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Recent Fourth District Foreclosure Trends

Foreclosure rates among Fourth District states remain at or near historic highs. Outside of West Virginia, which has seen its rate remain elevated but stable, these rates have continued to trend up since the recovery began in the second quarter of 2009.

Figure 1. Foreclosure Rates, Fourth District States

This pattern differs noticeably from trends in the so-called sand states—Arizona, California, Florida, and Nevada. These states saw among the largest increases in foreclosure rates following the nationwide bust in housing market activity around 2005; however, since mid-2009, with the exception of Florida, foreclosure rates in the sand states have fallen sharply.

Figure 2. Foreclosure Rates, Sand States

The declines have been so significant that Arizona and California, which had the nation's third- and fourth-highest foreclosure rates in the second quarter of 2009, respectively, had the thirteenth- and seventeenth-highest rates, respectively, two years later. By contrast, Ohio has continued to have one of the nation's highest state foreclosure rates—remaining in the top ten—while Kentucky and Pennsylvania have each seen their rankings worsen, from twenty-second- to fifteenth-worst for Kentucky and twenty-ninth- to twenty-fifth-worst for Pennsylvania.

What accounts for this divergence? Broadly speaking, states can use two different kinds of processes for resolving foreclosures, and these differences appear to be behind the differing patterns of recent foreclosure-rate changes. One approach, judicial, requires that a foreclosure proceed through the courts. Another approach, nonjudicial, is handled outside of court, generally by a third-party trustee who, at the time the loan was originated, was given the power to sell the property under certain conditions. States may employ one or both of these processes.

Figure 3. Judicial and Nonjudicial Foreclosure States

Judicial foreclosure timelines tend to be longer under normal circumstances. But they are also prone to getting even longer if courts face a flood of foreclosures, as has happened in the last several years. As a consequence, those states that rely on courts to process their foreclosures have generally seen their stock of foreclosures continue to build, often amassing a considerable backlog. By contrast, the states that rely more heavily on trustees' sales have in many cases seen their foreclosure rates fall.

Figure 4. Change in Foreclosure Rates, by Type of Process

This partially explains patterns evident in the Fourth District, where states that rely exclusively on a judicial foreclosure process—Ohio, Kentucky, and Pennsylvania—have seen little decline in their foreclosure rates. But this difference can be seen even more starkly in the sand states. Florida is the only state among these that relies exclusively on a judicial foreclosure process. It is also the only state among the sand states that hasn't seen a meaningful decline in its foreclosure rate. This has recently prompted Florida officials to consider changing the state's foreclosure process from one that's court-mediated to one that's not.

Of course, changes in new foreclosure filings could be contributing to differences in foreclosure rates as well. However, foreclosure filing rates fell for most states from the middle of 2010 to the middle of 2011. And unlike what we've observed for foreclosure rates, foreclosure filings don't appear to have been affected by differences in state foreclosure processes. This suggests that recent changes in foreclosure rates across states are being driven by differences in the rate at which loans are moving through and out of foreclosure, rather than the rate at which they are moving into foreclosure.

Figure 5. Change in Foreclosure Rates Filing Rates, by Type of Process

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