5 REASONS WHY JUDICIAL FORECLOSURES TAKE SO LONG
COASTLINE CAPITAL FUND MANAGEMENT
5 Reasons Why Judicial Foreclosures Take So Long
by Andy Mirza
A lot of note investors will only buy non-performing notes in non-judicial foreclosure states. I assume that most don’t want to deal with the extra complications that judicial foreclosures entail and I don’t blame them.
Judicial foreclosures take more time, are more expensive, and have a lot more uncertainty. They’re more risky than the simpler, non-judicial foreclosures. However, if you buy your note with enough extra margin to make up for these uncertainties AND focus on the things that you can do to shorten the timeline, you can make some great profits on notes in those states.
Five Main Factors
The five main factors are:
The Foreclosure Process
The Lender or Noteholder
The Foreclosing Attorney
For two out of those five you can take steps to minimize the delay in the foreclosure process. Unfortunately, the other three are out of your control and, ultimately, the only thing you can do is react as quickly as you can, when problems or delays arise.
Number 1: The Foreclosure Process
The Foreclosure Process, by my definition, means the state’s foreclosure laws and the normal capacity of the court system, which means the normal scheduling process for hearings. The foreclosure statutes of each state will determine the exact process that the courts need to take in order to foreclose on a loan. (Federal statues apply to each state equally; it’s the state laws that make the difference in timelines between the states.)
Some courts have the capacity to handle cases quickly with minimal delays while others are swamped. Some court systems have online services, allowing you to easily check the docket for individual cases. Others are stuck in the stone ages, suffer from slow communications, and still use hand written court orders.
I haven’t completed the foreclosure process in all 50 states but I have done quite a few in a mix of judicial and non-judicial states. In every instance, the timeline has always been longer in judicial states. When you compare the “perfect” scenario i.e. one without complications, the judicial timeline is always longer than the non-judicial timeline.
For example, the quickest that you could actually foreclose in Cook County, Illinois looks like this:
In a perfect world where nothing stopped the process, you’re looking at about 8½ months from the start of the foreclosure to finish.
The quickest you could foreclose in California is 3 months and three weeks, less than half the time of Illinois. There are non-judicial states that are quicker than California and judicial states that take longer than Illinois. You can view Fannie Mae’s guidelines to find the states that matter most to you.
Both the Process and the Court’s normal availability are things that you cannot control but they do affect all parties equally.
Number 2: The Lender or Noteholder
Specifically, I’m referring to the Lender’s ability and speed to make decisions and execute required documents. I’ve come to the conclusion that Fannie’s Guidelines don’t apply to smaller investors. They apply to larger, bureaucratic institutions (Big banks) that have large, unwieldly bureaucracies.
I can tell from the servicing notes of the loans that I buy that the Big Banks take a long time to get things done. The people that work for Big Banks are typically hourly or salaried employees, whose compensation is not directly tied to any one asset. They are doing what their bosses tell them to do because they want to keep their jobs. Their bosses are typically concerned with quarterly results of the entire portfolio and don’t care about what happens with the individual assets.
The result is that you have an environment where you have disconnected parts of an organization with no real accountability or even concern when things take a long time. For example, through servicing comments, I saw that it took a Big Bank one year to get the correct Assignment of Mortgage to the correct person at the foreclosing attorney’s office. The Big Bank used an outside vendor to prepare the documents, which added complexity. The document was passed from one person to another until it finally got to the end of the line. Once there, that person sent it back because it had the wrong information and needed to be corrected and re-executed. This went on for a year.
We bought that loan and it took us two weeks to do the same thing. When you’re a small Fund or investor and you are able to give each asset the attention it needs, you have a big advantage over the bureaucracies of the Big Banks. Add the incentive that our compensation is directly tied to the performance of each asset and it makes a lot of sense why we make decisions and execute documents far more quickly. The small note investors have a huge advantage over the Big Guys and can minimize this factor.
Number 3: The Foreclosing Attorney
Specifically, I’m referring to the foreclosing attorney’s competence and speed. Big Banks oftentimes hire Big Attorney Firms. Big Attorney Firms can have the same problems of Big bureaucracies that their clients have. When you have two large bureaucracies, you’ve compounded the problem, the complexity, and it’s a miracle when things finally get done.
When we buy notes, we inherit the foreclosing attorneys along with the loans. If we have a preferred attorney for that area, we’ll typically transfer the file right away. If the loan is right in the middle of something, however, we’ll opt to keep it with whatever attorney is handling the loan. Half of those usually don’t make it.
Some attorneys and their paralegals are sloppy with paperwork and hearings. At the end of the day, the delays don’t matter that much to them if it doesn’t matter anything to their client. With the Big Banks, there is not the same sense of urgency for any of the complicated steps in the judicial foreclosure. The attorney firms need to generate fees and it doesn’t necessarily matter if what they’re doing is the quickest way to foreclosure.
With us, it’s different. All of a sudden it does matter. However, we’re still the small investor with a few files here and a few files there. The Big Guys might have a 50 or a 100 files with a huge, law firm and they don’t give the attorney firm grief for working slowly. When an attorney firm acts like they’re doing us a favor, makes it difficult to talk to the attorney handling the case, or just lacks basic customer service, we move on.
There are plenty of highly competent, efficient, communicative attorneys and firms that do a fantastic job and are great at what they do. Fannie Mae guidelines don’t apply to us because we place our files with top notch attorneys. If you’re getting sub-par service, do yourself a favor and find someone else.
Number 4: The Borrower
The borrower gets a say in judicial foreclosures but typically not in non-judicial foreclosures. This is the biggest factor that’s outside of a note investor’s control. Borrowers get to fight and delay the process because a judicial foreclosure is a lawsuit. The lender is filing a lawsuit against the borrower in order to collect on their loan. The borrower can defend himself in court like he could in any other court proceeding in which he was the defendant.
Some borrowers choose not to contest the foreclosure proceedings. In those cases, the foreclosure is very similar to a non-judicial foreclosure. Your attorney shows up to all of the hearings, presents the documents to the judge to prove the case, but there’s no opposition. You go through the process as outlined in the “perfect” scenario above.
Some borrowers decide to fight. Some want to stay in their home as long as they can because it’s their home. Some don’t want to move. For others, it comes down to economics. They say, “My credit’s already ruined and I want to stay here as long as I can. I might as well pay this attorney $500 a month to fight the foreclosure instead of paying $1500 a month to the greedy bank, especially since I owe twice what it’s worth.” It’s hard to fight that logic.
We buy clean paper. There might be title issues that need to get cleaned up but the loan was a legitimate transaction between the borrower and whoever originated the loan. We don’t buy anything remotely shady. When you buy good loans (and the vast majority of institutionally originated paper is), the most that the borrower and his attorney can do is delay the process. The better your attorney is, the less tricks the borrower will get away with. Eventually, the foreclosure will happen. Before it does, though, a fighting borrower coupled with a sympathetic judge can draw out the process even longer.
Number 5: The Judge
Judges have a great deal of power. They listen to the facts, examine the evidence, interpret the law, and pass judgment. That’s the way our system works. Judges are human beings, not robots, and their attitudes, opinions, politics and experience affect how they act on the bench. There are some judges that are more borrower friendly than others. These judges have the power to give the borrower extra chances. Again, though, as long as your paperwork is in order, you should prevail in the long run. The case might get dragged through state court (and federal court if the borrower files bankruptcy) but you should win in the end.
When it comes down to it, the short and medium term are determined in large part by what the judge and the borrower do. If you get the wrong combination, the foreclosure can take years (and fit Fannie’s guidelines!). If you get a lesser combination, you’ll get delayed but eventually make it through to foreclosure. You can’t do anything about the timeline of the foreclosure process but neither can anyone else. If you can make decisions and execute documents quickly and have a competent, foreclosing attorney that works in sync with you and has the same values, you can significantly cut down the timeline to foreclosure. Make sure you buy with extra margin to compensate for the delays and to spread your capital across several notes.