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Is the Window of Opportunity Beginning to Close?

Several banks had recently suspended foreclosure procedures on hundreds of thousands of homes while they were forced to review all their paperwork. The lenders had to prove they fulfilled the legal requirements for repossession.

We have reported that homeowners of all non-distressed properties were given a window of opportunity to sell their house without the competition from these ‘discounted’ properties. 

Now, there is news that this foreclosure mess may already be behind us. That’s what several banks are now saying. Bank of America yesterday announced that they reopened more than 100,000 foreclosure actions and Citigroup says their foreclosure processes are ‘sound’. Many believe that these actions will be followed by other major lenders making the same type of announcements in the days to come. It seems that many foreclosures may return earlier than estimated.

However, there seems to be two different challenges facing the lending institutions. As the Atlantic explained yesterday, one may be easy to rectify, the other may not:

Bad Foreclosure Process

The first problem came to light in late September. Banks discovered that some foreclosures had been signed off on without being properly reviewed. This could be a problem for a number of reasons. The loan file might be incorrect or incomplete. This caused banks to halt foreclosures to figure out if mistakes were made and to correct the process.

Bad Mortgage Bond Process

The other problem occurred much earlier in the process — shortly after the time of loan origination. It turns out that banks may not have transferred loans properly into trusts for securitization. As a result, covenants may have been broken, so investors who bought bonds backed by mortgages might have reason to file suit against banks. This doesn’t actually affect foreclosures directly, though title problems could also further complicate the process.

So which problem is worse? The banks probably have more to lose through the latter mistake.

Banks can fix their foreclosure process problem pretty easily going forward. At most they would probably only face a handful of legitimate lawsuits if borrowers’ homes were foreclosed in such a way that violated the rules surrounding the process. And those monetary remedies will probably be minimal, amounting to penalties rather than big damages.

The documentation problem, however, could be worse. If investors try to put-back bad mortgage securities to banks, then things could get pretty ugly … If this is a legitimate legal claim by investors, then these lawsuits may soon begin to mount. Congress could try to step in and prevent them through some legislation, but politicians are too busy campaigning at the moment to deal with this problem.

In a paper released yesterday by Moody’s Analytics:

Recent revelations about “robo-signing” have also raised questions about mortgage underwriting and securitizing practices during the housing boom such as whether securitized loans were properly underwritten and whether titles were properly assigned.

The New York Times this week reported on the opinions of two law school professors who claim that the challenges based on the bad mortgage bond process may result in some homeowners winning court cases:

The worst outcome would be a conclusion that errors by financial institutions had decoupled the payment promises made by borrowers from the mortgages they signed. In that case, the mortgages would be invalid. Homes could be sold without paying off lenders.

So is the problem over or just beginning?

No one knows for sure. As Moody’s said:

The uncertain scope and timing of foreclosure moratoriums make the risk hard to assess …

Revelations about questionable foreclosure procedures could delay the resolution of thousands of troubled loans and are fast becoming a risk for the U.S. housing market. The scope of the situation is uncertain, both in terms of the number of loans involved and the length of time it will take to resolve the problem …

Analysis of the current situation, which is shifting rapidly, does shape the balance of risks to the current forecast. This analysis suggests that foreclosure delays could have a positive impact on house prices in the near term but could weaken home sales. Conversely, house prices could decline more than anticipated next year, once processing issues are resolved

Assuming that foreclosures are interrupted for a quarter at most and that the moratoriums do not extend to additional servicers or states, the disruptions in foreclosure processing will weaken fourth quarter home sales but support house prices as the share of distress sales declines. Once the issues are resolved and foreclosures are completed, distress sales will cause house prices to dive again.

Bottom Line

We can’t be sure how this will unfold. All we can promise is to do our best to keep you informed as we learn of new twists and turns in this road.

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2 replies
  1. Mike Davis
    Mike Davis says:

    Good article. Every “problem”, though, is an opportunity in disguise. The current problem for home-sellers is a boon for home-BUYERS. If you’re a buyer, NOW is the time to buy: low rates, low home prices… it’s a buyer’s market.


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