2009 LRC Foreclosure Report
In 2009, the Legislative Research Commission examined foreclosures going on in the Bluegrass state. Here are some excerpts from the Report. Click to read the entire report: Foreclosure Report.
“In January 2009, the Program Review and Investigations Committee directed staff to study home foreclosures in Kentucky. The resulting report was to address three major objectives:
• describe the foreclosure process in Kentucky, including how laws in Kentucky compare to those in other states;
• describe recent foreclosure trends in Kentucky, as well as factors that have contributed to these trends; and
• identify the effects foreclosures have on neighborhoods, local government, and state government, including house prices and tax revenues.
. . . .
Here’s the Summary of the Report, but the entire Report is well worth the read: Foreclosure Report.
Summary
In January 2009, the Program Review and Investigations Committee directed staff to study home foreclosures in Kentucky. This report covers the foreclosure process, the number and distribution of foreclosures in Kentucky, causes and effects of the increase in foreclosures, and government programs that have been implemented in response to the increase.
Courts Handle the Foreclosure Process in Kentucky
In Kentucky, foreclosures go through a judicial process, meaning foreclosures are handled by the courts. When it is determined that a borrower is in default on a loan, the lender files a foreclosure suit with the circuit court. Typically, the homeowner does not respond to the filing, so the court issues a default judgment for the lender. The property is then referred to a court official, the master commissioner, who will auction the property. The lender will usually buy the property at the auction and relist the property for sale.
Some states use a nonjudicial foreclosure process, which means the process is not required to go through the courts. Other differences between states include whether the homeowner retains the right for a period of time to repurchase the property, and whether the borrower can be sued for any portion of the loan amount not covered by the sale of the property.
Kentucky’s Foreclosure Rate Has Been Increasing
Data from the Mortgage Bankers Association’s National Delinquency Survey indicate that in Kentucky during the fourth quarter of 2008, 0.78 percent of loans entered the foreclosure process, approximately four times higher than the percentage in the 1990s. In the same quarter, about 7.5 percent of all loans were past due on at least one mortgage payment, an indication of borrowers at risk for future foreclosure. Nationally, rates were slightly higher. In the U.S., 1.03 percent of loans entered the foreclosure process and 7.8 percent were past due on at least one payment.
State data indicate that there are a higher number of foreclosures in the middle region of Kentucky. This could be due to a number of factors, such as a higher percentage of homeowners having a mortgage, and recent population growth increasing the demand for new mortgage loans, which have a higher probability of default. Foreclosure data collected from Daviess, Hardin, and Jefferson Counties show that some counties have experienced large increases in foreclosures in recent years, but other counties have not seen the same growth.
Causes of Increased Foreclosures
Nationally, the increased rate of foreclosures appears to be caused by a number of factors. Recent changes in real estate finance contributed to three main factors that led to more foreclosures: volatility in house prices, changing interest rates, and weakening employment. In recent years, an increasing number of loans have been sold to investors. This creates an incentive for lenders to issue more mortgages. The result has been that many lenders began to offer mortgages that had low initial interest rates, required little or no documentation of income, and required little or no equity. When interest rates increased and housing prices decreased, many borrowers could no longer pay their mortgages and were unable to sell their homes.
According to the Federal Housing Finance Agency, house prices in Kentucky have not been as negatively affected as in other states. An index that tracks property purchases and refinance appraisals shows a 3.4 percent national decline in house prices over the past year. In Kentucky, house prices increased 0.8 percent over the past year.
Rising interest rates increase the monthly payment for borrowers with an adjustable rate loan. The Federal Housing Finance Board reported that in 2006, 12 percent of the loans in its survey in Kentucky were adjustable rate loans, lower than the median of 15 percent for all states.
As of April 2009, the unemployment rate in Kentucky was 9.8 percent, higher than the national rate of 8.9 percent. Home prices most impact individuals trying to sell their homes, and interest rates impact borrowers with adjustable rate loans, but increasing job losses potentially impact all borrowers.
Effects of Foreclosures
In addition to losing the equity in the home, the loan default hurts a borrower’s credit score, making it more difficult and costly to get credit in the future. Borrowers not involved in a foreclosure also can be affected by difficulty accessing credit and paying higher interest rates.
The costs of foreclosures to mortgage lenders, servicers, and investors vary depending on the type of loan and contractual arrangements between lending institutions. Historically, loans are insured against mortgage losses through private mortgage insurance, and some of the losses are eventually recouped. Local sources estimated that a foreclosure costs lenders $25,000 to $30,000 on average.
Foreclosures negatively impact property values for homes nearby. This is primarily because the properties are not adequately maintained and the crime often increases at vacant property. Twenty-two neighborhoods in west Louisville had a net decrease in property assessments from their last assessment to 2009.
The total impact of foreclosures on tax revenues cannot be determined. In the case of a foreclosed property, current and past due taxes are first liens on a property and are paid from the proceeds of the foreclosure sale. This means that property tax revenues may be delayed but will be received. In addition, because of foreclosures, property values might decrease or not increase as quickly. However, lower property values do not necessarily result in reduced property tax revenues. Local property tax rates may be set so that the property taxes yield at least as much revenue as in the previous year. If property assessments increase less than 4 percent, state property tax revenues will not yield the 4 percent growth permitted under state law. Overall, state real property assessments and revenues are growing but at a lower rate than in previous years.
Federal, State, and Local Governments’ Responses to Increasing Foreclosures
Federal programs include Making Home Affordable, which offers a loan modification and loan refinance components; and the Neighborhood Stabilization Program, which deals with the effects foreclosed homes have on neighborhoods. The Neighborhood Stabilization Program has granted Kentucky $37.4 million and Louisville/Jefferson County an additional $6.97 million.
State programs include the Kentucky Homeownership Protection Center, a central facility aimed at referring homeowners in need to certified counseling programs. On the local level, Jefferson County Circuit Court has implemented a foreclosure conciliation program that requires the mortgage holder to participate in a conciliation conference if the homeowner chooses. Some of these programs may have limited effectiveness. Evidence from loan modifications made by banks in prior years suggests that the redefault rate on loan modifications is high.
This report has six major conclusions:
1. Foreclosures have increased both nationally and in Kentucky. Kentucky’s foreclosure rate in the fourth quarter of 2008, 0.78 percent, was about four times higher than in the 1990s.
2. In recent years, an increasing number of loans have been sold to investors. This created an incentive for lenders to issue more mortgages, so they offered mortgages that had low initial interest rates, required little or no documentation of income, and required little or no equity. When interest rates increased, many borrowers could no longer pay their mortgages. A decrease in housing prices meant that many borrowers owed more on their homes than the market value of the house.
3. Weakness in the housing market affected the rest of the nation’s economy, and unemployment began to rise. As workers lost jobs, they had more difficulty paying their mortgages. Unemployment appears to be one of the factors contributing to the increase in Kentucky’s foreclosures.
4. Foreclosures can reduce the property values of other homes in the neighborhood.
5. If foreclosures were to cause total property assessments to be lower than they otherwise would be, property tax revenues could be impacted. Property assessments for the state as a whole have not decreased.
6. Federal, state, and local governments have responded to increases in foreclosures. Twenty-five states enacted 36 laws in 2008 or 2009 that deal with foreclosure issues relevant to this study.
Read the entire report here: Foreclosure Report