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November 24, 2014

State faces foreclosed property sale purge

PHOTO | Contributed
Brian Rich, law partner, Halloran & Sage
Candace Adams, CEO, Berkshire Hathaway Home Services
By Alexander Soule

Despite fewer Connecticut homeowners falling behind on their mortgage payments, realty and banking experts say they are steeling themselves for an increase in court-ordered and bank-owned property sales, as the state purges its inventory of foreclosed homes.

According to residential realty data tracker Corelogic, Connecticut has the sixth highest inventory of residential mortgages under foreclosure proceedings, with about 2.5 percent of home loans caught up in the legal process. That is actually down from 3.7 percent a year ago, mostly because there has been a recent uptick in foreclosed homes hitting the market.

Connecticut's higher-than-average rate of residential mortgages under foreclosure procedures is largely the result of new rules state lawmakers enacted following the 2008 financial crisis that forced lenders to enter prolonged mediation with homeowners who were falling behind on loan payments, industry experts say.

The foreclosure mediation process has helped some homeowners avoid, or put off foreclosure, but it also created a bottleneck in the foreclosure process, experts say.

“For a long time, Connecticut foreclosure actions didn't exactly grind to a halt, but they were certainly slowed down by the legislative activity, the mediation requirements, the stricter standards that the courts began to employ in terms of increased scrutiny of foreclosure actions, and lenders' responses,” said Brian Rich, a law partner in the Hartford office of Halloran & Sage, who has extensive experience in contested mortgage suits. “For the past two or three years, it really created a bottleneck in the foreclosure litigation process whereby cases were stalled, either through litigation activity from the borrower or reluctance on the part of a lot of lenders to proceed.”

Six years after the crash, Connecticut continues to tinker with its foreclosure laws; in June, the General Assembly passed a new law intended to give homeowners with no equity access to a “pre-foreclosure” process that speeds up the legal process and spares borrowers the stigma of undergoing foreclosure.

The state's foreclosure bottleneck, however, does appear to easing. There were 5,448 foreclosures completed in Connecticut between Oct. 2013 and Sept. 2014, compared to 4,044 in the prior-year period, Corelogic data shows.

“They're finally coming to the point where they are hitting the market and we knew that was going to happen — that there were more pent up foreclosures in this particular state compared to others,” said Candace Adams, CEO of Berkshire Hathaway Home Services. “I think that any of the forgiveness or intervention [programs]…have no doubt been exhausted for many of these folks who are in the foreclosure process. They've been through their wait period. They've been through their period of being able to appeal their foreclosure.”

Adams said the legislative moves to forestall foreclosures helped some people, but it had a broader, unintended side effect as well.

“It took Connecticut out of the frenzy of a declining real estate market and for those people who would have been put through the foreclosure process, it provided additional time to make housing arrangements,” Adams said. “But it might have stalled a full recovery in the state. Connecticut is not seeing a robust recovery as other areas of the country because we haven't filtered through all the foreclosed properties. But in terms of the value to the homeowner and putting them in a better place, I think it has helped.”

Adams said a lot of foreclosed property sales involve lower-tier homes that are attractive to first-time buyers.

As of the second quarter, foreclosure “starts” in Hartford County were 9.9 percent lower from two years ago, according to RealtyTrac, a California company that analyzes initial foreclosure notices, court-scheduled auctions, and the point at which a lender takes back title to a home.

While initial foreclosure filings have been dropping this year in Connecticut compared to the increases of 2012 and 2013, the latter two categories RealtyTrac measures are increasing, according to Daren Blomquist, a RealtyTrac vice president.

“What we're seeing now is a surge in the second stage of foreclosure activity in Connecticut … at that point the property is scheduled for a foreclosure auction,” Blomquist said. “It makes sense — we saw the surge in initiated foreclosures and now at least some of those are making it to the auction … We would expect as this surge in delayed foreclosures makes its way through the pipeline, that the last few months of this year and into next year we would see an uptick in actual bank repossessions.”

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