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As foreclosures mount, housing recovery stalls Experts: It's going to take time to correct N.J. market

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New Jersey's residential real estate market is beginning to accommodate a wave of foreclosures after last year's judicial moratorium on new foreclosures, which has contributed to the state trailing the nation in its housing recovery.

In a March report by Lender Processing Services, a national supplier of foreclosure data, New Jersey had the largest year-over-year growth in the percentage of mortgages that are not current. Only three other states had increases.

Bill Flagg, a real estate agent with ERA Queen City Realty, in Scotch Plains, said new foreclosures have been trickling onto the market. "There's no silver bullet — it's going to take some time for everything to correct itself with the market," Flagg said.

The state Supreme Court imposed the moratorium in December 2010 due to "robo-signings," in which banks signed mortgage documents without verifying information.

Flagg said private mortgage servicers remain concerned about the effect of allowing a flood of mortgages to sweep into the market. He said mortgages held by federally supported entities, like Fannie Mae and Freddie Mac, comprise the bulk of recent foreclosures.

Real estate appraiser Jeffrey Otteau, president of the East Brunswick-based Otteau Valuation Group, said the moratorium had a positive effect on the state.

"So far, the housing market has benefited from the backlog, because we avoided a deluge of distressed sales in a market that was unraveling," he said, noting the state only saw a 4 percent drop in home prices in 2011.

Still, Otteau said, the downward pressure on home prices will continue longer in New Jersey than in most states due to the foreclosure backlog. He said the state was averaging 5,000 foreclosures monthly before the moratorium, and estimated 60,000 homes had their foreclosures delayed by the moratorium.

Michael Affuso, senior vice president of government relations for the New Jersey Bankers Association, said the state judiciary must "take a hard look" at what steps are necessary to increase the speed with which it disposes of foreclosures. Banks are holding mortgages without receiving payments for 900 days or more, as it's politically difficult to impose faster foreclosures, Affuso said.

"They've greatly improved commercial filings," he noted, adding that residents would also benefit from a reduction in uncertainty. "At the end of the day, it's taking three times as long as it should to foreclose — three times as long to have a market improvement."

Affuso added that it can be irrational for prospective homebuyers in certain areas to enter the market when they don't know how low home prices will fall. "How can the market rationally find a bottom when there's this overhang out there of essentially devalued properties?" Affuso asked.

Otteau said the various strategies being proposed for foreclosed properties — from a federal plan to convert real-estate-owned properties into rental units, to state Sen. Raymond J. Lesniak's (D-Union) proposal to convert REO properties to affordable housing — could start to make a difference.

But recent growth in multifamily housing construction is a sign that banks remain eager to lend, according to Affuso.

"We only make money when we lend money," Affuso said, adding that there is also a robust market in refinancing.

Otteau said the impact is not evenly distributed across the state, since the foreclosures are concentrated in the same lower-income urban and rural areas that saw the largest number of subprime mortgages during the housing boom.

"It will be more like a tornado effect than flood waters," affecting some neighborhoods while sparing others, Otteau said. He said Morris, Somerset, Bergen and the western parts of Essex and Union counties have largely been unaffected, with home prices in those areas remaining stable.

Flagg agreed that the boom-and-bust of the housing cycle had its greatest impact on low-income areas. "It's kind of unfair, because it went from being undervalued to being overvalued," Flagg said.

E-mail to: akitchenman@njbiz.com
On Twitter: @Kitchenman

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