Foreclosures: The Chickens Come Home to Roost

The O’Malley administration’s response to the real estate crash in 2008 was a characteristic one: kicking the can down the road. Lenders were blamed; foreclosure attorneys were blamed; everything was done to obscure the fact that many if not most of inner-city loans should not have been made in the first place, were frequently made for more than 100% of inflated values, and would not be rendered good by the efflux of time.

The administration sponsored legislation providing for foreclosure mediations–mediations which can in no way alter the underlying economic realities. The minimum time necessary to accomplish a foreclosure was raised from 15 to 135 days. Attorneys attempting foreclosures were required to file 16 separate affidavits, driving up foreclosure costs and ensuing deficiency judgments. As a result, in June 2013, finished Maryland foreclosures required an average of 575 days, as against 184 days for Virginia foreclosures. A Shinn, “Thousands of Marylanders are Losing Homes in Second Wave of Foreclosures,” Baltimore Sun, August 10, `2013. This period is likely to grow still longer, since on May 16, 2013, Governor O’Malley signed Chapters 414 and 415 of the Acts of 2013 requiring that sheriffs evict foreclosure defendants and eliminating self-help remedies except where a property is vacant and an additional 15 days’ notice is given.

In that month, Maryland had the nation’s third highest foreclosure rate, “a backlog of delinquent loans, created in part by the State’s long foreclosure process.” The new legislation caused the average time spent in foreclosure to escalate from 379 days in the second quarter of 2010 to 634 days in the fourth quarter of 2011. H. Perlberg, “Baltimore Foreclosures Surge Again as Legal Logjam Breaks,”,August 15, 2013. In May 2013, there was a 229% increase in new foreclosures relative to the previous year; “foreclosures are weighing down the Maryland market.”

While the O’Malley-mandated delays ensue, homeowners do not make interest payments and have no incentive to make repairs; lenders suffer income and balance sheet losses and wind up with seriously deteriorated properties; foreclosure signs in neighborhoods depress the market for private sales; and Maryland’s civil courts are clogged with cases which accomplish nothing and go nowhere.

What makes this development extraordinary is that a large body of literature about underdeveloped countries makes clear that one reason for their under-development is the lack of swift remedies for secured creditors and a consequent reluctance of lenders to extend mortgage financing. See, e.g. K. Dam, The Law-Growth Nexus: The Rule of Law and Economic Development (Washington: Brookings, 2006); H. De Soto, Missing Ingredients of Globalization, in E. Zedillo, The Future of Globalization (London: Routledge, 2008), 20; A. Vargas Llosa, Liberty for Latin America (New York: Farrar Straus, 2005). Even as we propagate swift remedies abroad, we destroy them at home.


Posted in: Economic Regulation, Judiciary and Legal Issues, Legal/Regulatory/Judicial, Markets and Privatization, Regulation, State and Local Politics, Taxation/Budget/Economic Policy

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