Many Americans facing foreclosures on their homes are starting to believe they may not have to leave their homes, because questions have arisen as of late about lenders and whether they have followed all the foreclosure rules. If they have not, then seizures may be halted until the regulators get to the bottom of it all. But is it really a relief, is it simply postponing the inevitable, or are these foreclosure irregularities perhaps going deeper and threatening the overall recovery?
Attorneys general in as many as 40 states so far have started investigations into home foreclosure procedures and many lenders seem to have been caught in the net of providing foreclosure documents that have not been properly validated. Executives appear to have signed hundreds of thousands of documents without actually checking any loan records or having even the basic knowledge about who owns specific mortgages.
The defense of some of the lenders is that, while there may have been some procedural errors, the underlying transactions have not been fraudulent. This is hard to believe; if the lenders are not familiar with the details of specific loans, how can they be sure such loans are not fraudulent? In the meantime, the pressure is mounting. As foreclosure levels have reached record highs in the U.S., the U.S. government has had to say something, pressuring the lenders to reduce their eviction rates. But lenders, many of them having benefited from the billions of dollars in bailout money, are quite adamant on getting their loans back, one way or another.
Regardless, suspicions are mounting that lenders facing an exorbitant number of foreclosures have taken one shortcut too many trying to collect as much money as they could before the lending market truly imploded. According to RealtyTrac, just in August, lenders have taken possession of 95,364 California homes and served eviction notices on 338,836 more.
The problem is if these deficiencies are as widespread as 40 attorneys general think they are, hundreds of thousands of foreclosures could be tied up in courts for years, including the evictions already executed as well. If that happens — and it seems right now that the problem might be turning into an avalanche — economic recovery in the U.S. could be further delayed. There is simply no way getting the economy to start moving again without resolving foreclosure issues first.
The foreclosures fraud highlights another problem — the “shadow inventory.” If the homes now in default flood the market, which is a distinct possibility, real estate prices could be further depressed. If potential buyers, who are already scarce, believe that prices have not yet hit rock bottom, the will keep on waiting to get into the market and the U.S. real estate market will continue being nothing more than barren wasteland.
As for the resale homes turnover rate, the data point to an even more dismal picture. Data collected from 23 states where faulty foreclosures are now flooding the courts indicates that the average time between borrowers defaulting on their loan payments and sales of their homes has widened to 25 months in August of this year from 18 months reported in August 2007, at the onset of the financial crisis that has led to the crash of 2008.
The widening of the turnaround time is not only having an adverse impact on resale prices, but it may also serve as a signal to other stressed borrowers that it may be okay to stop paying, because their cases could also end up in courts for years. Considering the number of foreclosures, lenders are very likely to deal with the worst-case scenarios first and leave delinquent homeowners of less valuable properties in their homes longer.
Even when defaulting borrowers are trying to find a resolution and renegotiate their loans, they are hitting six-foot-tall brick walls. In far too many cases, no one can tell them who owns their mortgages, let alone how to go about refinancing them.