New Mortgage Foreclosure Crisis Puts Big Banks On Defensive

The phrase "foreclosure crisis" took on a new meaning last week, becoming more of a threat to the financial services industry rather than beleaguered homeowners.

It was the revelation that a GMAC Mortgage employee did not always read and sign foreclosure affidavits that sent the first shock wave through the industry. Twenty-three states require something called "judicial foreclosure," meaning that the lender must file an affidavit with the court, stating that the information in the foreclosure documents is accurate and the foreclosure is justified.

The law in those 23 states requires that a bank official attest that they have read the documents and verified the information, and then sign it in the presence of a notary public.

Faced with processing 10,000 or more foreclosures a month, bank officials apparently took shortcuts. Lawyers representing homeowners fighting foreclosure are claiming the process was not legal. Some representing homeowners whose foreclosed homes have already been sold to new buyers say they will challenge the legality of those sales in court.

Serious business

It's a serious matter, and last Friday Bank of America announced it would also suspend foreclosures in the 23 states where judicial foreclosure prevails. The same day Old Republic National Title Insurance said it would no longer underwrite policies on property sold as the result of a JPMorgan Chase foreclosure.

Chase, it turns out, had just stopped 65,000 impending foreclosure actions because of uncertainty that it had followed all the rules. Suddenly, it joined the banks who are on the defensive.

"To be certain affidavits have followed the correct procedures, Bank of America will delay the process in order to amend all affidavits in foreclosure cases that have not yet gone to judgment," spokesman Dan Frahm said in a statement.

At this point, no one knows how all this will play out. Banks are likely to argue in court that it is unreasonable to expect them to read and sign every foreclosure document when they are processing 10,000 or more a month, just as some members of Congress argue that it's unreasonable to expect them to read a 2,000 page bill before they vote on it.

Lawyers for homeowners may point out there is no law requiring lawmakers to actually read the bills, while there definitely is a law, at least in some states, requiring bank officials to read foreclosure documents before taking someone's home. "The law," they will likely point out, "is the law."

What happens next is anyone's guess. While all of this is being sorted out, its impact on the real estate market may be more predictable.

Fewer foreclosures?

Real estate experts say evictions from homes are likely to slow to a crawl, especially in the 23 states with judicial foreclosure. That means if you are at the beginning of the foreclosure process, you may be able to stay in your home longer than you think.

With lenders slamming on the brakes when it comes to foreclosures, that means fewer foreclosed houses will be coming onto the already glutted housing market, and that may be a very good thing for real estate, at least temporarily. With fewer houses on the market, the supply could tighten some, restoring price stability sooner than expected.

"Maybe this is like shock therapy," economist Karl E. Case told the New York Times. "Maybe this will actually get the lenders to the table and encourage them to work out deals that are to the benefit of everybody."

What you should do

If you are facing foreclosure or already in the process, you should consult an attorney if you haven't done so already. You should determine whether your state is one that requires the affidavits and who, if anyone, actually signed it.

There's a good chance that, if you can't actually stop the foreclosure, you may be able to slow it down.

If, on the other hand, you recently purchased a foreclosure, you might also seek legal advise. In some states attorneys for dispossessed homeowners will likely challenge the legality of the sale of their clients' property. You, as the purchaser of that property, may find yourself a party to a lawsuit.

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