The epicenter of the U.S. foreclosure crisis is shifting to New Jersey and New York, threatening a housing rebound in one of the country’s most densely populated areas.
New Jersey has surpassed Florida in having the highest share of residential mortgages that are seriously delinquent or in foreclosure, with New York third, a Mortgage Bankers Association report showed last week. By contrast, hard-hit areas such as Arizona and California have some of the lowest levels of soured loans after allowing banks to quickly foreclose after the 2007 property crash.
The number of New York and New Jersey homeowners losing their houses reached a three-year high in 2013. Banks in these states have been slowly working through a backlog of delinquent loans that enabled borrowers to skip mortgage payments for years. Now these properties are poised to empty onto a market where affluent Manhattan suburbs neighbor blighted towns that are struggling most with surging defaults.
“It is really a delayed reaction in New Jersey and New York,” said Michael Fratantoni, chief economist for the Mortgage Bankers Association in Washington. “Loans that were made pre-crisis have been in this state of suspended animation for a number of years. And now, we are beginning to see the pace of resolution pick up.”
In January, the number of New York foreclosure auctions reached 527, the highest monthly level since October 2010, according to data firm RealtyTrac. Foreclosure filings in New York City increased 30 percent to 15,993 in 2013, a three-year high, according to RealtyTrac.
Almost 10,000 cases in New Jersey headed to a sheriff sale in 2013, 47 percent more than the year before and the highest level since 2009, according to the New Jersey Administrative Office of the courts. Across the country, repossessions fell 31 percent in 2013 to the lowest since 2007, according to RealtyTrac.
The difference in New York and New Jersey stems partly from a foreclosure process that requires court approval before lenders can seize homes. It takes 1,029 days on average to foreclose in New York, the longest timeline in the United States, followed by New Jersey at 999 days and Florida, at 944 days, RealtyTrac data show.
Delays were worsened by negotiations between top banks and state attorneys general over alleged foreclosure abuses that ended with a $25 billion settlement in 2012. Superstorm Sandy, which damaged homes and businesses in coastal northeast communities in 2012, also slowed the process.
New York Trailing
The real estate markets in New York and New Jersey are trailing the rest of the country as a result. Prices in New Jersey, the most densely populated state, climbed 2.9 percent in the fourth quarter from a year earlier, compared with a 7.7 percent jump for the United States, the Federal Housing Finance Agency said Tuesday. New York values rose 3.7 percent.
California prices surged 19.5 percent and Arizona’s gained 15.2 percent. These states do not have a judicial foreclosure process.
“Price increases that are occurring in the rest of the country are not likely to happen in the New York-New Jersey area, with the potential inventory that can come at any time,” said Lawrence Yun, chief economist of the National Association of Realtors.
“When one sees a price increase in Phoenix or many other parts of the country, one can assume it’s a genuine increase from falling inventory,” he said. “If it happens in Edison, New Jersey, or Long Island, New York, one has to ask, ‘Is this for real or just temporary?’ ”
Jon Pardi, a 62-year-old resident of Edison, N.J., is among those facing eviction after he stopped making house payments in mid-2012. Last month, a judge gave Pardi six months to generate enough income so that he could work out a modified payment arrangement with his loan servicer, Ocwen Financial Corp., or lose his home to foreclosure, he said.
Pardi said he could no longer pay his loan because his commission-based income as a mortgage broker dropped to $20,000 a year from a peak of more than $100,000. Having little confidence in New Jersey’s housing market rebounding and the career prospects for loan officers, Pardi is training to become a holistic nutritionist.
“My odds are down, but the chances of saving my home aren’t zero,” Pardi said. “If I start making money again, everything changes. But if jobs don’t come back for me, and for my country, then it’s going to keep moving in a down direction.”
Ocwen, which declined to comment on specifics of the case, citing privacy considerations, said it hasn’t made a decision and hasn’t received the necessary documentation from the borrower.
“Ocwen has been working hard to provide a modification or other resolution for this borrower,” since the servicing of the loan was transferred late last year from the prior servicer, the company said in an e-mailed statement.
Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, said many borrowers who aren’t paying their mortgages don’t put that money aside.
“Some people put money away, but most people are not paying for their house because they don’t have it,” Kaye said. “Why they don’t have it is often due to lack of employment or underemployment.”
Lenders in New Jersey are pushing cases through more quickly, and it now takes about two months to process final judgments against delinquent homeowners, compared with a backup of nine months a few years ago, said Kevin Wolfe, assistant director of the Civil Practice Division in the Administrative Office of the Courts.
The Office of Foreclosure, which reviews case files before they can move to the final step of sheriff sale, has added four permanent staff members, six law clerks and 10 case analysts since 2012. It previously had seven employees.
“We are staffed up to move these cases faster,” Wolfe said. “But the other reason cases are moving more quickly is that lenders have improved their foreclosure practices and worked out logistics with their law firms, and, as a result, they’re geared up to handle foreclosures more efficiently.”
Private-equity firms such as Blackstone Group—which helped drive up prices by buying thousands of single-family homes to rent in Arizona, Nevada, California and Florida—have steered clear of the Northeast. Large investors favor markets with newer construction and demographic growth rather than the Northeast’s aging homes and higher property taxes, said Sam Khater, senior economist for CoreLogic.
Some hedge-fund investors are instead purchasing delinquent mortgages in the New York and New Jersey area. They are discounted because of the legal delays, said Jeff Taylor, managing partner at Digital Risk, a mortgage-risk analytics firm.
The investor strategy is to avoid court delays by modifying loans, and if that’s not feasible, to pay homeowners to handover keys or sell for less than what’s owed, Taylor said. That may help flush out the pipeline of delinquencies.
“The sooner that this inventory that has been pent up gets to the market place the quicker you’re going to see more home price appreciation,” Taylor said. “It gets the overall real estate market healthier quicker.”
Housing inventory remains tight in the United States, with a 4.6 month supply in December, according to the National Association of Realtors. New Jersey had a 6.6 month supply, the New Jersey Association of Realtors data show. A six-month inventory is considered equilibrium between buyers and sellers.
While investors may help the market, they are generally avoiding hard-hit neighborhoods in cities such as New Jersey’s Newark, Irvington, Elizabeth, Trenton and Camden, according to Jeffrey G. Otteau, president of Otteau Valuation Inc. in East Brunswick. About 21 percent of New Jersey foreclosures are in urban areas and another 18 percent are in towns hit by Sandy. Only 4 percent are in the southern suburbs and 2.5 percent in the northern ones, Otteau said.
“There is a crisis, and where that crisis will play out is in inner, urban neighborhoods where unemployment is highest, credit scores are lowest and investor appetite is non-existent,” Otteau said.
Newark, the state’s most populous city, and nearby Irvington are considering plans to use government power to seize underwater mortgages to help homeowners reduce debt and avoid foreclosure. The cities are researching a program that would offer fair-market value for the loans and reissue them to homeowners who can afford to keep making payments at the lowered amount.
Many largely black and Hispanic communities in New Jersey and elsewhere were targeted for predatory loans during the boom, said Linda E. Fisher, law professor at Seton Hall University, who is helping the cities research the eminent domain proposal.
Fisher is also campaigning with residents on her block in the town of Montclair to encourage the bank, which owns a vacant property two doors down from her, to clean it up and resell it. The house, which has been empty for three years, was stripped of pipes. It attracted squatters who moved in a stove and a flat screen television, she said.
Montclair, home of comedian Stephen Colbert, is a leafy commuter town with hundreds of shops and restaurants accessible by foot.
“Here we are in our middle- and upper-middle-class community and we’re seeing the same problem of poor maintenance by servicers,” Fisher said. “The foreclosure crisis has had ripple effects and it is not limited to poor communities of color where it’s concentrated.”
About a 15-minute drive south of Fisher, a court officer knocked on the door of the two-story home on Newark’s west side that Janet Hopes-Edrington shares with her elderly parents. The officer served her with foreclosure papers. Hopes-Edrington, 50, said she had filed the necessary paperwork to modify the terms of payments with her lender in December and was surprised to learn it was pursuing a foreclosure. Now, she’s contemplating having to move along with her infirm parents.
Hopes-Edrington, who lives on Social Security disability benefits, fell behind on her mortgage after losing her job at the Internal Revenue Service and hasn’t made a mortgage payment since July 2012.
“That’s the thing that’s getting me, I can’t easily relocate,” she said. “I have no idea what I’m going to do.”