The news that some large banks have been cutting corners on the foreclosure process will most likely keep the U.S. housing and mortgage markets from recovering as quickly they could, according to housing and mortgage experts.
The corner-cutting, which was soon dubbed "robo-signing," came to light after litigation-related discovery revealed some large banks have been signing and notarizing foreclosure documents without understanding what they said, or in some cases, without reading them at all.
As the news came out, several large banks announced they had suspended home foreclosures in some states and several state attorneys general announced investigations. (See article, page 28.) Bank of America, the largest mortgage servicer, has suspended its foreclosures nationwide while it reviews its foreclosure procedures.
Experts said the scandal would likely have two impacts, one good for some homeowners and the other almost certainly bad for the majority of other homeowners and the economy at large.
For local homeowners fighting foreclosure proceedings in court, the news could have the singular impact of giving them more time to work out deals with their mortgage servicers and motivate the servicers to negotiate with them. And this will be good for those homeowners. But for homeowners seeking to sell their homes for the best price or home builders wondering when they will be able to get back to work, the news will likely slow the process of bringing foreclosed properties back on the market again even more.
"I see this situation bringing a great deal more uncertainty into the real estate and mortgage markets," said David John, an analyst with the Heritage Foundation, located in Washington D.C. "And the uncertainty will not end there. It could impact the secondary market for mortgages and mortgage-backed securities as well."
John explained that the worry of many home buyers, that they might buy a home with a disputed title, would probably not happen. Once a foreclosure court has spoken and ruled a property foreclosed, John said, and that property is sold, the buyer of that property is generally held harmless.
"Any damages, if there were any, would likely be between the property's original owners and the servicer or bank or credit union that foreclosed on the property, not between the former owners and the current owners," John said.
But John added that while the foreclosure problems might not impact the sales of foreclosed properties directly, they would definitely impact the numbers of foreclosed properties coming onto the market because the foreclosure process problems went to the question of valuation.
And putting a moratorium on foreclosures would only make things worse because it leaves an open question about how many properties might be on the way to foreclosure, particularly in local areas.
"Imagine you are a home buyer and you have found a neighborhood that looks solid. Not many foreclosed or 'bank owned' signs around and you buy there. But then in six months another two or three or four homes that were being held off foreclosure are released and are now available and your property value has just dropped," he said.
Other impacts could be felt on title insurers and the price of title insurance will likely rise, John said, though no title insurance firms would comment for the record on how questions about ownership of previously foreclosed property might impact their business.
But Fidelity National Financial put out a statement estimating that it would not face much of a loss from the scandal.
"FNF believes that these policies will not result in additional claims exposure to FNF because the new owners and their lenders would have the rights of good-faith purchasers which should not be affected by potential defects in documentation," the title insurance firm said, adding, "even if a court sets aside a foreclosure due to a defect in documentation, the foreclosing lender would be required to return to our insureds all funds obtained from them, resulting in no loss under the title insurance policy. As a result, FNF does not believe that the recent announcements regarding potential defective foreclosure documentation will have a material adverse impact on its title business."
The scandal has also introduced doubt into how ownership of the electronically traded mortgages could be established and that has very far-reaching implications, John said.
"The more courts rule that the current go quick foreclosure methods are not adequate and that foreclosures cannot take place without more paperwork and the actual mortgage documents, the more questions will be raised about loan ownership," John explained. "And if loan ownership is unclear, then what's the real market value of mortgages now on lender books or securities backed by bundles of mortgages?"
The value of many mortgage-backed securities might take another hit, he said.