Banks are taking longer to complete the foreclosure process for homeowners with high-balance mortgages and those who have more than one home loan — in part because of changes in accounting rules that have allowed them to put off recognizing inevitable losses on those loans.

That’s the conclusion of Sean O’Toole, founder and CEO of ForeclosureRadar, after his company analyzed 153,956 foreclosure sales in California from January 2008 through early July 2011.

The analysis found that homes with loan balances larger than $417,000 (the conforming loan limit) were taking 396 days to complete the foreclosure process, compared with 286 days for homes with loan balances below that threshold.

While it’s taking longer and longer for lenders to complete the foreclosure process on all homes, regardless of loan balance, the foreclosure process has grown even more dramatically for high-balance loans and homes with more than one loan. The "spread," or difference in time to complete the foreclosure process for high- and low-balance loans, has grown from 16 days in July 2009 to 110 days two years later.

ForeclosureRadar estimates that the average loan balance on foreclosed homes with high-balance loans is currently about $616,000, and the average current market value was $404,000. After sales costs, ForeclosureRadar estimates lenders stood to lose an average of $250,000 when they foreclosed on those homes.

That compares to an average loss of $115,000 on low-balance loans with an average loan balance of $274,000 and a current market value of $176,000.

The speed at which borrowers are pushed through the foreclosure process "is directly tied to the size of the potential loss that the bank might face," O’Toole concluded in a blog post summarizing the analysis.

"Perversely, this means those who took the biggest loans, on the nicest houses, with the largest lines of credit to buy lots of shiny new toys will also get the most free rent when they strategically default."

O’Toole says there are many differences between California and other states, but told Inman News he believes that "the core issue here is more universal" and that analyses of other states would produce similar findings.

The discrepancy in foreclosure completion times seems to appear in early 2009 — around the time that the Federal Accounting Standards Board (FASB) loosened requirements that banks "mark to market" assets, including mortgage-backed securities, to current market values, O’Toole said.

When Treasury Secretary Henry Paulson announced the Troubled Asset Relief Program (TARP) in September 2008, "he made it clear that he didn’t think banks should have to write down these assets to — or be forced to sell them at — what he believed were distressed prices," O’Toole said.

Pressure was then put on FASB to ease the mark-to-market rules, he said. Some have theorized that relaxing the rules created an incentive for lenders to "extend and pretend" with high-balance loans — essentially put off recognizing losses that could require some banks to raise more capital.

Regardless of the wisdom of such changes, "I think there is little doubt that the changes to these rules were necessary in order for the banks to pass the stress tests that were undertaken shortly after this accounting change was pushed through," O’Toole said.

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