Will the robo-signing foreclosure mess topple the housing market?

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Foreclosure sign in front of a houseWill a paperwork snafu -- which is what lenders would like you to believe is the problem -- topple the housing market? Sadly, it very likely could.

The issue is that thousands of people lost their homes when the guy who was supposed to review and sign off on the lenders' paper case against the homeowner didn't actually do his job. Nor was the notary who was supposed to actually witness the guy's signature even in the room. Short cuts taken by overworked clerks, we're told. Fair enough, except the lenders weren't fulfilling their legal obligations to process foreclosures. When the stakes are as high as someone losing their home, maybe it isn't such a good idea to take shortcuts, you think?
Anyway, when the short-cutting clerks finally spoke up, the lenders were forced to freeze their foreclosures in the pipeline. But what about the hapless homeowners who had already gotten the boot from their houses? They went to court. Which is where the whole sticky mess currently resides as lenders wait to see what judges want them to do to remedy the problems they caused.

So far, the judges have been determining that the banks didn't have clear title to the homes they repossessed and therefore shouldn't have been able to sell them. Bummer for the homeowners who were foreclosed upon; bad news for the people the banks sold their homes to; and the banks are looking down the dark abyss. It's a mess, for sure.

For homeowners struggling to avoid foreclosure, the freeze is either an opportunity to successfully argue the banks have been deceptive -- or at very least unhelpful. It puts them in a prolonged limbo, where they are stuck in homes they still can't really afford and still have the threat of the foreclosure process hanging over their heads.

The big banks are themselves sitting on pins and needles. The nightmare scenario is, of course, that the way the hurried securitization process was handled leaves them exposed to lawsuits from homeowners and investors who bought mortgage securities -- a potentially crippling and expensive picture.

Meanwhile, as the nation sits back and watches this unfold, the impact on the housing market is already being felt. The market, which was slow as molasses in terms of home sales with more than 25% of all sales being of homes in foreclosure, has come to a screeching halt. Who in their right mind would buy a foreclosed home from a bank today? Nobody. And what buyer isn't thinking that when all these foreclosed homes re-enter the market, there won't be a major glut of inventory to force prices down even further?

For the fragile housing market, it could mean confusion for years. And it may even force the government to step in again.

But there is one bright note about the situation. It has finally added some jobs to the country's employment rolls: A whole lot of lawyers are now gainfully employed by the thousands of people who wrongly lost their homes. So yep, the lawyers are happy as foreclosed-upon homeowners hire them to try and get compensation for their loss, pain and suffering or whatever it was that occurred when all the Ts weren't crossed and the I's dotted.

My prediction: This won't won't be ending pretty.


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