(Bloomberg News) Wendell and Margret Brady haven't paid their mortgage in more than three years, withholding the money amid a foreclosure dispute on the couple's 11-bedroom house in Morristown, New Jersey.
The Victorian home, built in 1887 and owned by the retired couple for 38 years, is part of the growing backlog of properties facing repossession in the state, which now has the second-highest serious delinquency rate in the U.S. While shrinking nationwide, the pipeline of distressed real estate, or shadow inventory, is also growing in New York, Connecticut, Maine and Pennsylvania because of state laws that slow the foreclosure process. The Bradys heard nothing from their lender from May 2011, until a letter arrived in the mail last week.
"This was like going back to day one," said Margret Brady, 77, after she and her husband received on Sept. 15 the certified letter saying they must pay $223,730 by the end of the month or face losing the house. "It was like we hadn't gone through any of the stuff of the last three years."
New Jersey's judicial review of all foreclosures, which delays seizures to help borrowers, threatens to hold down prices for years as properties remain subject to repossession and then may be sold at a discount. That's buffeting a housing market already hurt by unemployment that's risen to a 35-year high.
Passing Nevada
The state passed Nevada in the second quarter in the rate of homeowners with seriously delinquent loans -- those 90 days late or in foreclosure -- according to the Mortgage Bankers Association. Only Florida had a higher rate of serious delinquencies, and that fell 1.2 percentage points from a year earlier to 17.5 percent of mortgages. In comparison, New Jersey's rose 1.3 percentage points to 12.7 percent.
While home values increased in July from a year earlier in 42 states, New Jersey prices fell 0.8 percent, according to CoreLogic, a real estate services company based in Santa Ana, California.
"Housing is an albatross around New Jersey's economy, which is one of the weakest in the country," Mark Zandi, chief economist at Moody's Analytics Inc. in West Chester, Pennsylvania, said in an e-mail.
Serious delinquencies as of June 30 were up 6 percent from a year earlier in New York, Connecticut and Maryland, and up 5 percent in Pennsylvania and the District of Columbia, the Washington-based Mortgage Bankers said on Aug. 9. The rate fell by 27 percent in Arizona, 24 percent in California and 14 percent in Nevada, among states worst hit by the housing crisis.
Shadow Inventory
"Shadow inventory is falling in much of the country -- except for the Northeast," said Zandi. "The implication is that house prices will be much weaker in the Northeast in coming years as these distressed properties eventually get sold."
U.S. foreclosure filings plunged in late 2010 after attorneys general in all 50 states started investigating allegations of faulty and fraudulent paperwork used to repossess homes. The country's biggest banks, including JPMorgan Chase & Co. and Bank of America Corp., agreed to a $25 billion settlement in February.
In New Jersey, where about 60,000 foreclosures started since January 2008 still await resolution, borrowers in the foreclosure process haven't made a payment for an average of 934 days, according to Lender Processing Services Inc. New York, at 953 days, and Florida, at 938 days, are the only states with longer time frames. The U.S. average is 742 days.
New Jersey's foreclosure process ground almost to a halt in December 2010 after state courts threatened to suspend seizures by six of the largest banks unless they showed they had processes in place to ensure that information in uncontested foreclosures is based on a personal review of records. State Supreme Court Chief Justice Stuart Rabner said the lenders were implicated in "robo-signing," using assembly lines of workers to sign foreclosure documents without verifying them.
Robo-Signing Scandal
The Bradys were among those caught up in the scandal. In September 2006, they took out a $485,000 loan from a division of General Motors Acceptance Corp. on their home, which has an assessed value of $650,000, according to public records. The debt paid for home improvements and medical bills for their daughter, Karen Quinlan, Margret Brady said. They missed a payment in November 2008, the month after their daughter died of cancer, Brady said.
"We used her life insurance to catch up, which was $10,000," she said. "We thought we were even, but they kept putting on these bogus charges."
Susan Fitzpatrick, a spokeswoman for Residential Capital LLC, the parent of GMAC Mortgage, declined to discuss a specific borrower, citing privacy reasons.
GMAC Restarts
GMAC Mortgage has restarted foreclosures on delinquent properties in New Jersey, Fitzpatrick said in an e-mail. "Although foreclosure delays have allowed delinquent borrowers to remain in the home without payment for a longer than normal period of time, they do not increase the likelihood a servicer can provide sustainable and affordable alternatives to foreclosure, such as loan modifications or short sales."
For more than a year, the Bradys tried to negotiate a loan modification, putting aside $2,000 a month into a special bank account rather than paying the lender.
They received a foreclosure notice in March 2010, which they challenged in court. In May 2011, the foreclosure action was withdrawn after the judge ordered a copy of the mortgage note, which wasn't produced, said Margret Brady, a retired house painter and former member of the town council.
Certified Letter
The Bradys heard nothing about their foreclosure until the certified letter from GMAC arrived. It said their monthly mortgage payment would be $6,336, about three times their previous bill.
"That's about $4,000 more a month than we've been putting aside," she said in a telephone interview from her home, a one- hour train ride from Manhattan.
Judicial states such as New Jersey provide automatic court review of home seizures, giving borrowers a legal forum to demand proof that lenders have the right to foreclose or to argue for mortgage modifications. The 21 judicial states --also including Florida, New York, Connecticut, Maryland and Pennsylvania -- have about 40 percent of the 42.5 million home loans tracked by the Mortgage Bankers Association.
By some estimates, the visible inventory of 2.4 million homes for sale nationwide is dwarfed by the hidden supply, which may number 5.7 million, according to a Morgan Stanley analysis. The U.S. shadow supply -- a combination of off-market bank-owned homes and properties forecast to be repossessed by lenders -- has decreased by a third from the peak in early 2010 as more homeowners have lost their houses or received a loan modification that allowed them to bring their mortgages current, Morgan Stanley said in a July 26 report.
Property Supply
The U.S. supply of properties listed for sale, a seasonally adjusted measure of how long it would take to sell off the inventory at the current sales pace, fell to 6.4 months in July from 9.3 months a year earlier, according to the National Association of Realtors. That helped push up the median sale price of an existing home by 9.4 percent from a year earlier to $187,300.
The logjam in New Jersey may be breaking following a February ruling in a case involving the state's Fair Foreclosure Act, which required lenders to furnish the name and address of the note holder on foreclosure notices, rather than just the contact information for a loan servicer. In July, lenders filed 2,387 foreclosure complaints in the state, more than twice as many as a year earlier and the most since December 2010, according to state court data.
Filing 'Glut'
Also in July, Wells Fargo & Co. requested permission to move forward with 4,000 stalled New Jersey cases. State courts have a new electronic filing system and are preparing to add dozens of new employees to handle the bigger caseload, according to Winnie Comfort, spokeswoman for New Jersey's court system.
"We are anticipating a glut in filings because that's what the lending community is telling us," Comfort said in a telephone interview. "We will do everything we can to move those in a timely fashion."
The Northeast's path to recovery faces other headwinds. Of the nine geographical divisions tracked by the Bureau of Labor Statistics, the mid-Atlantic area, which includes New Jersey, New York and Pennsylvania, is the only region where the jobless rate didn't fall in July from a year earlier. Unemployment in the mid-Atlantic increased to 8.9 percent from 8.5 percent, a change within the margin of error. The U.S. rate was 8.1 percent in August, down 0.2 percentage point from July.
New Jersey's unemployment rate jumped to 9.8 percent in July, with declines in manufacturing, construction and professional and business service jobs, the state's Labor Department said.
'Domino Effect'
The weak economy is hitting inner cities and more-affluent communities alike, said Mark Cherry, a Cherry Hill, New Jersey- based attorney who represents delinquent borrowers. Wall Street cuts are being felt in the New Jersey suburbs, resulting in a "domino effect" on luxury home sellers, high-end car dealerships and restaurants, he said.
"You could drive down a street that looks perfectly normal, with minimal for-sale signs, and not realize that 20 percent of those homes are in foreclosure," Cherry said. "There's no big flag that says that a lot of these people are in trouble."
Short sales, in which lenders let borrowers sell for less than the balance of their mortgages, now account for a third of Eileen Meehan's business. A year ago, it was only 10 percent, said the Realtor with Re/Max Properties in Saddle River, one of the wealthiest towns in the New York suburbs of Bergen County, New Jersey.
Free Living
Some sellers have backed out of short sales because they don't want to pull their children out of school or aren't in a rush to move because they're living in a home for free, she said. Many others, including one client who fell behind on his mortgage after pulling equity from his property for years to keep a title business afloat, would rather sell and move on with their lives, she said.
The delinquent homeowners who remain in the shadows are keeping potential homebuyers on the sidelines amid concern that prices will fall more, Meehan said.
"It has given buyers a wait-and-see attitude," she said.
Higher-income markets, such as New Jersey's Morris and Bergen counties, will probably avoid the worst pain because there's a shortage of homes and when distressed properties are listed, "the housing market will swallow them whole," according to Jeffrey G. Otteau, president of Otteau Valuation Group Inc., in East Brunswick, New Jersey.
'Gulf Oil'
"In the employment-rich suburban submarkets, this will be much like the gulf oil spill," Otteau said in an e-mail. "For the most part, it never happened. The foreclosure wave will be the same way."
Foreclosure delays in judicial states also are keeping capital on the sidelines and reducing borrowing options for buyers of high-end homes, according to Chris Whalen, a senior managing director at Tangent Capital Partners LLC in New York.
"Here in the Northeast, we have a problem," Whalen said in a telephone interview. "Investors won't touch a state where they can't foreclose on the house. They have no collateral."
In California and Arizona, which have cut their shadow inventories in half in the past two years, investors have flooded the market with cash to buy a diminishing supply of distressed homes, helping housing prices find a floor and reducing the incentive for underwater homeowners to walk away from their debts.
Phoenix Homes
Phoenix-area homes sold for a median $149,000 in July, up 31 percent from a year earlier, according to a Sept. 6 report from the W.P. Carey School of Business at Arizona State University.
Mike Orr, director of the business school's center for real estate, said the shadow inventory no longer deters investors in Arizona.
"It's not as big and scary as you think because time will take care of it," he said in an interview. "The problem is really focused on the East Coast, where you have a foreclosure system that is slow and a build-up in delinquency rates."
Billy Pinilis, an attorney with Pinilis Halpern LLP who represented the Bradys, said court proceedings give delinquent homeowners who can't pay their mortgage more time to consider options, including a loan modification or selling for a loss.
"Lawyers know it's going to take longer for a foreclosure to wind its way through court and they can use that strategically," Pinilis, who declined to discuss details of the Brady case, said in a telephone interview. "That buys the homeowner time to work things out."
Margret Brady said she's hopeful New Jersey's legal system will give her a chance to work out a deal to keep her home.
"I think New Jersey is better than a lot of states," she said.