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Understanding the Duration of Property Foreclosure in the United States

Amid speculations about a potential recession and rising unemployment rates that could trigger an upsurge in foreclosures, it becomes imperative to grasp the average duration it takes to foreclose on a property in the USA.

This knowledge is essential to anticipate when these foreclosed properties might enter the market. The prevailing misconception is that foreclosures occur swiftly, but the reality is quite different. This article explores the typical timeline for property foreclosures in the US, rather than focusing on the fastest possible scenario.

What Constitutes a Foreclosure?
Foreclosure transpires when a homeowner secures a loan against their property, subsequently using the property as collateral. If the homeowner ceases mortgage payments or violates any other terms of the loan agreement, the lender, often a bank or mortgage company, initiates the foreclosure process.

The foreclosure process is subject to variation from state to state and generally involves local courts or a Public Trustee overseeing the proceedings. Banks typically engage a lawyer to prepare the necessary documentation, including loan contracts and foreclosure papers, which are then submitted to the courts or trustees.

These authorities review the documents, and if everything is in order, they proceed to publish a foreclosure notice. Following the notice’s publication, homeowners are provided with a specific window to rectify the foreclosure by bringing their loan up to date.

A sale date is scheduled, and if the homeowner fails to rectify the situation, the property can be sold to the bank or another party through a foreclosure auction. In some states, the previous owners still retain the option to reclaim the property after the sale, or other lien holders may choose to redeem it, ensuring that the full foreclosure sale price is satisfied.

Distinguishing Between Short Sales and Foreclosure/REO Sales
During the foreclosure process, homeowners retain ownership of the property until the proceedings conclude. If they possess equity in the property, they might choose to sell it to pay off the loan and any associated liens. It’s crucial to recognize that the amount owed during a foreclosure is typically greater than the outstanding loan balance due to additional expenses, such as legal fees, levied by the lender.

Alternatively, if the homeowner owes more on the property than its current value, they may opt for a short sale. In a short sale, the bank or other lien holders agree to accept a lesser sum than what is owed, permitting the homeowner to sell the property. The outcome can vary, with some debts being forgiven, while in other cases, the homeowner may still owe a portion to the lien holder. Remarkably, some banks even incentivize homeowners to pursue short sales, as they seek to avoid the complexities associated with foreclosure.

Understanding the Prolonged Foreclosure Timeline
The duration required for foreclosure has substantially increased since the housing crisis of 2008. While many attribute this delay to the COVID-19 pandemic and foreclosure moratoriums, it is essential to note that the foreclosure timeline had already witnessed significant expansion before the pandemic’s onset.

Post the housing crisis, both the US government and banks recognized that mass property sales were detrimental to the real estate market, homeowners, and foreclosure victims. Consequently, the government introduced regulations that compelled banks to prolong the foreclosure process, offering homeowners ample opportunities to avert foreclosure.

Banks are now obligated to provide loan modification options and explore short sale opportunities, all while meticulously adhering to foreclosure and loan procedures. The foreclosure process is lengthened due to these stringent measures, with many banks choosing to avoid foreclosures whenever possible due to their unfavorable public image. In some cases, banks prefer selling pre-foreclosure properties in bulk to investors to circumvent the hassles associated with foreclosure.

Average Foreclosure Durations by State
The average duration for completing a foreclosure in the US has seen a remarkable surge, increasing from less than 200 days in 2007 to over 900 days in 2022. While the timeline briefly decreased to less than 900 days at the close of 2022, it ascended once more in 2023, reaching approximately 950 days.

States with the lengthiest average foreclosure timelines for properties foreclosed in Q1 2023 included Louisiana (2,770 days), Hawaii (2,486 days), New York (1,963 days), Kentucky (1,881 days), and New Jersey (1,697 days).

Conversely, states with the shortest average foreclosure timelines for Q1 2023 included Wyoming (111 days), Minnesota (141 days), Montana (143 days), Texas (146 days), and Arkansas (157 days).

Though some states may allow lenders to foreclose more swiftly in theory, the practical timeline exceeds these projections. The data illustrates that the surge in foreclosure timelines occurred well before the onset of the COVID-19 pandemic.

Will Foreclosures Trigger Another Housing Crash?
While foreclosures played a pivotal role in the previous housing crisis, the protracted foreclosure timeline, averaging two years, currently prevails. Even if there were a sudden influx of foreclosures, it would still take an average of two years for the foreclosure process to conclude. Presently, foreclosure starts and completions remain significantly lower than pre-pandemic levels. The link to Attom Data provides comprehensive statistics on foreclosure initiation and finalization.

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