Many of the same banks whose lax lending standards led to the rubber-stamping of countless mortgages in the years leading up to the financial crisis are now under fire for allegedly cutting corners on foreclosures.
Ally Financial’s GMAC Mortgage, Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and Bank of America (NYSE:BAC) are among the mortgage lending giants currently being targeted for allegedly mishandling foreclosure procedures.
The banks have been accused of acting improperly in an effort to rush delinquent borrowers out of their homes. Speaker of the House Nancy Pelosi, D-Calif., has called for a federal investigation.
The banks contend the problem is essentially a technical glitch caused by a flood of paperwork.On Friday, Bank of America became the first major bank to halt foreclosure sales and proceedings in all 50 U.S. states.
As a growing number of states call on big mortgage lenders to suspend foreclosures to determine whether proper procedures were followed, there is concern that widespread delays could further weaken the already fragile U.S. housing market.
Experts say it’s too early to predict a long-term impact, but it’s widely agreed that challenges to foreclosures will likely multiply exponentially in the coming months.
Under a worst-case scenario, a significant number of the estimated two million U.S. homes currently facing foreclosure could enter into a legal limbo in which the delinquent homeowner can’t be evicted and potential buyers can’t buy.
That would almost certainly stall any potential housing recovery by adding tens of thousands of additional homes to an already bloated inventory.
“It could have the effect of keeping houses off the market,” said Grant S. Nelson, a real estate law expert and professor at Pepperdine University.
Of more immediate concern to Nelson, though, is the cost to taxpayers if thousands of delinquent borrowers are allowed to stay in their homes payment-free while mountains of loan paperwork is reviewed.
“Eventually these houses will be foreclosed,” said Nelson. “Now the question is who pays for this.”
Nelson answered his own question: “U.S. taxpayers.”
That’s because the vast majority of U.S. mortgages are guaranteed by the quasi-government lending entities Fannie Mae and Freddie Mac. So loans that don’t get paid by delinquent borrowers and are guaranteed by the U.S. government will ultimately be covered by U.S. taxpayers, Nelson explained.
“So who benefits from the chaos? Largely the people in default,” said Nelson.
The circumstances that led to the current troubles are eerily similar to the run-up to the housing bubble and subsequent financial crisis.
A decade ago, a potent combination of low interest rates, easy credit and government policies designed to increase homeownership in the U.S. led to an explosion of mortgage applications. Mortgage servicers, swamped with paperwork and well aware of the financial incentives tied to approvals, signed off on nearly every loan that crossed their desk, regardless of borrowers’ past credit history or ability to earn an income.
Now millions of those mortgages are going unpaid, and the same lenders who approved the original loans are being flooded with foreclosure paperwork. According to the Mortgage Bankers Association, the percentage of loans delinquent by 90 days or more has more than doubled in the past two years, to 9.5% in the first quarter of 2010 from 4% in 2008.
“The servicers aren’t equipped to handle this many foreclosures and this much paperwork,” said Celia Chen, who covers housing market issues as a senior director at Moody’s Analytics.
Several bank employees who have given affidavits in lawsuits brought by homeowners challenging foreclosures have acknowledged signing as many as 6,000 foreclosure documents each week.Loan servicers employed at these tasks have been dubbed “robo-signers.”
On Wednesday, North Carolina’s Attorney General Roy Cooper joined a growing chorus of law enforcement agencies and consumer advocates calling for virtually all of the top U.S. mortgage lenders to temporarily suspend foreclosure proceedings.
“If mortgage companies are using potentially unlawful practices to push through foreclosures in North Carolina, that needs to stop,” Cooper said in a statement.
Similar requests have been made in California, Connecticut, Ohio, Massachusetts, just to name a few states, and more politicians are climbing on the bandwagon to stop foreclosures.
Ally, JPMorgan and Bank of America have already agreed to delay some foreclosures while investigations into procedures are conducted, and the pressure is rising on other lenders.
JPMorgan made clear in a statement issued last week that it believes there was nothing improper with its procedure: “We believe the accuracy of the factual loan information contained in the affidavits was not affected by whether or not the signer had personal knowledge of the precise details. The affidavits were prepared by appropriate personnel with knowledge of the relevant facts.”
Other banks have issued similar statements.
Chen said she’s inclined to agree with the "technicality" explanation, for the time being at least.
“It’s probably a blip. It feels like it’s related to organizational issues” within the mortgage servicers, she said. “But it’s still very uncertain. We’re at the beginning now. Who knows what else we might unearth.”
Chen said there could be a temporary silver-lining: as foreclosures are delayed while these legal challenges are worked out it could actually have a positive impact on home prices, she said.
Foreclosures are putting downward pressure on home values, she explained, because foreclosed homes are discounted markedly from a home not being sold in foreclosure. As more and more foreclosed homes go on the market and are sold it means the aggregate price of all the homes on the market goes down.
“If this robo-signing keeps foreclosures from being sold it could actually support home prices in the near term,” said Chen.