Foreclosure freeze a big deal

This week Bank of America announced that it’s stopping all foreclosure sales for the next 30 days. During that time they’ll review the foreclosure process to ensure that their procedures are correct.

Three other banks (PNC Financial, GMAC Mortgage and JP Morgan Chase) have also announced a 30-day moratorium.

Why the freeze? Evidence is mounting that, over the course of the last several years, some homeowners may have been improperly kicked out of their homes. There are a lot of questions about the banks’ procedures, and they’re worried about lawsuits from former owners who feel they may still have a claim to their home – even if it’s already been sold to someone else!

As you probably know, the number of foreclosure properties has risen dramatically in the last couple of years, and banks have struggled to keep up. Turns out that foreclosure papers may have been simply ‘rubber-stamped,’ and not actually reviewed by a real person. If that’s the case, you know that mistakes were bound to happen.

My gut tells me this could be a huge story for a couple of reasons. If it’s discovered that owners lost their homes because the bank acted improperly, you can imagine the lawsuits that will follow. It’s also important to note that, while the bank may not be processing any more foreclosures for the next 30 days, there are still owners struggling to make payments. Some of those owners are abandoning their homes, so the number of houses that will eventually be foreclosures will continue to rise. Picture a pipeline, with more and more properties being stuffed into it. That’s going to create a huge backlog, and at some point that backlog will need to be released.

When that release comes, cities will see a fresh wave of foreclosure houses on the market. Generally speaking, that’s not good for current homeowners, because the sale of the repossessed houses tends to drag down the property values surrounding it.

The banks’ decisions also pose a question to transactions currently in progress – what happens if the bank can’t guarantee clear title? What if the bank won’t sell the property until they determine that their processes were correct? What if their processes weren’t correct? Buyers hoping to close on their new house in the next 30 days might be forced to wait … and they could end up waiting a long time. (Banks tend to work very slowly – I’ve worked with banks before, so I know from experience!)

This story is just beginning to unfold, but I think it’s going to become a big deal.

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