Winners and losers from a foreclosure holiday
The foreclosure machine -- which turned out to be more automated than most would have guessed, with some processors admitting to signing off on key documents without giving them a glance -- threatens to grind to a halt as some of the nation's biggest banks are forced to reexamine their document-handling processes. Despite calls from activists and some members of Congress for a nationwide moratorium, foreclosures are still proceeding. But Bank of America and Ally Financial (formerly GMAC) called a moratorium on their foreclosures as they review past transactions. J.P. Morgan Chase is reviewing loans in 41 states.
To proceed with foreclosures, banks must be able to document that they really do hold titles to the homes in question, and that they have followed the proper legal procedures in seizing the properties.
Although few expect that many homeowners in default will ultimately be able to remain in homes they can't pay for, in the short term, delays in the foreclosure process offer them some respite.
Many analysts warn that a prolonged foreclosure moratorium could damage the housing market's recovery by delaying the day when supply, demand and home prices come into balance. And there could be untold damage to banks and the financial system if the banks can't find a way to resolve this problem quickly. But, in the short term at least, there are other potential losers and winners from a foreclosure holiday.
Buyers of foreclosed properties are already showing anxiety about the situation, said Susann Haskins, branch manager for Long & Foster's Gaithersburg/North Potomac office. "Buyers are reluctant to put a foreclosure under contract," she said.
Moira Olevsky, a settlement officer with Settlement Pros, a title company headquartered in Bethesda, said, "The whole thing is absolutely a mess." She said that she has seen some lenders quickly push transactions from short-sale consideration to foreclosure, and that sometimes there is concern that the lender did not allow the legally required time for all creditors to be notified of the pending foreclosure. Either situation can cause problems with the title to those foreclosed properties.
Olevsky added that lenders often offer buyers financial incentives to use the lender's closing lawyer to close their deal, and warned that problems such as improperly updated title work can be missed in the title examination, to the detriment of the person buying the foreclosed property.
A title insurance policy covering the owner, which is an optional purchase, is absolutely a must-have for anyone who buys such a property. "That's your only relief it it turns out the title abstract was wrong," said Darrel Longest, a lawyer who underwrites such policies for Peerless Title & Escrow in Rockville.
Foreclosures -- and the months of unpaid condo assessments that typically precede them -- have devastated some condo associations' budgets. And high delinquency rates among owners can short-circuit future sales, even though solvent buyers are exactly what would help the condo bring its books back into balance. "A lender generally won't lend to a new borrower if an association has got so much bad debt," Olevsky said. "That's been an issue. Sometimes a transaction ends up dying before it goes to closing because [the buyer] can't get financing." Stalled foreclosures -- with financially strapped owners continuing to skip their condo assessments -- could drive more associations into such financial meltdowns.