Seeming End to Foreclosure Mess - Analyst Blog

The much awaited foreclosure mess is expected to end soon with the five largest lenders – Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Company (WFC) and Ally Financial Inc – may be the first to settle the probe. The probe, started by U.S. bank regulators and a task force of Attorneys General (AGs) of all 50 states, is headed by Iowa Attorney General Tom Miller.

Though no deal has been finalized as to what should be the agreement, the Iowa AG expects five separate settlement deals with the five largest lenders instead of a group settlement.

The foreclosure mess began in mid-September 2010, when General Motors Acceptance Corporation (GMAC) Mortgage LCC, a subsidiary of Ally Financial Inc, stopped foreclosures. Soon, JPMorgan followed suit and suspended foreclosures in 23 states where foreclosures have to be approved by the court while BofA halted foreclosures in all 50 states.

However, after the intervention of the Obama administration and with the start of probe in October 2010, these affected lenders again resumed the sale of foreclosed properties.

While the continuation of the foreclosure suspension was required as the mess was not wiped out from the root, we think that the recurrence of the paperwork flaws and the torrent of resulting lawsuits will lessen when the settlement is reached between the lender banks and AGs.

Focus on Process Rectification

The upcoming settlement by the AGs is expected to have a three-pronged approach. First, all major lenders including BofA, JPMorgan Chase and Citigroup would contribute money into a fund that will be used to compensate borrowers who have lost homes due to foreclosure, if they can prove that they were the victims of flawed paperwork. The AGs would administer the payment process.

Second, a third party intervention would be required for the reviewing of cases in which borrowers will claim compensation from the AG fund.

Finally, banks will decimate dual-track modifications and foreclosures. Accordingly, banks can start foreclosing only after all options of modification are exhausted. This will give time to borrowers who are in an indeterminate state of the modification process.

A Long Way to Go

Though the proposed settlement is expected to lessen the paperwork flaws, which will gradually put an end to the foreclosure mess, we expect the problem to persist for a longer period as in some cases the lenders have no information about the owners of the loan. As a result, a significant stress will persist in housing recovery. We will have to wait to see how well the shock is absorbed.

Following the housing crisis, the pressure on the lenders to hasten the foreclosure process is primarily responsible for the mess. Though the harm had already been done before the burst of the housing bubble, an immediate action was required when the problem was detected. The latest initiatives would at least control before the damage spreads further. The resolution of the foreclosure issue, even though it might seem a little late, gives a somewhat positive turn to the crisis.

 
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