Just when you thought the real estate industry could not possibly become more surreal, IT HAS! The controlled flow of foreclosures to the market has been the number one concern of every housing analyst. There could be a ‘double dip’ in house values if they were released too quickly. The recovery could take years if they were released too slowly. Getting it just right was crucial. We posted on this issue last month. Both the private sector and the administration have been working the last eighteen months trying to get the release rate just right.
It seemed as though all the effort was paying off as there were a manageable number of distressed properties coming to the market and selling. Enter the ‘robo-signers’.
What is a ‘robo-signer’?
Because of the flood of foreclosures needing to be processed, there were employees who signed off on thousands of foreclosures attesting to the accuracy of the documents without having much personal knowledge of what they contained. These employees became known as ‘robo-signers’. It now appears that hundreds, many thousands of homes might have been foreclosed on without the proper procedures being followed.
What has this created?
Banks, servicing companies and even state governments are now putting a halt to the sale of tens of thousands of foreclosures. Below, is a partial list of the actions taken and we may have only seen the tip of the iceberg so far.
- GMAC has suspended foreclosures in 23 states.
- JP Morgan halted 56,000 foreclosures
- Bank of America has frozen the process on ‘tens of thousands’ of foreclosures.
- States are considering foreclosure moratoriums.
- Maryland governor calls for banks to temporarily stop foreclosures.
What will this mean to the housing market?
The market has been covered in a fog of confusion for over a year. The fog is about to get a lot thicker. A monkey wrench has just been thrown into what was hoped to be a well thought out process for releasing foreclosures in a timely fashion.
The New York Times reported on some of the challenges being created:
Evictions are expected to slow sharply, housing analysts said, as state and national law enforcement officials shine a light on questionable foreclosure methods revealed by two of the country’s biggest home lenders in the last two weeks. Even lenders with no known problems are expected to approach defaulting homeowners more cautiously and look more aggressively for resolutions short of outright eviction.
As more defaulting homeowners become aware of the lenders’ problems, they are expected to hire lawyers and challenge the proceedings against them. And if completed foreclosures were not properly done, families who bought the troubled homes could be vulnerable to claims by the former owners.
Radar Logic posted an opinion on the overall impact of the problem:
In most cases, however, distressed loans will not be restructured and delinquent borrowers will not become current on their mortgages. The delay in the foreclosure process will simply be a delay and will not result in a cure. A delay in foreclosures could have a lasting positive effect on housing markets if sales of foreclosed homes are put off to a point in the future when the overall economy is healthier, housing demand is greater, and housing markets are better able to absorb the new inventory. But this outcome is far from certain. It is equally possible that delaying foreclosures will simply push the economic reckoning further into the future, and any relief in the short term will be offset by pain in the middle- or long-term, with no net benefit to housing markets or the national economy.
If this challenge proves to be significant in scope, the process of foreclosing may grind to a screeching halt for some companies. 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.