Bank Delays in the Resolution of Delinquent Mortgages: The Problem of Limbo Loans

Abstract:     
Limbo loans are defined as delinquent mortgage loans that have not progressed either to foreclosure (non-foreclosure limbo) or to resolution (foreclosure limbo). We find that 21.79% (representing $24.8 billion in principal) of the subprime loans originated in Florida during 2004-2008 were in limbo as of December 2010. We utilize a unique legal docket database and find no support for either bottlenecks or bank capital constraints as explanations for the limbo loan phenomenon. Rather we find support for an operational risk hypothesis in which the impairment of property rights contributes to both the likelihood that a loan will remain in limbo and the length of time spent in limbo. In particular, we find that the presence of the Mortgage Electronic Registration System (MERS) in both assignment and foreclosures significantly increases both the likelihood and severity of the time spent in limbo, such that a 10% increase in the presence of MERS in county foreclosures and assignments adds around 8 months (3.5 months) to the time spent in foreclosure limbo (non-foreclosure limbo). Lost documentation affidavits are found to be required to replace lost property rights so as to move these loans to resolution more quickly.

Number of Pages in PDF File: 65

Keywords: Mortgage, MERS, foreclosure

JEL Classification: G21, G28

working papers series