovery process. In fact, the number of foreclosures in both states is above the national average, and continues to rise, according to a recently released report from Reuters. According to the Reuters report, the national average of homeowners in foreclosure has dropped to nearly 4% in 2012. But, in New York that rate is 7%, and in New Jersey, it hovers near 8%.

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So why are there more foreclosures in these two states?

Some experts blame the legal system. New York and New Jersey are among 26 states that have adopted a judicial foreclosure process. That means lenders have to prove in court that a borrower is in default before the foreclosure can proceed and be finalized.

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The end result?

A backlogged court system that is taking months, and in some cases years, to process cases. Not only are banks in New York and New Jersey required to supply documentation that a borrower has defaulted on the loan, but the homeowners also have the right to challenge the foreclosure. That leads to more mediations, which further delay the process.

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How much of a delay are we talking?

A recent study released by RealtyTrac shows that the average number of days a mortgage is in foreclosure (from the bank's initial notice of default until completion) is 1072 days in New York and 900 in New Jersey. That's nearly three years! The system is designed to give borrowers more time to try and find an alternative to foreclosure. Yet in many cases, as the value of the property deteriorates during the backlog, the homeowners lose their incentive to try and keep their home, so they stop trying to fight the foreclosure.

How does this affect you?

Foreclosures not only cause a drop in value of the distressed property, but also to the other homes in the surrounding neighborhood. Plus, more foreclosures mean there’s an increased inventory of homes for sale. Also, distressed properties often sell for much less than the actual value of the home, since the bank is only trying to get back the money they lost on the defaulted mortgage. So, the median sales price in the area is much lower than it would be without the foreclosures. All of this adds up to a struggling housing market in both states!

What’s being done to solve the problem?

Some of the major lenders in the country, including Fannie Mae and Freddie Mac, fear that the foreclosure delays in states like New York and New Jersey will cause more borrowers to default on their loans. To protect themselves against the risk of increased delinquencies, Fannie Mae and Freddie Mac have proposed raising guarantee fees in states that have lengthy judicial foreclosure processes. However, that could lead to higher mortgage interest rates.
While major lenders think the delayed process in states like New York and New Jersey hurts the housing market, economists and financial experts seem to be split over its impact. A December 2011 study conducted by the Federal Reserve found that these borrower-friendly laws delay but often do not prevent foreclosures. However, others argue that the delays in the system have slowed down banks that were in a foreclosure frenzy just a few years ago. Either way, there are more foreclosures in New York and New Jersey than in other states across the country, and because of their borrower-friendly laws, the process to complete a foreclosure takes longer in these states than in others. And until the situation is solved, the housing markets in these two states will continue to suffer.

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