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Brad updates the foreclosure debacle today.

Here we go into the second inning. But if this wasn’t clear to you where things stand when I blogged about it a few day ago, it will most assuredly be less clear now.

What we know:

– Some lenders have discovered “spot irregularities” in their foreclosure process, but no widespread problems.

– Surreptitiously, HUD has been investigating several lenders behind the scenes for about five months, because HUD suspected something was amiss. If it comes to a readjustment in the way lenders are doing things, HUD has a lot more sway over FHA lenders than the rest, though.

– Bank of America has resumed foreclosures way ahead of their projected schedule, because, they allege, mistakes were few and far between, and isolated. In other words, they found no systematic problems.

– Investigations continue in all 50 states, initiated by Attorney’s General.

– Some individual jurisdictions have frozen foreclosure auctions.

– President Obama has called for further investigation into the matter, but has not instituted a nationwide moratorium on foreclosures. He is not in an easy position.

– HUD Secretary Donovan has assured the public that in cases where fraud was committed or mistakes were made, consumers will be made whole. Donovan also said that a complete foreclosure freeze would only delay the inevitable, meaning that the recovery in the housing market would be postponed.

I am certainly not an economist, but I’m not so sure that delaying foreclosures would hurt the real estate market. When it is phrased “delay the recovery”, it sounds as if a freeze would only knock off track what is a normal, natural rekindling of the housing market. But is that what we are experiencing?

Three years ago in the Las Vegas area, approximately 5% of purchases were made with cash. Today, that number is around 45%. I understand that falling prices have put cash purchases in reach for some people, but I think the biggest reason for the change is that investors have been buying up properties, especially foreclosures and short sales.

I really think that for the housing market to turn around in a sustainable way, we will need more buyers who intend to occupy the properties, not just investors looking to “buy low”. And in order for that to happen, the employment ship must be righted. Here in Las Vegas, we have not seen any improvement in the employment picture for quite some time. If someone in the family is without work (and this crisis has hit almost every family in town), then the entire family feels uneasy and reticent about making any large purchases and taking on any more debt. So if we are able to stall foreclosures for a while until the job market recovers a bit, or at least heads in the right direction, it might be a good thing, in my opinion.

Another byproduct of this mess is flailing consumer confidence. Over the last few years, homeowners have felt very pessimistic about real estate, as they have watched their neighbors foreclosed on, driven down streets lined with “For Sale” signs, and been inundated with media stories about mortgage fraud, short sales, falling values and the like. And now if we add the latest lender mess to the equation, it only exacerbates the ubiquitous negativity.

There is some speculation that former homeowners might be able to recover their properties if it is determined that the foreclosure action taken by the lender was fraudulent. In fact, in California, an attorney even advised his clients, who were foreclosed on, to break into their former Ventura-area home. Who was really trespassing: the former homeowners or the bank that (allegedly) repossessed the home illegally? My guess is that the vast majority of former homeowners have no claim, and that the errors, if any, were more technical than anything else. I don’t see a Pandora’s box here, although some remain hopeful.

Today’s blog is only an update; there really are no answers or solutions yet. But I can’t help but wonder about the upcoming elections. Many races across the country are tight. Polls show Democrats regaining some momentum of late, but will it be enough to tamp down voter dissatisfaction with the current administration? If Obama wants to retain control of Congress, then he might just think about pulling a rabbit out of his hat (and quick!) to address this issue definitively, succinctly and expeditiously, and in a manner that reinvigorates confidence in the entire system.

I will blog about further updates when they break.

Date posted: October 20, 2010