Foreclosure Freeze

Understanding the Foreclosure Freeze
by Bob Stahl, www.MyPhoenixMLS.com Guest Writer

Last week, Bank of America announced that it was halting foreclosures in all 50 states in order to review its foreclosure procedures, specifically the use of “robo-signers” – employees who were pushing paperwork through without verifying authenticity of the information. And now there is pressure mounting for other banks to follow suit. As of “press time” for this blog, Wells Fargo has adamantly denied that they will halt foreclosures to the point that BofA has, and most banks are doing more targeted foreclosures freezes.

This has created a lot of question from homeowners: both those interested in pursuing a foreclosure as well as those simply wondering how the freezes will impact them. I asked readers from my blog to submit questions and I also have some over-arching ones here to help us get a better understanding of the situation and its influence.

Why is this happening?

There is a lot of paperwork involved in buying a house. Yes, I’m pointing out the obvious. But it’s important to think about that pile of paperwork when understanding how the breakdown can happen.

Essentially, banks right now are having a difficult time proving that they own some of the mortgages they are attempting to foreclose on. Why? Because of a piece of paperwork called an “assignment” that is typically a short document signed by both the seller and buyer of the mortgage acknowledging the sale. In a perfect world, after the sale, it is then attached to the mortgage documents and delivered to the new owner.

However, during the height of the housing bubble, investment banks were churning out mortgage bonds in such a frenzy, sometimes the assignments never got executed. Often times, much of the documents were not properly signed, administered, inputted and filed. It was a fast growing bubble and difficult to keep up with.

But these assignments are important as they show ownership. For most mortgages, the assignments probably exist somewhere and it’s just a matter of tracking them down. But some mortgage lenders have since gone out of business or been acquired by a larger bank. This makes the process difficult. And if a bank can’t prove they own the mortgage, how can they foreclose on it?

How did it get to this point?

This issue has actually been quietly simmering for some time. But what really brought the issue to light was when Jeffrey Stephan, a GMAC loan officer who supervised 14 people, admitted in a sworn deposition that he signed off on between 8,000 and 14,000 foreclosure documents. . . a month. . . for five years. This Web site has much of his testimony, which is pretty interesting to read.

So it’s all Stephan’s fault? No, not at all. But it gave way to examination on how foreclosures were being processed everywhere and Stephan’s experience wasn’t isolated. And this is where the term “robo-signer” was born, given that people were acting as robots, just signing documents without taking the time to properly review them.

Hence, banks have chosen to freeze filings, take a step back and breathe. Where do they go from here?

If the problem is just that of robo-signers, banks can likely resume foreclosures before too long. But there is suspicion that banks don’t know where those assignments are, can’t prove that they own these mortgages – and this can truly impair their ability to foreclose on a property.

What does this mean for the housing market and the economy?

Lots of speculation, but analysts are saying that home prices will increase in the short term as the low-priced bargain foreclosures are taken off the market. However, home prices will most likely take a dip once the banks deal with robo-signers, find the assignments and foreclosures go back on the market

There is a concern out there that this may impact the economy by banks pulling back lending (yes, even more than they already have). This would be disappointing, but hopefully if it did happen, would just be in the short-term as they deal with the current issue at hand and gain an understanding of their true portfolios/ownership of these properties.

For REALTORS® and prospective home buyers, it means really checking into the foreclosed properties that are on the market to ensure that they are properly documented so that your purchase doesn’t get put on hold or take a long time to exchange hands.