What does foreclosure mess mean to buyers and sellers?
You've probably seen the headlines about the fast-spreading foreclosure mess - moratoriums on home sales, calls for congressional investigations, and state and federal litigation in the wings.
But what could all of this mean to you as a homeowner, buyer or seller? Potentially more than you might assume. It all depends on your situation.
For example, although you might not be delinquent on your mortgage, the bank-owned house down the street that hasn't gone to foreclosure sale - and has been sitting vacant and in disrepair for months - might not be resold for an extended period to new owners who would make needed repairs and capital improvements. If the house becomes a long-term eyesore, it could negatively affect neighborhood property values.
In fact, it's possible that the evicted former owners are hiring a lawyer to look through documents for evidence of irregularities in processing by the bank that could throw the entire foreclosure into question and stall any resale for months.
"The phones are ringing off the hook," said Ronald Scott Kaniuk, a foreclosure and bankruptcy law specialist in Boca Raton, Fla. "People know that the banks haven't been playing fair" on foreclosures and have cut corners through mass "robosignings" of documents rather than proper reviews, he said. The coming tidal wave of private and public litigation against banks could stall foreclosures indefinitely, he said.
The sheer numbers of houses and families potentially affected are huge. According to data researcher RealtyTrac, lenders filed for foreclosure on approximately 339,000 homes nationwide during August alone. During the same month, banks took back about 95,000 homes for eventual resale. Roughly 5 million households are somewhere in the foreclosure process, according to industry estimates; they've received notices of default and are on the conveyor belt to foreclosure and eviction.
Even without mass litigation gumming up past and future foreclosures, the process is often not a speedy one, especially in the 23 states where courts must approve each foreclosure. In the slowest states, the full cycle can take more than 500 days from the first filing to the actual sale.
Based on conversations with legal, banking and real estate experts, here are some of the potential scenarios and issues emerging from the national foreclosure mess. Say you fit into one of these categories:
Recent buyer of a foreclosed home. There's a chance that the bank's foreclosure processing could be found to have been improper or that the bank did not adequately document its legal title to the house. What does this mean for you? The first question to ask is: Did I take out title insurance that protects me? If you financed the purchase, it's virtually certain the mortgage company required at least a lender's policy that covers title issues affecting its collateral. The title insurance underwriter will go to court, if necessary, to defend the lender's interest and compensate it for any legitimate losses. But if you did not take out an owner's policy, or bought for all cash, you could find yourself defending your investment on your own.
Financially distressed homeowner who recently received notice of a foreclosure filing from the bank. What to do? Peter J. Henning, a professor at Wayne State University Law School, says now more than ever it is crucial to ask a lawyer to review all documents you receive. Henning says that banks have been sloppy in their high-volume processing of foreclosures. "They often seem to have sort of a 'good enough for government work' approach," he said, "because they assumed nobody was watching." The foreclosure crisis, which Henning calls "Hydra-headed" in its wide-ranging effects, should force banks to be more careful in foreclosures, he said.
Homeowner is behind on payments but has not received a foreclosure notice. Ira Rheingold, executive director of the National Association of Consumer Advocates, which provides support to foreclosure legal-assistance programs, says this may be a propitious time to demand a loan modification - even a substantial principal reduction - from your loan servicer. The nationwide foreclosure mess "might shake up the banks enough to convince them to finally become real partners" in devising workable solutions for distressed borrowers, "forcing them to deal with the reality they've created."
For their part, some of the country's largest banks insist that their foreclosures have been proper and that foreclosed borrowers typically are severely delinquent. Bank of America says that its average customer who goes to foreclosure has not made mortgage payments for 18 months.