Foreclosure Freeze Cuts Sales, Supply in Hardest-Hit States

U.S. home foreclosure sales are slowing in the states hardest-hit by the real estate crash as banks review their practices and delay seizures.

In Arizona, California and Nevada, foreclosure auctions on courthouse steps, known as trustee sales, are down 42 percent since Sept. 20, according to ForeclosureRadar, a real estate tracking service in Discovery Bay, California. In Florida’s Miami-Dade and Broward counties, fewer foreclosures have led to 18 percent declines this month in the number of repossessed homes listed for sale, said Ron Shuffield of Esslinger, Wooten, Maxwell Inc., a realty firm based in Coral Gables, Florida.

In a real estate market where as many as 7 million homes face foreclosure or have already been seized by lenders, according to Zillow Inc., a clog in the pipeline may delay a housing recovery, which won’t occur until home prices stop falling. That could in turn postpone a U.S. economic recovery. Distressed properties accounted for 31 percent of all U.S. home sales last month, RealtyTrac Inc. said Oct. 14.

“If what’s a hiatus turns into a moratorium, that’s quite problematic,” Stan Humphries, chief economist for Zillow, a Seattle-based real estate data provider, said in an interview. “It will delay the ultimate bottoming process in the market.”

Attorneys general in all 50 states started probes into foreclosure practices after court documents surfaced showing employees signed papers without ensuring their accuracy. Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc. temporarily suspended some foreclosure sales or evictions, pending reviews of their procedures.

Record Seizures

Full national data reflecting the effect of the foreclosure freeze isn’t yet available. Lenders took over a record 102,134 properties last month, before most of the delays, RealtyTrac, an Irvine, California-based real estate data provider, reported.

Nevada, Arizona, Florida and California lead the nation in foreclosure rates, according to RealtyTrac. Florida is the only one of those states where courts supervise home seizures, the focus of most of the banks’ reviews.

Bank-owned properties have been pulled off the market in Florida and re-sales of foreclosed homes have stalled in the process of closing, according to Shuffield. One in 56 homes in the state received a foreclosure filing notice in the third quarter, RealtyTrac data show.

Living in Hotel

Four days before Ted Roberts, 35, was scheduled to close on his first house -- a $168,000, four-bedroom foreclosed home in Orlando, Florida -- Bank of America put the sale on hold. After his apartment lease ended Sept. 30, Roberts moved his family of four to one bedroom at the Homestead Studio Suites in Altamonte Springs, waiting for the sale to close.

Roberts, a federal employee union organizer, could have gotten his $2,000 in escrow refunded. Instead, he is counting on the sale closing to avoid losing $1,000 spent on appraisal and inspection fees. Meanwhile, he’s spent more than $1,000 for the hotel room, furniture storage and a post office box.

“We’re going to try to ride it out,” he said in a telephone interview as he drove his sons Kalen, 13, and Torian, 5, to school, another cost of the temporary relocation. “We’d still like to get a house and obviously a foreclosure is a better deal. But if we knew this was going to happen, we would have looked at a non-foreclosure.”

Resubmitting Affidavits

Bank of America froze 102,000 foreclosures nationwide on Oct. 8 to review its procedures, and has now started the process of preparing affidavits for resubmission to courts. Affidavits will be resubmitted over several weeks, as they are completed through their internal process, according to Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank. Those cases will proceed through the foreclosure process, including re-sales, he said.

“This review remains in effect and our review is ongoing,” Frahm said. “We are committed to giving our customers confidence they are being treated fairly.”

For the Florida foreclosure-judgment hearings that are canceled this week, banks are almost a month away from rescheduling them. That’s because a hearing can be scheduled no earlier than 25 days in advance under the state’s rules for legal proceedings, said Rick Melendi, a chief deputy court administrator for the 13th Judicial Circuit in Tampa.

Faulty documentation has scared buyers away from foreclosed properties because of concerns their titles may be in question, said Erika Phelan, Roberts’s real estate agent with Buyers Broker of Florida in Orlando.

‘No Foreclosures’

“I just took out a buyer who said ‘no foreclosures’ to avoid the problem,” she said.

Rick Sharga, RealtyTrac’s senior vice president for marketing, said his company hasn’t seen an “appreciable” dropoff in foreclosure activity so far this month.

“It could just be that these delays will be delayed a little bit before they hit the numbers,” Sharga said yesterday in an interview on Bloomberg Television. “Or it could be that the falloff isn’t going to be nearly as big as people have been predicting.”

Before the foreclosure freeze, lenders were taking an increasing amount of time to seize homes as they complied with requirements to offer loan modifications or sought to avoid the costs of repossession. Foreclosed borrowers were an average 484 days -- about 16 months -- delinquent on their mortgage payments in September, up from an average of about 11 months in January 2009, according to Lender Processing Services Inc. of Jacksonville, Florida.

Bank of America, the largest U.S. mortgage servicer, took an average 18 months to complete foreclosures during the third quarter, Frahm said.

Off the Market

Of 103 foreclosed homes listed for sale by Michael Saunders & Co., a broker based in Sarasota, Florida, 35 were pulled off the market since the foreclosure freeze began, said Tom Heatherman, communications director for the firm. Another 23 properties assigned to the firm for pre-listing by Freddie Mac, the mortgage guarantee company under federal conservatorship, were temporarily held off the market, Heatherman said.

Fannie Mae, another mortgage guarantor under U.S. conservatorship, has also frozen foreclosure sales in cases with questionable documents, said Janis Smith, a spokeswoman for the Washington-based company.

“Transactions on such properties are on hold until the servicer can verify that the problem has been rectified,” Smith said.

Inventory Drop

Foreclosures and short sales, in which lenders agree to sales at less than the mortgage balance, made up 66 percent of transactions in Miami-Dade and Broward counties in September, said Shuffield, the president of Esslinger, Wooten Maxwell.

“The closing pace hasn’t stopped yet,” Shuffield said. “But the inventory has definitely dropped.’ ”

Western states have had a steep drop in foreclosed homes headed for resale, said Sean O’Toole, chief executive of ForeclosureRadar.

The number of trustee sales in Arizona, California and Nevada fell to 4,151 the week ending Oct. 22 from 7,142 four weeks earlier, when the first freeze was announced, O’Toole’s data show. Bank of America, Ally, and PNC Financial Services Group Inc., which also suspended some sales, were the only companies that he found to account for the decline, he said.

In Georgia, which had the seventh-highest U.S. foreclosure rate according to RealtyTrac, the moratorium killed three pending sales this month for Becky Loar, president of the Becky Loar Group LLC, a real estate firm in Snellville, Georgia. One was a cash sale, which was halted two weeks before closing. The other two were in early stages of negotiations.

“It’s a nightmare for Realtors,” she said. “If you get a contract to closing before they back out, you have a miracle.”

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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