In the rush to get out of the foreclosure crisis, have we dug a bigger hole for ourselves? The biggest lenders have already discovered enough paperwork flaws to suspend their foreclosure processing. As a precautionary measure, lawmakers have asked several other lenders to halt their processes as well, triggering fears of sending the housing crisis into a tailspin.
The latest bank under the microscope is Bank of America Corp. (BAC), the largest bank of the nation, which has extended its foreclosure suspension to all 50 states to scrutinize how documents had been handled during home seizures. This move follows the rising concerns of legislators and state prosecutors about whether homes are being seized on the basis of false data.
BofA’s latest action expands its 23-state foreclosure suspension announced just last week. Three other major mortgage lenders — General Motors Acceptance Corporation (“GMAC”) Mortgage LCC, JPMorgan Chase & Co. (JPM) and PNC Financial Services Group Inc. (PNC) — have also decided to halt foreclosures in 23 states. GMAC Mortgage is a wholly-owned subsidiary of Ally Financial, one of the largest financial services companies in the world.
BofA’s decision to extend its freeze across the U.S. mounts pressure on the other lenders as well. U.S. lawmakers also require the nation’s largest mortgage lenders to suspend foreclosures across the country. The attorneys general of about 40 states are planning to announce a joint investigation into flawed foreclosure paperwork into banks, the Associated Press reported last Saturday.
How the Problem Originated
At the time of foreclosing homes, many lenders use ‘robo-signers’ — employees who sign hundreds of documents in a day without verifying decisive information like the previously outstanding amounts of borrowers. This is the primary reason behind the mess.
Another major problem surfaced when multiple banks claimed that they have the right to foreclose the same property.
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.
The Ones Out of Danger
Standing apart from the rest, Wells Fargo & Co. (WFC) has expressed confidence in its foreclosure documentation, based on the affidavit procedures and the auditing of its process that it conducts on a daily basis. As a result, the company will not cease its foreclosure process.
The other institution confident about its foreclosures is Citigroup Inc. (C). Citi has affirmed that it continuously reviews its document verification processes and provides proper training to its staff, so it has a low exposure to such risks of having to freeze its foreclosure process.
Housing Recovery: A Short-Term Problem?
The snowballing foreclosure freeze will impede the sale of foreclosed properties. As a result, there is a high chance of a reduction in housing activity, at least in the short-term.
However, foreclosure actions should be ironed out in the long-run with the employees’ experience of properly reviewing the documents.
Was This Destined?
The paperwork flaw and related foreclosure halt will delay the sale of foreclosed properties. Analysts feel that the mess may hinder potential buyers, but the upshot will not change and there will be no impact on the housing recovery as such. However, we think the problem is going to persist for a longer period and there will definitely be a significant impact on housing recovery; while in some cases the lenders have no information about the owners of the loan, even when the documents are in place, it will take time to get the paperwork in order.
The root of the damage goes much further — the harm had been done before the burst of the housing bubble. Following the housing crisis, the pressure on the lenders to hasten the foreclosure process is primarily responsible for this paperwork flaw. Quantity over quality?
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