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A recent report from Fitch Ratings shows that longer foreclosure timelines resulted in wider loss severities on residential mortgage-backed securities during the fourth quarter of 2013.

The report finds that although rising home prices and a strengthening job market have led to improvements in delinquencies and foreclosures, longer foreclosure timelines - caused mainly by foreclosure prevention actions, but also, to a lesser degree, a new wave of litigation brought by homeowners who are intent to exploit state regulations giving them greater protections during the foreclosure process - are offsetting those gains. The problem is that home price appreciation has flattened in recent months, while foreclosure timelines have continued to lengthen. This, in turn, means that many of the homes that are in foreclosure will languish for longer periods of time without proper maintenance or upkeep - potentially diminishing their market value.

That could spell bad news for investors, who are hoping that foreclosed properties connected with the loans they’ve invested in don’t deteriorate to the point where their value is substantially diminished.

I recently interviewed some servicers who say lengthening foreclosure timelines are a major concern. Several told me that they are worried that the Consumer Financial Protection Bureau’s (CFPB) new mortgage rules could exacerbate the problem, depending on how many consumers file defensive claims under the bureau’s new ability-to-repay/qualified mortgage rule. This, in turn, could result in timelines for the properties increasing by as much as six months, according to a recent analysis from Standard & Poor’s.

Currently, foreclosure timelines in some judicial states can run as long as four years. And it should be noted that contested foreclosures will run longer, regardless of whether or not borrowers succeed in litigating their claims.

The CFPB’s new servicing rules - in particular, the new loss mitigation requirements - also stand to lengthen the foreclosure process. In this regard, the timeline is lengthening at both ends - when loss mitigation efforts begin and later, should the foreclosure be contested in court.

“We remain very concerned about how the CFPB’s new loss mitigation regulations will work out,” says Kevin Kanouff, president and CEO of special servicer Statebridge. “We’re concerned that they will be used by a minority of borrowers and their counsel to do things that perhaps the CFPB didn’t contemplate - by that, I mean trying to find a way to improperly delay the foreclosure process and keep the defaulting borrower in the home.”

My take? This is just another example of how the regulatory pendulum has swung too far in one direction and created unintended consequences. Expect a “correction” once lenders and investors have sufficient historical data to present showing the damaging effects that the CFPB rules and state foreclosure prevention laws have had on the market. Meanwhile, expect servicers to have their hands full with plenty of “legal rigmarole” in 2014.

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