The Foreclosure Mess

Last week, we reported on the beginnings of the mess the banks created by using ‘robo-signers’ to fast track foreclosure filings. We detailed the challenge and said that “the process of foreclosing may grind to a screeching halt”. And, it has. Bank of America has announced that it has halted foreclosures in all fifty states. Other major lenders have ceased foreclosures in 23 states and some politicians are calling for a total industry-wide moratorium.

Today, we want to explain what is actually taking place and what impact the situation may have on you and your family over the next several months.

Currently, many banks have ceased foreclosure procedures in all states which require a judicial process. You can find out whether your state requires such a process by visiting All Foreclosure.com which lists foreclosure procedures by state. It is our belief that all fifty states will eventually be impacted by the controversy.

How will it impact you?
That depends on where you are in the real estate process. We will look at three situations: your home is in foreclosure, you are selling or you’re buying a foreclosure.

You are a homeowner in the foreclosure process
It appears that some banks will be backing away from following through with normal foreclosure processes until they can be assured that their paperwork is in order. Early estimates are calling for a potential 30-90 delay to many foreclosure procedures (notices, repossessions, sales, etc.) However, there is absolutely no way for anyone to be sure whether your particular situation will be delayed.

You are currently selling a house
We have reported often on the affect foreclosures have on home prices in a community. The actual impact is measurable.

According to RealtyTrac, bank-owned properties went for an average of 35% less than non-foreclosure sales. Foreclosures not only absorb buyers but also impact the appraisals of the homes that surround them.

Obviously, if there are less distressed properties coming to the market, there will be less downward pressure on pricing in the short term. The Washington Post, in an article last week, reported:

Stretching out the foreclosure process would reduce the number of houses dumped on the market over the next six months, which could help firm up housing prices in the short term and put some extra support under a sagging economy.

There may be a window of opportunity for a seller to maximize the price they receive for their home if they sell in the next 90 days.

You are currently buying a foreclosure
A portion of the inventory of foreclosed homes on the market has been frozen. Banks and title companies (who insure good title to the property a buyer purchases) want to make sure the bank actually owns the property legally before they sell it.

The Washington Post in an article last week reported:

Nick Chaconas, a Maryland real estate agent, said he was one week from completing a foreclosure deal for one client, who was buying a $470,000 fixer-upper in Potomac, when an e-mail arrived putting the deal on the skids.

The e-mail, from the title insurance company involved in the deal, said the mortgage lender PNC was suspending foreclosure sales for at least 30 days “due to a review being undertaken on all foreclosure files.”

If you are buying a foreclosure, anticipate potential delays. We do not believe there will be large numbers of cancellations. Be patient and realize that you are getting a substantial savings on the purchase.

How long will the challenge persist?
The impact this will have on the housing recovery will be determined by both the depth and width of the challenge. Are there large numbers of homes that were mistakenly foreclosed on? We doubt it. Will the instances where errors (or even fraud) did exist cause mass delays? Maybe.

Peter J. Henning who follows issues involving securities law and white-collar crime for DealBook’s White Collar Watch explained:

The revelation of potential problems stretching across the foreclosure landscape means that civil suits against the parties to the process are inevitable. In individual foreclosure proceedings, homeowners would probably challenge any attempt to take title to the property, which may allow them to remain in their houses a while longer, or even stop the proceeding altogether.

On a larger scale, there are likely to be two potential classes of plaintiffs pursuing civil suits against the banks and others for their roles: first, homeowners who earlier lost their properties to foreclosure in which questionable documents were filed, and second, title insurance companies that may be on the hook for claims by purchasers of foreclosed properties who now have a cloud on the title to their house. Each may claim that the faulty documentation in the foreclosure cases caused them harm.

If class actions suits start to dominate this story, it could be a long time before we normalize the situation.

How will it impact the market overall?
There could be widespread ramifications. The Washington Post in an article last week:

It would not help the recovery of the economy, or the real estate market, if the foreclosure process became so hopelessly tangled that banks and investors effectively lose the ability to recoup the remaining value of their collateral. That would provide some immediate financial relief to households facing foreclosure, but it would encourage many more homeowners to begin shirking their mortgage payments in the belief that they would also be able to avoid the consequences. The long term consequences of that would be that mortgage rates would be higher and mortgage loans would be smaller and harder to get.

Bottom Line
As we said last week, fewer foreclosures coming to the market right now will mean prices will be less impacted. However, these properties will eventually come to market; if not now, than later. That will delay the housing recovery – perhaps for years.