Foreclosures Scandal to Delay Housing Recovery

With JPMorgan Chase and Ally Financial both calling a temporary halt to foreclosures and members of Congress questioning Fannie Mae and Freddie Mac's use of "foreclosure mills," are these just unnecessary delays for inevitable defaults? Will other major loan servicers be next in line?

RealtyTrac senior vice president Rick Sharga wasn't surprised to hear about the delays, but he does think the foreclosures are inevitable and that "these additional delays will just slow the housing recovery." He told HousingWatch that "banks and servicers have been managing inventory levels for a while." These legal moves now force them to delay foreclosures even longer. But even without these delays, Sharga thinks foreclosures will negatively impact the housing market until 2013.

Given that the banks and servicers have had since 2006 to get their act together, Sharga is amazed that they aren't further along in setting up the proper procedures for taking these foreclosure cases to court. For those homeowners threatened with foreclosure, it could mean a reprieve.

"None of the systems and processes in the industry were set up to handle the kind of volumes we're seeing today," Sharga said, but during the past five years the banks should have done more to get ready.
Sharga wonders, "How long these short cuts that are now coming into light have been taking place?" Lenders have been delaying foreclosures and allowing people to live in their homes in delinquency for a longer and longer period. Some of this was because they just don't have the paperwork. In other cases, that banks did not want to take on the responsibility for paying condo and homeowner association fees or carrying insurance on vacant property. He blames the "unbelievable sloppiness in paperwork in the industry that now leaves some banks without the legal standing to foreclose."

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Cases have been thrown out by courts. Ohio took the lead and threw out 14 cases in 2009. Ohio attorney general Richard Cordray sent a letter to all the state courts on Sept. 28 asking for a special review of all foreclosure cases that involve GMAC Mortgage, also known as Ally Financial. Now that Chase has halted foreclosures for the same reasons, it's only a matter of time before those courts take a closer look at Chase cases as well.

Sharga expected the banks to reevaluate their foreclosure processes after embarrassing cases in Ohio and elsewhere hit the news in the past couple of years. He was somewhat surprised to find that they still haven't made changes.

What does it mean for you? If you are facing foreclosure, assume that the bank involved does not have the necessary paperwork and may have taken shortcuts. Seek legal assistance through the Institute for Foreclosure Legal Assistance, or other legal aid offices in your state, to have someone review the documentation and see if you have a reason to question the foreclosure. Just because you got the paperwork doesn't mean it has been prepared properly.

Lita Epstein has written more than 25 books, including
"The 250 Questions You Should Ask to Avoid Foreclosure" and "The Complete Idiot's Guide to Personal Bankruptcy."

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