Tuesday, June 12, 2012

Foreclosure bottleneck opened?

Over the past few months, we’ve seen foreclosures down drastically in Arkansas.

RealtyTrac.com, a company that keeps up with foreclosures, reported those had dropped by around 79 percent in the Natural State compared to the same first three months of 2011. Was the decrease due to a booming economy?

No, not exactly. Foreclosure rates started falling last year in the wake of In Re Johnson, a chapter 13 bankruptcy case in the Eastern District of Arkansas, Jonesboro Division. In that case, the court held that a lender not authorized to do business in the state of Arkansas could not take back homes through the state’s non-judicial foreclosure statute.

Out-of-state banks claimed they were authorized to do business in Arkansas because they had been chartered nationally by the federal Officer of the Comptroller of the Currency and, therefore, had no need to register with the Arkansas Secretary of State or anywhere else. An appeal was filed and the Eastern District took up the matter again in May.

On May 11, the Eastern District reversed the earlier decision and held that, indeed, those banks that are nationally chartered are also authorized to do business in the Natural State.

So, where does that leave us and why should anyone care?

First of all, it’s important to keep in mind there are two types of foreclosure actions in Arkansas – judicial and non-judicial. Lenders prefer the non-judicial route as they are less expensive than going through the courts system and the foreclosing on a home through that method typically doesn’t take as long.

When the non-judicial option was tossed out the window for a lot of lenders, the foreclosure rate slowed considerably. That does not mean that financial woes vanished for people who couldn’t pay their mortgages.

It does, however, mean that title companies were reluctant to write insurance on transactions involving foreclosed homes when there was a question as to whether those houses were taken in line with Arkansas state law.

In other words, a lot of people purchased homes that were taken prior to the decision and were left in limbo. They couldn’t close on their purchases because they couldn’t get title insurance on the homes.

So, the murky foreclosure picture may get cleared up before long. It certainly appears that it will if the reversal stands.

Having said all of that, it’s important to point out that no one wins in a foreclosure. The borrower is left without a home and banks almost always lose money when they have to take a home through foreclosure and then sell it.

That being the case, buyers should know that there are options for them when they fall behind on their mortgages or are in danger of doing so. Your mortgage banker is well aware of those options, so feel free to call to find out what they are. Banks prefer to work with borrowers rather than file a foreclosure, after all, so finding out what your options are if you’re mortgage is at risk of falling into default is a good idea.


Home Sweet Home is distributed weekly by the Mortgage Bankers Association of Arkansas. Visit the Association on the Internet at mbaar.org.

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