Foreclosure Renewal: A New Housing Mess? - Analyst Blog

Are the major banks looking at housing troubles and billions of dollars of losses yet again? That is what a new report from the Congressional Oversight Panel seems to warn.

According to the report, the chaos resulting from foreclosure paperwork flaws could result in massive losses for banks and a new quandary for the housing market.

Rampant paperwork lapses in evaluating the authenticity of information provided in the mortgage documents have embroiled major lenders including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and PNC Financial Services Group Inc. (PNC) in a number of lawsuits by homeowners in the second half of September. As a result, these lenders temporarily suspended foreclosures.

According to the new report, financial firms that service a total of $6.4 trillion in mortgages are involved in the foreclosure mess. However, after the Obama administration cited that foreclosure suspension is not required in all 50 states, the affected lenders started resuming foreclosed properties sale.

Perhaps the continuation of the foreclosure suspension was required as the mess was not wiped out from the root. We think the recurrence of the paperwork flaws and the torrent of resulting lawsuits could make it difficult to find home buyers in the years to come. This could stretch outthe U.S. housing crisis for several years.

The Outcomes

According to the report, under idyllic circumstances, lenders would be able to continue foreclosure activity as the invalid information in the papers will be replaced with proper documents after a certain point of time. Also, the foreclosure mess could be an exaggerated problem. Anyhow, paperwork flaws related to the foreclosure will be ironed out in the long run with the employees' experience of properly reviewing the documents.

On the other extreme, the lenders may face legal challenges related to the validity of mortgage loans. Lenders might also be unable to prove their ownership of mortgage loans that they claim to own, incurring unexpectedly huge losses as a result. Also, the moratorium will impede the sale of foreclosed properties, leading to a high chance of reduction in housing activity.

At the Root

At the time of foreclosing homes, many lenders use ‘robo-signers' − employees who sign hundreds of documents in a day without verifying decisive information like the previously outstanding amounts of borrowers. This is the primary reason behind the mess.

Another major problem surfaced when multiple banks claimed that they have the right to foreclose the same property.

Flawed paperwork also raised questions about the validity of the ownership documents. In many cases, an individual who moved into a house after a payment may not be the legal owner. As a result, mortgage lenders improperly expelled original homeowners from their homes as part of their foreclosure process.

The Way Out

As a redemptive measure, lawmakers and bank regulators are expected to push lenders to modify loans rather than foreclose, which could probably lessen the paperwork flaws.

The Congressional Oversight Panel is also pushing for loan modifications as any further paperwork error could damage Home Affordable Modification Program (HAMP), the main foreclosure prevention effort of the Treasury. 

Homes at Stake Again?

Some of the analysts feel that the mess may hinder potential buyers in the short term, but the upshot will not change in the long run and there will be no impact on housing recovery as such. However, we think the problem is going to persist for a longer period and there will definitely be a significant stress in housing recovery, as in some cases the lenders have no information about the owners of the loan.

Also, lenders could be unable to prove their ownership on mortgage loans due to wrong documentation. We will have to wait awhile to see how well the shock is absorbed.

 
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