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Explainer: Just How Bad Is New Jersey's Foreclosure Crisis?

The Garden State has the country's highest percentage of foreclosures among mortgaged homes -- and that's just the beginning

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Early this year, banking and real-estate analysts concluded that New Jersey had achieved a dubious distinction, passing Florida to become the state with the highest percentage of foreclosure among mortgaged homes, 6.2 percent as calculated by CoreLogic, a leader in real-estate analytics. (That percentage was actually an improvement from a year earlier.)

Meanwhile, Florida’s rate dropped to 6 percent from 10.1 percent in 2012, and housing markets around the country are recovering far faster from the Great Recession.

New Jersey also took another unfortunate first place, passing New York for the average length of time to complete a foreclosure, at 1,103 days or just over three years, according to CoreLogic.

No end in sight: New foreclosures increased nationwide in January, before dropping again in February, according to RealtyTrac. But in New Jersey they kept rising, up another 126 percent, the firm found. Actual bank repossessions were up 90 percent from a year ago.

Those trends continue. State court records show that through April 15, lenders filed 15,150 new foreclosure cases in New Jersey this year, the sort of number seen only in the depths of the recession. In Atlantic City, foreclosures are up 254 percent from a year ago.

A long wait: In New Jersey, even a completed foreclosure is no guarantee that a house will come back on the market and be reoccupied anytime soon. According to RealtyTrac, it takes 830 days to sell a home in foreclosure here, though that is slightly less than in New York and well behind Massachusetts’ average of 1,299 days.

Zombie foreclosures: New Jersey courts closed 12,639 foreclosure cases by entering default judgments against the borrowers in 2013. But CoreLogic found only 5,888 homes actually went to sheriff’s sale in that time. The borrowers or tenants might still occupy some foreclosed properties, but many stand vacant, “zombie foreclosures.” Even after obtaining foreclosure judgments, banks do not have to maintain a property until taking possession at a sheriff’s sale.

Those empty homes serve as a drag on the market, keeping down prices that collapsed during the recession and leaving many borrowers “underwater,” owing more on their mortgages than the properties are currently worth.

RealtyTrac sees that situation, though still drastic, getting better in much of the country. But again, not in New Jersey. In the first quarter, the number ticked upward here to almost a quarter-million mortgages, 19 percent of the total.

Some signs of hope: Cindy Marsh-Tichy, president of the New Jersey Realtors Association, sees some hopeful signs. The association’s latest data shows median sales prices have risen 3.3 percent in the past year.

Activity seems particularly brisk in Shore counties hit hard by Hurricane Sandy, where “there’s a lot of rebuilding and renovations taking place” and delayed projects coming on line, Marsh-Tichy said. There is also the mixed blessing of “after the storm a lot of properties that weren’t available before came on the market,” she said.

A shrinking market: That has not been enough to prevent New Jersey’s real-estate market from shrinking. NJRA figures also show that closed sales and new listings are each down 8.2 percent over the year.

Even more than underwater mortgages, Marsh-Tichy said real-estate spending prior to the bust is keeping people out of the New Jersey market now.

“People tell me they bought at the top of the market and then put money into the home,” she said. "They’re worried that they’re not going to get their equity back."

Looking for work: In February 2008, New Jersey’s civilian workforce was 4,499,400 strong, with unemployment at 4.7 percent, according to the state Department of Labor and Workforce Development. Last month, the workforce had shrunk by 25,000, but unemployment was 7.2 percent.

New Jersey’s economic recovery has lagged the nation, and it is hard to pay for a house if you are un- or under-employed. And despite everything, New Jersey housing prices remain in the top five in the nation. Because before a bubble can burst, it must inflate.

A great time to sell: In December 2004, the Federal Housing Finance Agency reported that home prices were appreciating by 18.48 percent annually, the highest average rate in 25 years. New Jersey was doing even better, at 18.57 percent statewide. The Ocean City area, ranking 20th in the nation, and the North Jersey-New York area each topped that.

It was a great time to sell a house. And to some buyers, whether intending to nest or to flip homes, real-estate seemed like a safe investment.

Depression-era reforms had calmed the economic boom-and-bust cycle that once made real estate investments risky. Community banks often were just that, focused on local residents and business borrowers. And even on Wall Street, investment banks were partnerships required to put up their own funds alongside those of investors. But as the past century drew to a close, those regulations went up in smoke.

A mortgage was no longer a key step in a long relationship between a local lender and a local resident or business. Instead, it was a tiny piece of a package to be securitized, sliced, diced, packaged, and marketed along with hundreds or thousands of others. Hedges, side bets, derived deals all gave banks, brokers, and rating agencies -- and presumably investors -- multiple opportunities to profit on paper and pixels in ways only tangentially connected to any tangible property. Hucksters on TV, email, and snail mail lured consumers to the carnival.

Not exactly a house party: On Linden Avenue in Irvington, an attractive three-bedroom home has just come onto the market at an asking price of $175,000. It stands behind a white picket on a lot of about one-ninth of an acre with off-street parking. Inside, it features an open floor plan, a master bedroom suite, and 2.5 baths.

In 2003, this house sold for $107,000, according to the real-estate site Zillow. In 2006, it sold for $275,000. Last fall, it went at sheriff’s sale for $34,000. (For the record, Zillow estimates its current value at $137,231.)

Hard-hit Irvington: A blue-collar, largely African-American and immigrant community between Newark and Maplewood, Irvington was hard hit by the recession and the bursting of the housing bubble. Like some other urban areas, the township has had a chronically high crime rate, often four times the state average, but also many streets of tidy middleclass homes.

RealtyTrac reported roughly 88,000 completed foreclosures in New Jersey in 2008-2012. Few places were hit harder in that period than Irvington with 1,775, almost 9 percent of households listed in the 2010 Census.

Besides overheated prices and unregulated banking, Irvington offers another piece of the profile of areas that have suffered the most: gullible buyers, often working-class and minorities with little previous borrowing experience.

The subprime syndrome: In the past, borrowers who truly were “subprime,” with bad credit scores, might not have gotten mortgages at all. But in the new era of securitization, things had changed drastically, as Princeton researchers Jacob Rugh and Douglas Massey, president of the American Academy of Political and Social Science, wrote in a 2010 paper in the American Sociological Review.

Splitting “the origination, servicing, and selling of mortgages into discrete transactions … made it possible for banks to earn more money quickly by originating and selling loans than by lending money and collecting interest payments over time,” they noted.

They cited other studies showing black and Hispanic borrowers were far more likely to receive subprime mortgages than whites, even when their financial circumstances were the same. And if borrowers eventually defaulted, that was a problem for them and some other investor, the one that bought the securities.

“Specifically, ongoing residential segregation and a historical dearth of access to mortgage credit in U.S. urban areas combined to create ideal conditions for predatory lending to poor minority group members in poor minority neighborhoods.” Rugh and Massey wrote.

A failed rescue: There have been some highly publicized government efforts to address troubled mortgages. But the largest, a $26 billion deal between the federal government and most states and five major banks to settle mortgage fraud claims, fell well short of its advertising.

Data from the settlement monitor’s office indicate that 171,663 homeowners received modifications of first mortgages or refinancing to help keep their homes. No Irvington properties were listed. Meanwhile, at least 182,728 participants actually lost their homes through the program, walking away through short sales or deed surrenders.

So when Irvington officials recently targeted 199 mortgages held by private lenders for acquisition in an urban renewal program, few were surprised to see the details. In an era where prime mortgages were available at 4 percent to 6 percent, 124 of the Irvington borrowers are paying interest of 10 percent or more, with 49 at 15 percent to 20 percent.

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