Tuesday, October 5, 2010

"The New Normal" - Part II - Major Banks Halt Foreclosures in 23 States; Other Lenders Ordered to Review Processes in Widespread Allegations of Fraud

The "New Normal" in housing?  Expect unanticipated consequences. 

In the Charlottesville / Albemarle area and surrounding counties, bank-owned foreclosures typically sell quickly, within a few days of listing (especially single-family homes), because they are usually 10% - 50% less than privately-owned "comps." But:
  • What if the house is foreclosed...and then the mortgage holder discovers the bank didn't have a clear right to evict?
  • What if a new buyer purchases a foreclosure...and then discovers that the bank didn't have clear title to sell it?
This is exactly the scenario that is playing out--and will continue to do so for years,  in a scandal brought to the American people by big banks.

JP Morgan Chase, Bank of America, and Ally Bank (formerly GMAC, General Motors Acceptance Co., primarily owned now by Uncle Sam, have all halted foreclosures in 23 states because the legal professionals signing off on the foreclosure packages were giving signatures to so many thousands that they didn't bother to read them, and are also unable to produce complete documentation to prove ownership.  

Other major banks ordered by the Office of the Comptroller of the Currency to review procedure include Citibank, HSBC, PNC Bank, Wells Fargo, and US Bank.  And as a consequence, some major title insurance companies will no longer offer their services to foreclosure purchases.

For the widespread impact, read this from Google news:
"There is a potential for class action liability in the United States for billions and billions of dollars on behalf of homeowners who lost their homes in proceedings where lenders used these kinds of phony documents."
Even without massive lawsuits, the suspension was bound to damage the already fragile financial market and housing industry, [mortgage broker] Moskowitz said.
"It is going to encourage people who are in default already to drag it out. In most of the cases it means they will have to start the process again, even though actually speaking, they defaulted," he said.
"This isn't healthy for the market. It is unhealthy for the real estate market because the values are artificially high because all the foreclosures are not on the market yet."
"It is bad for the finance market because the lenders can't get their money for years. The losses for the banks will be much bigger."

Mark your calendar, because the housing "recovery" has just been set back several years.

Related Reading:

See current foreclosure offerings (caveat emptor, as is always the case) here and here and here.

Virginia has two kinds of foreclosure: Judicial, and Right to Sale.  Read

"7 Major Banks Ordered to Review Foreclosures" - WaPo

"Flawed Paperwork Aggravates the Foreclosure Crisis" - NYT 

'Foreclosure Errors Cloud Homeownership With Millions of "Blighted Titles"'  - Bloomberg

Title Insurer Will No Longer Do Foreclosures - NYT 


AliG said...

Any idea what this means for home prices? If the foreclosure process is held up, will that delay or even reverse a return of pricing to historical norms, since foreclosure sales has been one of the drivers for lower housing prices?

C'ville Bubble Blog said...

Foreclosures were leading the way in "accurately" valuing home prices--even in this area. As the process is now suspended, not only is there still a huge overhang of inventory (more so here than elsewhere), but the price reversion is interrupted.

Read Ritholtz on the problems facing the entire housing industry due to this:

"We are not discussing economic problems of too many homes for sale and falling prices. What is being discussed here is a full blown crisis underlying home titles, foreclosure procedures, and securtized mortgages. The rampant, epidemic and systemic abuse of legal property protections is now reaching a crisis."

Foreclosure Fraud Reveals Structural and Legal Crisis


Anonymous said...

Incredible foreclosure prices here now, seriously bringing a reality check to Albemarle county: 4 ac43w 1800 sq ft, $144k


Anonymous said...

looks about right to me. That house needs to be completely gutted not to mention that it is fugly. It's called depreciation. Homes in the city will learn what this is about- look at sales volume now imagine where prices need to be in order to have volume at a 2002 pace. You can apply that anywhere really.

Anonymous said...

It is next to an electric tower line.

Humpty said...


The smart ones will begin to drop their numbers dramatically to attract the small pool of qualified buyers, before the market drops down to the next pool of buyers. We will see steep declines over the next 18-24 months.

Cherry picking season is getting closer!

Anonymous said...

Every day the house doesn't sell it's worth less in this market. Sellers should be in a panic and their agents should get them to that state. Except many agents heads are still in the great dark place. New construction on a decent size costs less than the existing sh*t currently offered, which is priced to cover the seller's a$$. Pain now rolling through this market like a steamroller.