Latest foreclosure crisis: Is that bank takeover legal?

Several large banks have halted efforts to foreclose on homes in 23 states. There's evidence that many foreclosures may have been processed with incomplete or improper paperwork.

Reed Saxon/AP
A "bank owned" sign is seen on a home that is listed as a foreclosure on a HUD website, in Hawthorne, Calif. Several large banks have halted efforts to foreclose on homes in 23 states. There's evidence that many foreclosures may have been processed with incomplete or improper paperwork.

Concerns about the legal validity of foreclosure documents has become the latest hurdle facing a weak US housing market.

In recent days, several large banks have halted their efforts to foreclose on homes in 23 states where the process must be approved by a judge. The controversy revolves around evidence that many foreclosures have been processed with incomplete or improper paperwork.

Some politicians have called for a nationwide moratorium on foreclosures while the problems are investigated.

And on Friday one of the largest lenders, Bank of America, put a nationwide freeze on sales of foreclosed properties while it reviews documents on past transactions.

"Fraudulent foreclosures must end immediately,” said Rep. Elijah Cummings (D) of Maryland in a statement Friday. “I am glad Bank of America has taken this huge step, and I challenge every other lender and [loan] servicer in the nation to do the same."

In addition to Mr. Cummings, attorneys general in at least 10 states have called for a voluntary or mandatory halt to foreclosures. Those states span from Florida to California, some of the states with the most soured home loans.

A slowdown in foreclosures and sales

The foreclosure foul-up promises to slow the pace of sales in a housing market where demand was already tepid. That's because, of the transactions that are occurring, a high percentage (roughly 1 in 4 at present) involve sales of bank-owned homes. Document probes could delay both the pace of new foreclosures and the ability of banks to find buyers for homes that they have already taken over from delinquent borrowers.

"The impact on home prices would actually be positive in the near term," if the supply of homes on the market shrinks, predicts Celia Chen, a housing analyst at Moody's Analytics in West Chester, Pa. "However, I think that'll just mean that prices will fall even further next year, or whenever these foreclosures end up on the market."

The legal issues add to a housing-market picture that's already rife with uncertainty. Many housing analysts had been predicting a rise in foreclosures, and further modest declines in home prices, as lenders work through a tide of borrower defaults.

Since the end of a tax credit designed to revive buyer demand, sales of previously owned homes have declined to an annualized rate of about 4 million units, lower than what's needed to bring down the large inventory of homes for sale.

The condition of foreclosed homes could suffer

By slowing foreclosures, the legal snags could postpone sales until next year or beyond, when the economic climate for selling homes might be better. But a lengthy moratorium on foreclosures wouldn't necessarily be positive. The care and maintenance of homes could suffer, for example, if several million people live for a long time in homes they believe they'll ultimately lose.

According to Amherst Securities, the nation currently has 5 million nonperforming home loans (60 days or more delinquent, or already in foreclosure). That's about 10 percent of all homes with mortgages.

Also, a failure to address the legal concerns could mean lost confidence for many homeowners and potential homeowners.

"When homes are fraudulently repossessed, the housing market will suffer, particularly where homeowners have redemption rights and can demand the return of their homes if they were wrongfully evicted," Mr. Cummings argued in his statement Friday. "Avoiding fraudulent foreclosure will keep the American Dream alive for many families and ensure that our national recovery is built upon a firm foundation.”

In addition to Bank of America, two other big lenders have halted foreclosure sales in 23 states, pending a review of the alleged problems: JPMorgan Chase and Ally Financial's GMAC Mortgage unit.

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