Divided States of America: Judicial vs Non-Judicial Foreclosure

Roy Oppenheim’s commentary was originally published on Yahoo! Homes and is being redistributed on South Florida Law Blog with their permission.

According to some analysts, whether or not your state is on its way to a housing recovery depends on whether you live in a state that requires judicial foreclosure or one that does not.

What is the difference? In states that require judicial foreclosure, a lender must go through the court system in order to foreclose on a home. A judge must issue a legal judgment against a homeowner in order for that person to be forced out of their home.

That is how it is in Florida, where I practice law, along with 20 other states. But in the rest of the country, in states like California or Georgia, courts are not required to intervene.

With non-judicial foreclosures, banks hold all the cards. If you are deemed by your lender to be in default, the banks can play the role of judge, jury, and executioner.

Your home can be put up for auction, and the court has no or little say in the matter.

It’s like what happens when your car is repossessed by the repo man.

This is why I like to call our country the Divided States of America. There are some states where the rule of law still matters, but there are many that have allowed banks to essentially make up the rules as they go along.

As a lawyer and someone whose job it is to help uphold the law, I think you can guess which side I am on.

Now at one point it seemed that non-judicial states had an advantage when it came to the housing market recovery. Advocates of non-judicial foreclosure like to think it is the only way to get our country back on track.

But take a look at the rise in the number of short sales. Even as the price of a pre-foreclosure home is going down, sales are at a three-year high, according to RealtyTrac.

Short sales, long a pain in the banks’ backside, have finally become an acceptable alternative to foreclosure.

And most importantly, when you look at a state breakdown of this surge in short sales, you’ll see that in fact, whatever semblance of a pattern there might have been is now non-existent.

Short sales have spiked in both judicial and non-judicial states.

California, a non-foreclosure state, had the most short sales in the first quarter. Florida, a judicial state, was in second place.

The idea that it is necessary to forgo legal protection of our property rights to heal the housing market is nonsense.

In fact, I have always suggested this, long before short sales were common, and now it seems I have been proven right.

You do not have to throw the baby out with the judicial bathwater.

The judicial foreclosure process has encouraged banks to work with underwater homeowners to participate in more short sales.

Everyone who has implored states to move to a non-judicial model is barking up the wrong tree.

Without judicial states, robosigning and the entire fraud-closure crisis would not have been discovered, and you would not have the Mortgage Fraud Task Force being led by New York Attorney General Eric Schneiderman.

Without judicial foreclosure the fox would not just run the henhouse, but the entire farm.

Judicial foreclosure is critical to the protection of property rights in our country.

Property rights have been a bedrock of our constitution and our society. Not the protection of lenders’ rights, despite efforts from some politicians to make it so.

Judicial foreclosure historically has always been part of our constitutional process.

When the pilgrims came over from England, that was how they handled it.

The fact is that non-judicial foreclosure was nothing more than an invention of the banks, as another means to deny you the homeowner your day in court.

From The Trenches,

Roy Oppenheim