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Brad comments today on the foreclosure debacle.

A quote from my blog on October 8, 2010:

“Therefore, I predict that next week, . . . other banks will follow BofA’s strategy, and also freeze their foreclosures.”

I guess I was right because news came out yesterday that several major lenders and mortgage servicing companies are expanding their investigations into their own possible mishandling of foreclosures.

To me, nothing reeks more than the proverbial fox guarding the hen house, and if ever there was an example of this . . . .

So, let me get this straight: banks are going to investigate themselves? Maybe they should even pay themselves some bonuses for doing it. What do you think?

At least Ally Bank, formerly known as GMAC (don’t let the name change fool you), has retained an outside accounting firm to look into their mess. Small kudos for that.

Wells Fargo is also on the self-investigation bandwagon, but neither Wells Fargo nor Ally has yet to freeze foreclosures. I guess it will depend on the screaming they hear as to whether they will follow BofA’s lead and stop foreclosures all together, unless and until they can verify that those foreclosures are legitimate.

Other smaller lenders, such as Litton (part of Goldman Sachs) and PNC, have already instituted partial freezes.

In some states, such as Florida, Michigan and Rhode Island, foreclosures have represented about a third of all recent sales. Here in Nevada, about a quarter of all homes purchased this year were repossessions.

Temporarily, I presume, prices will stabilize, or possibly even increase. Foreclosed homes typically have the lowest median sales price of any category. So fewer foreclosures means those lower priced listings will not be flooding the market, and that should result in level or moderately higher prices in the interim.

However, when the banks resume foreclosures, we could see the opposite effect, especially if several banks reinstate their auctions nearly simultaneously. At that point, a new wave of foreclosures might be in the cards. Personally, and I may be in the minority here, I don’t have much fear of a foreclosure avalanche, but of course, I could be wrong.

Although foreclosures have been frozen by some lenders, the foreclosure process continues. The only difference is that the final judgment and auction steps will not be undertaken at this time. But if the banks release the entire backlog of foreclosures at the same time, they would only be shooting themselves in the foot by depressing prices across the board. So I am skeptical that they would opt do that.

Attorneys General in all 50 states have now launched investigations into lending practices within their borders. I guess the self-investigations didn’t sit well with the government. And rightfully so. Being led by Iowa, the states intend to expedite their research into the foreclosure crisis, and attempt to determine the degree of lenders’ culpability.

Senate Majority Leader Harry Reid has called for a total freeze pending the outcome of these investigations, but some government officials have expressed concern that an all-out ban would depress the housing market even further.

Another concern that might arise is regarding title insurance. The vast majority of purchases involve what is commonly referred to as an owner’s policy (also called a seller’s policy). Title insurance is meant to protect the new owner in the even of fraud or other complications with the chain of title. If it is determined that at least in some cases, homeowners were unfairly evicted, or the foreclosure process was tainted in some other way, title insurers might be reluctant to issue new title policies. That could create yet another problem for the already battered housing industry.

I cannot predict the outcome of this mess; no one can. But I think it is safe to assume that we are only in the first inning. BofA is hoping to resume foreclosures next month, but I sincerely doubt that will happen. Too many federal government offices, too many states attorney’s general, too many bureaucracies are now involved, and this could take some time to sort out. Time might be one thing that the real estate market would consider to be a benefit.

Date posted: October 13, 2010