In a paper, Andra Ghent, an assistant professor specializing in real estate at the W.P. Carey School of Business, examines differences between states that require court hearings on foreclosures, referred to as judicial states, and those that don’t. Arizona allows both judicial and non-judicial procedures.
“The overall time cost is really a big issue and the poor condition the properties are going to be in in these judicial states,” Ghent said. “For these judicial states, you have to start a court proceeding, so you actually have to go to a judge and that depends, of course, on the judge’s availability.”
Ghent said that in general states like Arizona that don’t require judicial involvement have been able to get through the bulk of foreclosures caused by the housing crisis. States that require judicial approval of foreclosures, like Florida and New York, face backlogs and shortages of judges available to hear cases, she said.
“They still have a lot of excess in supply, whereas in Arizona we’re not out of the woods completely but we worked our way through a lot of the foreclosures in the queue,” she said.
A foreclosure occurs when a property owner can’t make a payment on his or her loan, and the first step of the process usually involves the lender sending the borrower a formal notice of default. In Arizona, lenders can proceed with a judicial or non-judicial foreclosure.
Diane Drain, a Phoenix real-estate attorney, said 99 percent of lenders in Arizona dealing with residential foreclosures will choose the non-judicial route. Known as a trustee sale, it involves a third party who will sell the property within 90 days.
“That’s efficient,” Drain said. “It is inexpensive for the lender because lawyers don’t have to do them. They can be done by title companies and others who are licensed.”
Drain said foreclosures in Arizona are slowing down because lenders are becoming more efficient in processing trustee sales.
“Lenders are being a little smarter about doing their foreclosures,” she said. “They’re speeding them up a little bit rather than just letting homeowners stay in their homes for months and years.”
Mike Orr, director for the W.P. Carey School’s Center for Real Estate Theory and Practice, said that in a judicial foreclosure state, where a lender files a lawsuit for the right to foreclose, it can take years to complete a foreclosure.
“People would be sitting in those houses waiting for their cases to come up,” he said. “It’s good for them because they don’t have to pay their mortgages. They get to live in the house rent-free and mortgage-free. But it’s not very good for the market at all when all those loans go outstanding.”
Jerry Sell, owner of Prescott mortgage lender Jerry Sell Mortgages, said he’s seen a noticeable slowdown of foreclosures in Yavapai County, primarily because the system doesn’t have to go through any “red tape” to bring a foreclosure to market to dispose of it.
“We, here in a non-judicial state, will be healthier quicker because the system isn’t as overwhelmed or overburdened by all of the additional paperwork that a judicial state or judicial foreclosure requires,” Sell said.
Elliott Pollack, CEO of the Scottsdale-based economic and real estate consulting firm Elliott D. Pollack and Co., said foreclosures in Arizona are down because of the state’s foreclosure laws.
“We’re still above normal, but essentially we’ve made a tremendous progress in dealing with these issues and getting them through the process, getting them to the market and being re-sold to people who will take care of them,” he said.