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Court revenue forecast is a cause for concern

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Court revenue forecast is a cause for concern

It appears the courts will need another loan to make it through the fiscal year

Senior Editor

Revenues for Florida’s courts will be lower than initially projected for the 2011-12 fiscal year, but how much lower was a point of contention at the Article V Revenue Estimating Conference September 12. The eventual consensus, however, showed that the courts will need another loan of state funds in the current fiscal year.

The courts began the year with a $54 million loan for the first three months because of the dramatic slowing in foreclosure filings. (The budget anticipates the courts will pay that loan back by the end of the fiscal year.)

Foreclosure chart Under the new estimates, the courts foresee a shortfall of around $108 million, which includes paying back the initial $54 million loan.

Officials from the Governor’s Office, the Economic and Demographic Research Office of the Legislature, legislative budget staffers, and the Office of the State Courts Administrator shared their economic projections and reached a consensus of what is likely to happen for the remainder of the year.

On most items, various officials were fairly close together on their projections. But on foreclosures — the largest source of funding for the courts — they were far apart.

Skip Burnside, of EDR, said his office modeled three different scenarios based on a high, medium, and low number of filings, then blended those for a prediction of around 265,000 filings for the year — a figure that officials from the Governor’s Office generally agreed with, although they used a different methodology. Holger Ciupalo of the Governor’s Office noted that an increasing number of delinquent properties appeared to be going through short sales rather than through foreclosure.

Kris Slayden, of OSCA, said court officials were being conservative in their projections after last year’s dramatic reduction in mortgage filings following questions about the procedures used by banks in preparing foreclosure paperwork and the accuracy of the information filed in those cases. She said that led to a prediction of 155,000 filings.

Since filing fees for foreclosures range between $380 and $1,900, depending on the value of the property, that difference had major fiscal implications.

“The foreclosure filings have been unprecedentedly volatile,” Slayden said.

She said the courts acknowledge that there is a backlog of cases waiting to be filed in the wake of continuing defaults by owners and the banks seeking to clear up robosigning and other paperwork problems that plagued foreclosures beginning last year. Also, most of the 131,000 foreclosure cases dismissed in the past year could be refiled, Slayden said.

But counteracting that pressure, she said, banks are showing a greater tendency to use short sales in lieu of foreclosures and noted specifically that it has been reported that J.P. Morgan Chase bank has been turning to short sales and is offering incentives to defaulting owners to use that route.

In addition, the Fourth District Court of Appeal recently ruled that those signing indebtedness affidavits for banks in foreclosures must have personal knowledge about the foreclosure and cannot have just looked at figures on a computer screen, Slayden said. That could have a major impact on foreclosure filings.

“We don’t know where this is going to go, but given the fact that our [operating] trust fund has at times been 80 percent funded from these fees, we have to be conservative,” she said.

The courts took a 15-month average of recent signings and also factored in the low monthly filing rate since the robosigning problems surfaced a year ago. The EDR and Governor’s Office projections call for an average of just over 22,126 filings per month, Slayden said. Given that filings for July and August have been half or less that rate, they would have to average more than 25,000 filings a month for the remainder of the fiscal year to hit that projection.

“We don’t think the structure is out there where they [banks] would be able to clear that many cases and file that many cases in courts,” she said.

But Ciupalo of the Governor’s Office noted that of about 740,000 properties in foreclosure or delinquent [out of 3.2 million mortgaged properties], only about half of those have reached the court system. He also noted that about 45 to 46 percent of Florida properties owe more on their mortgages than their properties are worth, which could lead to more foreclosures.

Christian Weiss, also of the Governor’s Office, said another factor is that many of the mortgages issued at the end of the housing boom in 2006 and 2007 were balloon mortgages where payments are set to dramatically escalate after five years, or in 2011 and 2012. If those owners can’t afford those higher payments because of the recession and can’t refinance, that could be a new source of foreclosures.

Another unknown is negotiations with a coalition of state attorneys general and banks over the mortgage paperwork irregularities. Settling that issue could remove a roadblock to foreclosures.

Amy Baker, with EDR, said the state should continue to plan on a large number of foreclosures until it sees something concrete to change that.

“I think it would be completely irresponsible to wipe out hundreds of thousands of foreclosures and take it out of the [state’s economic] forecast completely,” she said. “I tend to think they’re [banks] ramping it up [foreclosure filings], and if it lets loose, it lets loose quickly.”

Don Langston, staff director of the House Finance and Tax Committee and who represents the lower chamber on the economic forecasting panel, said he thought the court estimates were too low, but at the same time he was uncomfortable predicting a dramatic increase until the attorneys general negotiations were concluded and banks figured out how to handle their inventory of delinquent homes.

“The industry is going to try to figure the best way to get themselves out of this mess,” he said. “Foreclosures are not the easiest thing you can do if you can do short sales instead.”

After discussion, the panel agreed to set the projections at around 210,000 foreclosures for the coming year. Staffers will now calculate how that will affect projected revenues for court operations. Filing fees, fines, and other court-related charges were initially expected to bring in more than $1.1 billion this year, with some going to the courts, some to court clerks, and some to the state. The revisions approved by the estimating conference will bring that number to somewhere around $905 million.

The number could be important if foreclosures continue to lag. The court system was given a $54 million loan for the first three months of this fiscal year to make up for the lower levels of foreclosures, but then filings were expected to pick up.

(Those revenues are projected to rise slightly to $943.5 million for 2112-13, then decline to $864.4 million in 2113-14 and drop further to $794.2 million in 2114-15.)

The revenue forecast will be used to figure the size of any additional loans needed by the court system.

A couple days after the conference met, news stories reported that foreclosure filings for Florida were up 10 percent in August from July but still well below the level of August 2010. Other states had a sharper increase in filings, according to a story in the Palm Beach Post.

Quoting the national real estate monitoring company RealtyTrac, the article said foreclosures rose 33 percent nationally but varied greatly in different states.

The company reported that states with nonjudicial foreclosures had a 46 percent hike, while states with judicial foreclosures went up only 21 percent (including Florida’s 10 percent hike).

Those rates nationally still remained significantly below the number of foreclosures in August 2010, before the paperwork problems surfaced.

The article quoted several legal and financial sources as saying this could be the start of the expected resumption of a high level of foreclosure filings.

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