New States Rules Begin To Impact Foreclosure Numbers

The real estate marketplace must be exploding in Maryland. What else could possibly explain the huge fall in foreclosures throughout the state?

In April, according to, Maryland ranked sixth in foreclosures among all the states but just 30 days later it fell to 22nd for the month of May.

If you believe that foreclosures are not good for borrowers, lenders or neighborhood home values then you will surely want to know what it is that Maryland did to reduce foreclosure levels so quickly. No less important, other states will certainly want to borrow some of that Maryland foreclosure magic.

The answer, it turns out, has nothing to do with home values, buyer demand or local economics. Yes, reported foreclosure actions in Maryland dropped from 6,052 in April to 2,351 in May, but this change was not the result of some economic miracle. Instead, Maryland reduced foreclosure levels by changing the rules. Today if you’re a lender and want to foreclose it simply takes longer to complete the process because the state of Maryland says it will take longer.

Under legislation passed in April, the time required to foreclose was increased from 15 days to not less than 135 days and probably much longer. Maryland, according to the governor’s office, now “requires a lender to wait 90 days after default before filing the foreclosure action and to send a uniform Notice of Intent to Foreclose to the homeowner 45 days prior to filing an action.”

That’s at least 135 days under the new rules versus just 15 under the old system.

The updated Maryland rules require lenders to physically notify homeowners about impending foreclosure actions. That’s important because the Maryland rules say that a foreclosure sale cannot occur until 45 days after such notice has been provided. In addition, under the new Maryland legislation a lender must show that it actually owns the loan before it can foreclose, a standard which may trip up lenders because home mortgages are sold, re-sold and divided up with electronic speed on Wall Street — records which may not have changed in local courthouses.

What’s happened in Maryland has begun to happen in other states: Massachusetts has just passed legislation which will require lenders to give homeowners at least 90 days notice before starting a foreclosure and at this writing New York state is close to adopting similar rules.

In essence, while states cannot oversee national banks, savings & loan associations and credit unions regulated by the federal government, the federal government cannot regulate the debt collection process at the state level.

“In theory,” says James J. Saccacio, chief executive officer of, the nation’s leading source of foreclosure data and listings, “federal regulators could take Maryland and other states to court with claims that state governments are interfering with the right of the federal government to regulate national lenders.”

But, added Saccacio, “such suits would take years to resolve and a win by federal regulators is hardly assured. The states have historically set foreclosure rules, there are endless precedents which favor state authorities and if the Supreme Court were to decide against the states then a new Congress and a changing political climate could well result in new federal laws which support the states.”

By revamping debt collection rules it would seem that the states have effectively slowed the foreclosure process. However, the impact of revised state legislation is likely to have several results — some good and others not so good.

First, the dip in Maryland foreclosure filings — and the dip in several other states — produces misleading numbers. The process has been delayed through legislative tinkering, but without loan modifications or property sales, the inevitable result will be the loss of many more homes and massive lender losses.

“State rules extending the foreclosure process reduce reported numbers, but while the problem may be masked it remains firmly in place,” says Sacaccio. “For many states, the result of legislated foreclosure delays will be a reduction in published foreclosure numbers for several months and then a new wave of foreclosures once the initial extension period runs out.”

Second, longer foreclosure spans give borrowers more leverage to negotiate with the lenders.

For instance, imagine Maryland borrower Smith fails to make three monthly mortgage payments and the lender moves to foreclose. The process now takes perhaps another 150 days — five months — to move through the foreclosure system. During this period borrower Smith never makes a mortgage payment so the lender is out a total of eight monthly payments — plus foreclosure costs. In such circumstances, or potentially such circumstances, a lender might well be interested in a short sale or a loan modification.

Third, some homes will be saved because of foreclosure delays. This will happen because owners will have more time to sell. No less important, owners can offer homes for sale for a longer period of time without appearing to be distressed — a factor which may help them get a better sale prices.

Fourth, the number of toxic loans is unchanged, meaning that millions of badly underwritten mortgages, exploding adjustable rate mortgages (ARMs) and interest-only loans remain a potent source of steep foreclosure numbers in the future.

Fifth, delays might benefit servicers and lenders. The lending community has not had sufficient staff to deal with the huge foreclosure increase seen during the past 18 months. State-based foreclosure slow-downs might give lenders and servicers the time to hire and train more people and also to install better equipment and software. The result could be more modifications, refinanced loans and repayment plans as opposed to outright foreclosures and short-sales. Both lenders and owners would come out ahead, and foreclosure numbers could fall as increasing numbers of homes were saved.

Sixth, it would not be surprising to see lenders backing away from states where the foreclosure process has been tightened. Lenders have been writing down hundreds of billions of dollars in losses so it would make sense to suspend loan activities in those areas which represent the most risk, just as insurance companies have done in response to floods and hurricanes. Reduced loan availability in selected states could result in higher local interest rates, slower sales and reduced home prices throughout a state.
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers

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