Foreclosure Stoppage and the Possible Side Effects

In case you've somehow missed it, many of the largest U.S. mortgage servicing companies have halted foreclosures. Ally Financial's GMAC Mortgage, Bank of America, JP Morgan and PNC have stopped foreclosures in many states - BOA has, in fact, put a moratorium on foreclosures in all 50 states.

Pressing the pause button on foreclosures came as the result of several states' attorneys general inquiring into the validity of foreclosure judgments for which mortgage servicers did not properly handle documents.

The "rubber-stamping" of documents - signing off on documents without really reading them - has come under fire after one manager admitted to signing off on about 8,000 foreclosure documents a month without reading them to verify facts. The mortgage companies have halted foreclosures while they investigate practices in their foreclosure processes.

Of course, it being an election year and all, members of congress are calling for a federal probe of lender misconduct. In the short-term anyway, the halt in foreclosures might give some struggling homeowners a little extra time to get on their feet. It might finally lead to overworked employees at busy banks getting the help they need to properly handle foreclosures, and it should make banks a little more willing to work with homeowners to modify distressed loans. With fewer foreclosures hitting the market, home values in some areas might creep up.

There are some long-term effects, though, that cannot be ignored. Some of them are potentially troubling.

First, the halting of foreclosures for any period of time by banks that hold as many mortgages as these firms do is going to stop up the pipeline. Tons of foreclosed homes hit the market over the past two or three years, but there are more coming. Stalling that flow of homes now is going to drag out the process for a longer period of time. That means, for one, likely longer pressure on home values. Most experts will agree: The inventory of unsold homes on the market, many of them foreclosures, has to get smaller before home values will stabilize completely.

The effect on the volume of homes sales could be staggering if the moratorium lasts longer than a couple of months, and/or if more servicing companies join the party. Across the U.S., foreclosures make up about 30 percent of all home sales. In California, Florida, Nevada - the states that have been hit hard by foreclosure - they make up a considerably larger percentage of all sales.

It's also safe to assume that title insurance companies are going to be reluctant to insure titles on homes that have been foreclosed. That could be a huge problem because no lender is going to make a loan on home without an insured title. What happens if the bank has already re-sold homes that were invalid foreclosures? Are the title insurance companies going to have to pay the new buyers?

On top of everything else, the whole mess is going to make potential real estate buyers even more nervous about the market, which is already dealing with a huge drop in demand since the federal government's tax credits for home buyers expired. Perhaps the delay in the flood of foreclosed homes to the market will give time for demand to return. However, a more likely situation is yet another "doom and gloom" real estate scenario that will scare buyers and investors off.

Hopefully, the big lenders agreement to halt foreclosures was a gesture of good faith made to the attorneys general, a sign that the firms are taking seriously the matter of following proper procedure in foreclosures. Hopefully, investigations will determine that for the most part, the banks are doing things the right way and will be able to move on.

While the short-term effects of the halt might seem attractive, a long-term foreclosure problem would not be good for anybody involved in real estate.

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