Foreclosure Mess Nearing End? - Analyst Blog

U.S. bank regulators and a task force of Attorneys General (AGs) of all 50 states of the nation are gearing up to settle the foreclosure issue at large financial institutions early next year, CNBC reported on Tuesday. This would undoubtedly lessen the looming threat on housing recovery.

But the aftermath of faulty paperwork might still make it difficult for lenders to find home buyers in the years to come. The foreclosure mess would probably cast a long shadow on U.S. housing.

The Proposed Settlement

The upcoming settlement by the AGs has a three-pronged approach. Firstly, major lenders including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and PNC Financial Services Group Inc. (PNC) would contribute money into a fund that will be used to compensate borrowers who have lost homes due to the foreclosure, if they can prove that they were the victims of flawed paperwork. The AGs would administer the payment process.

Secondly, 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.

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

Iowa Attorney General Tom Miller, the leader of the task force, said that the mortgage servicing system is not competent to handle foreclosures and is encumbering loan modifications. Also, according to Senate Banking Committee Chairman Christopher Dodd, the loan modifications have to be more robust to result in real principal forgiveness. If this comes out of theory and is realized, the housing crisis will definitely come to an end.

Foreclosure Flaws

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

The problem intensified because of the negligence of homeowners and lawyers despite their awareness. In many cases, signatures were not reviewed by any notary. Even when notarizations took place, it is unlikely that the officials witnessed the signings as per the legal requirement.

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.

Congressional Watchdog Warning

The Congressional Oversight Panel, which oversees the government's $700 bailout program, said in a report on Tuesday that the chaos resulting from foreclosure paperwork could result in massive losses for banks and a new quandary for the housing market.

Rampant paperwork lapses have embroiled major lenders in a number of lawsuits by homeowners in the second half of September. As a result, these lenders temporarily suspended foreclosures.

According to the Oversight Panel report, financial firms that service a total of $6.4 trillion in mortgages are involved in the foreclosure mess. The problem is in danger of being compounded after the foreclosure freeze was removed by the Obama administration, which cited that a suspension is not required in all 50 states.

The Road Ahead

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. Also, lenders could be unable to prove their ownership on mortgage loans due to wrong documentation.

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. However, better late than never; the latest initiatives would at least control before the damage spreads further.

 
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