Bankruptcy

Reexamining Non-Judicial Foreclosures

By Adam Levitin

Katie Porter's posts and scholarship about illegal fees tacked on by mortgage servicers to defaulted mortgages raise an interesting question:  why aren't states reconsidering non-judicial foreclosure?  Non-judicial foreclosure is generally faster and cheaper than judicial foreclosure, which is a good thing, at least for the foreclosing lender as it reduces loan losses.  And as Karen Pence has shown, there is a reduced supply of credit in states with judicial foreclosure.  But as the name implies, non-judicial foreclosure lacks court oversight, and this raises the possibilities for abuse.

As Katie has noted in her scholarship, it seems probable that illegal fees are even more likely in non-judicial foreclosures than in situations where there is court supervision, be it judicial foreclosure or bankruptcy.  If illegal fees are a pervasive problem--and Katie's work suggests that they are--then we should really think about crafting procedures that protect against these fees.  Katie's work, which looks at fees in bankruptcy cases, shows, judicial oversight alone is not a solution to illegal fees, but it seems like a sine qua non for correcting the problem; it is hard to imagine how non-judicial foreclosures could be changed in order to ensure effective monitoring against illegal fees.  There is a policy balance to be struck between ensuring cheap and available credit and ensuring fairness in lending.  Studies like Katie's should be starting a conversation about where that balance should lie, and I think part of it is considering whether the benefits of non-judicial foreclosure outweigh the abuses. 

Full post as published by Credit Slips on March 04, 2008 (boomark / email).