New state law slows banks from starting foreclosures

“We have seen a huge drop-off from September to October in regards to notices of default filed in Clark County,” said Mike Daniel, marketing director for ForeclosureRadar, a Discovery Bay, Calif.-based listing service. “It’s a shocking hit.”

That will choke off bank-owned inventory in coming months and spark the kind of “knee-jerk reaction” that created the housing bubble in the first place, foreclosure investor Zolt Szorenyi said.

Typically, about half of notices of default are cleared up, usually by people catching up on delinquent mortgages, while 1,700 to 1,900 go to foreclosure, he said. About 200 a month are sold to third parties at trustee auctions.

Roughly half of existing home sales in Las Vegas are real-estate-owned, or bank-owned properties. With a current REO inventory of 10,000 homes, it will take four to six months to absorb that inventory, Szorenyi said.

“People are going to see this and have a knee-jerk reaction. They’re going to make offers without appraisals, just like they did five years ago,” said Szorenyi, president of Lenders Clearing House Las Vegas, a company that works with banks in selling REO properties.

“With this constant interference from the government, they are putting shackles on the banks and holding everything back and then releasing the shackles,” he said. “That artificially jerks the market around. Banks have a huge bottleneck to deal with. They’ll just cut prices left and right because they’re just competing with themselves,”

Assembly Bill 284 requires a lender seeking to foreclose in Nevada to record a notarized affidavit of authority to foreclose that includes information showing that they have the legal right to exercise the power of sale.

The new law protects homeowners from improper foreclosures and protects the integrity of the homeownership system, Nevada Attorney General Catherine Cortez Masto said. It was crafted largely in response to the robo-signing scandal that surfaced last year. Servicers of mortgage loans will be fined $5,000 if robo-signing fraud is detected.

The law also gives Nevada homeowners access to data on companies that hold their mortgages by requiring that documents used in foreclosure be recorded in the county where the property is located, a challenge to the Mortgage Electronic Registration System, or MERS.

No one knows what will happen if foreclosures are halted or slowed materially, broker Frank Nason of Residential Resources said. He thinks investors would abandon the market except for select properties.

“Could it increase prices? Possibly, but it could stop the absorption of all product types until it became clear what the ultimate disposition of the distressed inventory was,” Nason said. “Just because foreclosures were halted for legal reasons doesn’t fix the underlying problem — underwater houses and people losing their jobs or other life events that require a sale or walk-away.”

Foreclosure filings in Clark County topped 6,000 in July, August and September last year, retreating into the 4,000 to 5,000 range for most of this year, according to ForeclosureRadar.

Nevada Bankers Association President Bill Uffelman said affidavit requirements from the new law are tripping up title companies.

“The reality is because of past allegations of robo-singing, what all the financial institutions are doing now is revalidating, if you will, everything in the foreclosure process, dotting the i’s and crossing the t’s and checking everything a second time because you don’t want to suffer the consequences,” he said.

“OK, it’ll take one or two more months, but it’ll return,” he added. “What everyone loses track of is the individual not paying their mortgage. At some time, the banks have to foreclose. You can’t sit in a house and not pay anyone.”

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.