Posted on 10/15/2010 7:07:26 AM PDT by WebFocus
ust how bad is "Foreclosure-Gate" going to get? This is the million-dollar question and the answer is as frightening as its implications: Nobody knows.
For anyone who's been living under a rock for the past three weeks, let's recap. Three weeks ago, Ally Bank (formerly GMAC), dropped the bomb that it was investigating potential problems with how its foreclosure paperwork was being processed and halted foreclosure proceedings in 23 states. Within days, other big lenders like JPMorgan Chase (JPM) and Bank of America (BAC) made similar announcements. Bank of America has now stopped foreclosures in all 50 states, just yesterday 50 state attorney generals launched an investigation into basically the entire mortgage servicing industry, and it seems that the rabbit hole is deepening daily.
All this less than a month before one of the most important mid-term elections in recent memory.
The housing market, already swooning, is slowly grinding to a halt, as uncertainty spreads from transaction to transaction. The most immediate fear is that buyers of bank-owned (or REO) properties will go away, removing an essential layer of demand for battered real estate markets around the country. If lenders didn't foreclose properly, buyers could find themselves without clean title, opening a Pandora's box of risks.
That having to give back a recently purchased home would be an extraordinarily rare event isn't important; in times of great uncertainty, confidence is the only thing that matters. This is the lesson to be learned from the financial crisis of 2008-2009, where the fear of default, not necessarily the default itself, torpedoed firms like AIG (AIG), Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Wachovia (WFC) and others.
If all this renewed talk of gloom and doom in housing is unnerving, it should be. If not quashed in short order, the situation could quickly spin out of control. If homebuyers en masse lose faith in the system of property ownership, title, and transfer, we'd all of a sudden arrive at a very scary place. Home prices follow sales volume, and if sales dry up in a meaningful way, especially in markets dominated by distressed sales, prices would collapse.
For an administration whose stated housing policy is to prop up prices, this is an unacceptable outcome.
Policymakers, who for months have been fighting for legislation to slow the flood of foreclosures, find themselves in the uncomfortable position of defending the economic and social value of an efficient process for repossessing homes. Foreclosure is the housing market's natural -- albeit unpleasant -- cleansing mechanism. Without it, impaired assets cannot be cleared and a sustainable floor in prices cannot be found.
There is, however, a silver lining to all this.
If you assume for a moment that the resolution for the so-called Foreclosure-Gate is not Armageddon, that cooler heads will prevail, it could end up being a massive blessing in disguise. For almost three years now, Washington has attacked the housing market Medusa by simply chopping off heads, leaving the body to regenerate more. Loan modifications have been a woeful failure while tax credits and other stimulus have proven transitory measures at best. But now faced with the specter of losing foreclosure, there's a chance policy makers will wake up to the stark reality that only through repossession, through the efficient reallocation of REO properties back into the market, can the housing truly heal.
There will be no bottom to this until all this paper gets unravelled and until the interventions, the bailouts, and easy money policies at the Fed come to an end.
This only deepens and widens as long as they try to prop it up with moratoriums, special lending...We will have to see more banks fail and more homeowners lose their homes to foreclosure to get to the end of this.
bookmark
Obama and the Dems view it very important to bail out the big bankers, least they have to pay for their bad investment decisions, like us little people do.
And to give trillions of tax payer money to the task of keeping housing unaffordable.
“But now faced with the specter of losing foreclosure, there’s a chance policy makers will wake up to the stark reality that only through repossession, through the efficient reallocation of REO properties back into the market, can the housing truly heal.”
Excellent conclusion, imo, although I know others disagree.
As long as the government is involved it will only get worse....
The bank’s problem is not foreclosed property, they are delaying the process to find out if they are legally in hot water (fines, prison, loss of license) for the sloppy paperwork that borders on perjury and fraud. That is why the bankers are delaying the process so they can tally up the legal costs for breaking the laws vs the foreclosure costs. It would be interesting to see how the numbers stack up. What will happen if the fines and legal costs exceed the cost of foreclosure??? Will the banks end up keeping all the REO’s on the books till they get a government bailout???? Hate to be a banker in the US today. White collar criminals getting tangled in their own web.
Yes.
Good article. It states the true nature of the problem, and not the bogus sideshow that innocent up-to-date mortgage payers are are being thrown out of their houses enmasse. Or that homebuyers are somehow paying the wrong people, and might lose their homes.
It also recognizes that the problem probably isn’t that bad in reality; only the initial, emotional perception - fed by politicians, attorney generals (more politicians), tinfoilers and scumbag, exploitative lawyers - of it is.
JMO but I think the banks are so hell bent on forclosing quickly so they can send the paper back to Freddie and Fannie and get paid for the loan at the higher prices. What a racket. The MERS thing will come back to bite them in the butt. All to save recording fees.
Somehow, I have a feeling that after all of the subterfuge is settled that this will turn out to be a back door way to forgive the mortgage debt to those homeowners who are in default.
So basically, my house will be worth a quarter what it is today, and we’ll be forced to either ruin our finances or stay in what will certainly be a high-foreclosure ghetto for 15 years until we pay our loan right-side up in order to fix this problem.
Me and millions of others, that is. Boy I love getting raped due to the failures of others.
I agree that foreclosure is the only way to clear properties that actually should never have been sold to the buyers because they could only qualify with special exemptions forced by government, but I don’t agree that ‘policy makers’ will necessarily ‘wake up’ before the election. Which means the problem will fester and only get worse over the next few weeks.
Happily, the election is very near and if Republicans really do win big, particularly if Christine O’Donnell wins in Delaware, then there is the chance that recalcitrant Dems will be forced to admit that their interventions have only made a bad problem worse and that removing their incentives has to go. Then the foreclosure paper problems need to be dealt with and the properties put up for distress sale, thus setting the floor.
So, I’m looking at at least three years of work-off before we get anything like a normal real estate market.
And I’m not referring to the market of the 2000’s. RE gains of 1 to 2% per year should be the normal equity gain, IMHO, outside of sweat and investment-improvement equity.
pingydingy for later
They wrote the foreclosures as diligently as they wrote the mortgages. There’s a certain symmetry, I suppose.
This scares me more than any doomsday or horror movie I’ve ever seen.
Many of those others have also been raped financially.
Banks need to start helping out the country and ease their loaning of money. As an example, if you have a loan on your house of 6% or more, own a small business, you will play hell getting your home refinanced. It’s almost like they want you to fail.
Failure has to be allowed to take place in order for capitalism to work. It’s sad to watch sometimes but it has to be.
“I agree that foreclosure is the only way to clear properties that actually should never have been sold to the buyers because they could only qualify with special exemptions forced by government”
Most foreclosures occurring now are due to unemployment. Not because an ARM reset.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.