Will Mass. Foreclosure Ruling Send Market Downhill?

foreclosure rulingA court foreclosure ruling in Massachusetts last week will definitely influence the way banks deal with foreclosures in the future, but it could also button up home lending for the rest of us.

The highest court in Massachusetts basically told two banks that they had no legal right to foreclose on two homes since they were lacking the proper documentation at the time the properties were foreclosed on. In this case, the documents were not any old docs -- we are talking about the titles to the homes.

And in what some analysts are calling the most extensive bank beating yet, others are wondering if this move could just make some financial institutions hold their money even closer, thereby making it even harder for consumers to get a loan.

Recall the robo-signing of foreclosures a few months back, when we learned that banks were so overwhelmed with foreclosures, and processing so many, that they hired lower-level employees to "robo-sign" legal documents, skipping some steps along the way? It gets worse. Not only were they shoving these papers out so fast the ink couldn't dry, they couldn't locate the titles to some properties.
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This is because, back in the Wall Street market and mortgage boom, banks were selling off loans fast and furiously to trusts owned by thousands of investors. Sometimes, because this was also happening quickly, titles and paperwork were getting lost along the way.

Well, now the Massachusetts court told the banks, in this case Wells Fargo and US Bancorp, sorry Charlie. We know you've had a tough time keeping track of paperwork, but if you don't have a title, you don't own the house.

Experts are divided on what this could mean for housing. For one, it could slow down foreclosures, say some. Here's the logic: it takes a bank about a year and a half to process a foreclosure. This ruling means that every bank in a judicial state --that is, a state where foreclosures have to be proven in court -- will have to find and locate the title to the home before they foreclose. This takes time, so that could drag the foreclosures out even longer. Fewer foreclosures could keep the market artificially propped, or drag out the price dips that occur when foreclosures flood the market. Maybe values would no longer fall?

Good or bad?

The New York Times thinks good, because fewer foreclosures means fewer homes on the market, hence higher home prices.

But even if home prices inch up a smidgen, it won't be for long. That's why others say now we're playing "extend and pretend" once again, but this time with foreclosures. Postponing the inevitable will just drag out the pain. One of the biggest problems with the market now is that banks are not lending money for home purchases all that readily. They are waiting to clear out their balance sheets, write off and clear the bad loans so they can lend more money on healthier loans. If those balance sheets get delayed by years, we might never see the end of this mess.

Experts, like UCLA Forecast's Ed Leamer, point out that sales have crept up in non-judicial states like California, when compared to states like Florida, where all foreclosures have to go to court. In the past, quicker foreclosures have led to a healthier market, purging the system of the bad debts. So the Massachusetts ruling, though well-intentioned, could seriously hurt the market if it starts popping up in other states.

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