Shadow Inventory and the Foreclosure Process in Virginia vs Maryland

The Washington Post had a few good articles this weekend about battling foreclosure. One article, in particular, highlighted the differences in approach by Virginia and Maryland. Starting in 2008, Maryland lawmakers passed laws to give homeowners more time to try to work out solutions with lenders; these measures included waiting periods, counseling, and required mediation. These laws, combined with the fact that Maryland is a judicial foreclosure state, slows down the process.  While this is great news for the people being foreclosed on, it often just delays the inevitable, and has affected Maryland’s real estate recovery. According to the article, Maryland ranks as #4 for longest duration of a foreclosure, with average days of 634. Virginia, on the other hand, is a non-judicial foreclosure state, which results in very fast foreclosures, averaging 132 days, the 4th fastest in the nation. (The U.S. average is 348 days.) Virginia can foreclose so quickly because at settlement, home buyers sign a deed of trust that allows the lender to foreclose outside of the court system.

I’m often asked by potential home buyers whether we can expect a wave of foreclosures and how to take shadow inventory into account. The foreclosure process in Virginia provides high visibility into the shadow inventory; one need only look at the publicly filed notices of default, and if the home owner doesn’t work out a deal with the lender, it will become real estate owned by the bank. At that time the tax record will reflect the change in ownership and you can be sure the bank will be trying to sell that home at some point. The timing remains an issue; banks don’t want to flood the market with foreclosures, thereby depressing all prices.

In Maryland, homeowners could stay in their homes for many months, or even years, before that home becomes real estate owned. They could well resume making payment or complete a successful short sale within that time. Notices of default are still used but the foreclosure process itself will likely take more than a year, providing a number of options (not to mention rent- and mortgage-free living) for home owners.

The bottom line for home buyers? Virginia pulls off the band aid quickly, resulting in short term pain to the market, but the end will arrive more quickly. Maryland slows down the process hoping that home owners will find a solution or otherwise resume making payments. We can expect a much slower rebound there. So when someone asks me: “Are we at the bottom?” I must reply with the question: “In which state?”

More Resources: Mortgage Bankers Association “Judicial Versus Non-Judicial Foreclosure”

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