Many people have speculated that a recession and rising unemployment could cause more foreclosures which could then cause a housing crash. If there is a recession and more unemployment that cause foreclosures it is important to know how long foreclosures take in order to get an accurate idea of when those foreclosures may hit the market. Many people may be surprised by how long it takes to foreclose on properties in the US. This article will go over the length of time it takes on overage to foreclose on a home, not the absolute fastest it can be done.
What is a foreclosure?
A foreclosure happens when a homeowner takes out a loan on their home or a home they are buying and uses that home as collateral for the loan. If the homeowner stops making payments or violates another part of the loan requirements, the lender (usually a bank or mortgage company) can start the foreclosure process.
The foreclosure process varies state by state and usually involves the local courts or a Public Trustee who oversee the foreclosure. The banks will have a lawyer prepare the paperwork, loan documents, and foreclosure documents. Those documents are sent to the courts or trustees. The courts or trustees will review everything and if in order, they will publish the notice of foreclosure. Once that notice is published, there is a certain amount of time the homeowners are given to cure (bring the loan current) the foreclosure. A sale date is scheduled and if the homeowners do not bring the loan current the house can sell back to the bank or another party at the foreclosure sale which is usually an auction. In some states, after the sale the previous owners still have time to redeem the property or other lien holders may redeem it as well which means the full foreclosure sale price is paid off.
What is the difference between a short sale and a foreclosure or REO sale?
The homeowner can sell the property right up until the foreclosure sale or even sometimes after the foreclosure sale and during the redemption period. They own the home until the foreclosure is complete. If the homeowner has equity, they may be able to sell the home and pay off the loan and any other liens. The amount owed during a foreclosure is usually quite a bit more than the loan balance because the lenders can charge lawyers’ fees and other costs.
If the homeowner owes more than the house is worth they may be able to sell it as a short sale. A short sale is when the bank or other lenders accept less than they are owed in order for the homeowner to sell the house. In some cases, the debt is forgiven and in some cases, the homeowner may still owe some money to the lien holder who allowed the short sale. Some banks even pay homeowners to complete a short sale because they do not want to have to go through the foreclosure process.
An REO sale (real estate owned or sometimes other real estate owned) is when the bank has foreclosed on a property, they bought the property back at the foreclosure sale (in some cases the homeowner just gives it back), and the bank is selling the home.
Why has the time to foreclose increased so much?
The time to foreclose on properties has increased significantly since the last housing crash in 2008. Many people think this is all due to Covid and the foreclosure moratoriums. However, the time to foreclose had increased significantly before anyone had heard of covid.
After the last crash, the US government and banks realized that selling a lot of houses at once was not good for the real estate market. it was not good for the people who owned houses or the people who lost homes to foreclosure. The US government enacted many rules that forced banks to take their time foreclosing and give homeowners many opportunities to prevent foreclosure.
The banks have to make sure they offer loan modifications, and the opportunity to do a short sale, and they have to take their time to make sure the loan and foreclosure are done correctly. You may remember, many banks got in trouble for foreclosing wrong and some people even got their houses back. I actually bought a house at the foreclosure sale where the previous owners thought they were going to get their house back for free, but that did not happen. I will do a video on that story soon but you can see some of my other crazy flip stories in in the video below.
All of these new requirements have made the foreclosure process much longer and many banks do not even want to foreclose unless they have to because of the bad publicity foreclosures bring. A lot of banks will even sell their pre-foreclosure properties in huge bulk packages to other investors so they don’t have to go through the headaches of foreclosing.
How long does it take to foreclose on a house in each state?
As I said the average time to foreclose in the US has risen significantly from less than 200 days in 2007 to more than 900 days in 2022! The time to foreclose decreased some at the end of 2022 to less than 900 days, but increased again in 2023 to 950 days!
States with the longest average foreclosure timelines for homes foreclosed in Q1 2023 were Louisiana (2,770 days); Hawaii (2,486 days); New York (1,963 days); Kentucky (1,881 days); and New Jersey (1,697 days).
States with the shortest average foreclosure timelines for homes foreclosed in Q1 2023 were Wyoming (111 days); Minnesota (141 days); Montana (143 days); Texas (146 days); and Arkansas (157 days).
While many of these states allow a lender to foreclose much faster, in reality, this is how long it is taking. As you can see from the chart covid is not what caused this massive increase in time foreclose since the massive increase occurred before covid.
Will foreclosures cause a housing crash?
Foreclosures were a huge reason for the last housing crash but as you can see the time to foreclosure is extremely long and even if there was a rush of foreclosures, it would take 2 years on average for the foreclosure process to be completed. As far as the number of foreclosures now, there are still much fewer starts and completions than before the pandemic. That previous link to Attom Data provides many of those numbers as well.