Do Judicial Foreclosures Cut Down on Fraud?

In my class on housing policy today, we spent some time discussing judicial vs. non-judicial foreclosures and the reasoning behind the different processes. I’m a bit new (and a bit behind) to all of this so let’s break it down a bit:

A judicial foreclosure state requires a lender to file a number of documents with the court to kick off the foreclosure process. The homeowner is sent a notice of the filing and receives the opportunity to contest the sale. Judicial foreclosures can drag on for months and are subject to much scrutiny. A non-judicial foreclosure state requires a lender to file a notice of default and notify the homeowner of it as well. The homeowner still can object to the foreclosure and take the matter to court, but otherwise the court is not involved at all. It does not examine any paperwork or scrutinize the foreclosure. This process is much quicker and less costly to lenders.

Our conversation in class today was kicked off by the following graph:


foreclosuresThe left axis shows the percent of existing mortgages currently in the foreclosure process. Clearly, there are a lot more foreclosures in process in judicial states than in non-judicial states. However, this is just because the process takes so much longer. When the foreclosure process drags on for months, there are bound to be a higher percent of mortgages in the foreclosure process than there are in states where the process takes just weeks. This wasn’t particularly surprising.

We then discussed the reasoning behind judicial vs. non-judicial foreclosures. After all, if judicial foreclosures take longer and are more costly, why even have them? The answer is consumer protection. Over the past few years, we’ve seen a huge amount of foreclosure fraud. In judicial states, the courts inspect all the documents of a foreclosure to try to eliminate as much fraud as possible. In non-judicial states, the courts only inspect all the documents if the borrower contests the foreclosure. That requires the borrower to have enough knowledge of the foreclosure process to notice fraud – something very few borrowers are capable or knowledgeable enough to do. Continue reading “Do Judicial Foreclosures Cut Down on Fraud?”