In a recent blog post I wrote for Metropolitan Regional Information Systems, the nation’s largest Multiple Listing Service, I had the chance to dig into how foreclosure activity is beginning to increase after an extended slump in the Washington, D.C., metro area — particularly in Maryland counties.
This extended slump in foreclosure activity is largely due to a slowed-down foreclosure process triggered by the so-called robo-signing scandal back in October 2012 that caused increased scrutiny on the paperwork and documentation that lenders are using to foreclose. Those delays mean it’s now taking more than a year — 370 days to be exact — to complete a foreclosure nationwide, up from 281 days in the third quarter of 2010, before the robo-signing scandal hit, and up from 120 days in the first quarter of 2007.
Foreclosure Starts Up, Foreclosure Finishes Down
But when digging into foreclosure activity in both Maryland and Virginia, I noticed something enlightening: any increases in foreclosure activity that we’re seeing is driven by foreclosure starts, the initial public notice that starts the foreclosure process. In Maryland this is the Lis Pendens, or 
pending lawsuit, and in Virginia, this is the scheduled foreclosure home auctions.
Those foreclosure starts were up on a year-over-year basis for four consecutive months starting in November 2011 and through February 2012 — following 16 consecutive months of annual decreases in foreclosure starts. Meanwhile, foreclosure starts in Virginia were up on a year-over-year basis for two consecutive months in January and February 2012 — following 14 straight months of decreases. The annual increases in foreclosure starts in both Maryland and Virginia ended in March, when both states saw a year-over-year decreases.
What stood out to me, however, is that completed foreclosures, or REO, in both states continue to drop. In Virginia, REOs have been down on an annual basis for 10 consecutive months ending in March, and in Maryland, REOS have been down for 12 consecutive months ending in March.
REO Short-Circuit
And that trend is not just happening in Maryland and Virginia. In March, 22 states reported annual increases in foreclosure starts, while just 13 states reported annual increases in REOs. We expect that many of the foreclosure starts happening in the 22 states will translate into completed foreclosures in the coming months — or years given that it takes more than a year to complete a foreclosure.
But those increases in REOs could be mitigated by more short sales, which short-circuit the foreclosure process by allowing the distressed homeowner to walk away from the mortgage debt they owe. This may be more appealing to lenders because of the increasingly complex and costly foreclosure process, and we are seeing indications that 2012 will be a record year for short sales. In January, pre-foreclosure sales (typically short sales) increased 33 percent from January 2012 nationwide, and these pre-foreclosure sales actually outnumbered REO sales in 12 states, according to a RealtyTrac report that we issued on April 19 titled A Building Wave of Short Sales in 2012.
I view short sales as a much more efficient way for the market to absorb the more than 4 million distressed loans that are either delinquent or have already started the foreclosure process — and it’s usually better for the lender, distressed owner and new buyer. So if the bulk of the foreclosure starts we’ve seen over the past few months end up as short sales rather than REOs, the housing market will be better off.
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