In: Root » » Loans and mortgages
The current mortgage foreclosure system is a complex mélange of laws and rules that varies substantially from state to state. The foreclosure process generally entails three steps: First, a loan default, no more than 6 months after the first missed loan payment, then a foreclosure auction, and finally a sale of the property by the bank. The average time between the first and last steps ranges from about 7 months in Virginia to 20 months in New York City. The federal government streamlined the bankruptcy code in 2005 to make it more uniform across states, and it should do the same for foreclosures. A federal foreclosure system would substantially reduce the cost of the foreclosure process, be more equitable to borrowers and lenders, and allow for the more accurate collection of data and information. A federal foreclosure process should standardize the time between a mortgage loan default and an auction. One year would be reasonable because that is approximately the median current length of time among states. A year would be sufficient to give borrowers who have hit hard times perhaps due to unemployment or illness a meaningful opportunity to work with their lenders and turn things around. It also allows lenders to foreclose within a reasonable time if borrowers are unable or unwilling to meet their obligations. A federal process should also favor the judicial form of foreclosure, even though the costs are greater. Requiring a lender to file a lawsuit gives consumers greater protection against abuse. Lenders could recoup some of their extra expenses by obtaining deficiency judgments, which hold borrowers liable for the difference between the price a home fetches in a foreclosure sale and the amount of outstanding debt.4 Federal foreclosure should eliminate the right of redemption, which gives the original homeowner a chance to repurchase a foreclosed home for up to a year after it is auctioned. This right can add delay and uncertainty to the process and reduce the value of the foreclosed home. A one-year period between default and foreclosure offers homeowners sufficient time to negotiate with lenders or to find the cash to keep their homes if they are able.
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