A Cost-Benefit Analysis of Judicial Foreclosure Delay and a Preliminary Look at New Mortgage Servicing Rules

Abstract

Since the start of the financial crisis, we have seen an extraordinary lengthening of foreclosure timelines, particularly in states that require judicial review to complete a foreclosure but also recently in nonjudicial states. Our analysis synthesizes findings from several lines of research, updates results, and presents new analysis to examine the costs and benefits of judicial foreclosure review. Consistent with previous studies, we find that judicial review imposes large costs with few, if any, offsetting benefits. We also provide early analysis of the new mortgage servicing rules enacted by the Consumer Financial Protection Bureau (CFPB) and find that these rules are contributing to even longer timelines, especially in nonjudicial states.

Mortgage loss severities: What keeps them so high?

“…Despite a full recovery of the housing market, loss severities remained around 40% in recent years (Figure 1). Using recently released loss data from the GSEs, this paper is the first to directly observe that losses have remained persistently high postcrisis and link this fact to the increase in liquidation timelines that have been observed in prior studies (see, e.g., Cordell, Geng, Goodman, & Yang, 2015; Cordell & Lambie‐Hanson, 2016). In addition, we provide some causal evidence on the factors that contributed to the lengthening of liquidation timelines.…”

“…The time‐series variations of liquidation timelines come from changes in foreclosure timelines. Recent research claims that, among various factors, enactment of the new mortgage servicing rules by NMS and CFPB might have played an important role in extending foreclosure timelines (see, e.g., Cordell & Lambie‐Hanson, 2016; Cordell et al., 2015). We conduct multivariate analysis and DID tests to explore these factors.…”

“…Cordell et al. (2015) and Cordell and Lambie‐Hanson (2016) document some regime shifts in the servicing industry and the resulting prolonged liquidation timelines. Two important national legal remedies stand out.…”

“…These new servicing rules associated with these programs were intended to enable more borrowers who are experiencing repayment difficulties to remain in their homes through increased loan modifications. Cordell and Lambie‐Hanson (2016) pointed to this effect and possible adverse effect on foreclosure timelines. We provide causal evidence that these rules have lengthened foreclosure timelines and elevated foreclosure costs.…”

“…The results show that loans liquidated in recent years are associated with significantly longer timelines, even after controlling for local market conditions and loan and borrower characteristics. The existing literature points to recent mortgage market developments such as the new servicing rules by the CFPB as potential contributing factors (see, e.g., Cordell & Lambie‐Hanson, 2016). To draw conclusions about causality, we conduct difference‐in‐differences (DID) tests and show that the NMS and the CFPB mortgage servicing rules have extended foreclosure timelines, ultimately leading to higher loss severities.…”