The Foreclosure Mills: What They Do to the Housing Market
- October 5, 2010
- 3 comments
- Posted in Latest Posts, Real Estate
The law finally caught up with the home foreclosure mills. Some of the leading lenders and mortgage servicers – including Bank of America, JPMorgan Chase and GMAC Home Mortgage, a unit of Ally Financial — have conceded that they’ve mistakenly filed for foreclosure based on faulty or even forged affidavits. At some mortgage service firms, an employee might robo-sign as many as 6,000 documents a week, making it impossible to verify the facts.
All of these borrowers are in default and most will almost certainly lose their homes. Some, however, might have been able to recover if the lender had offered to modify their loan. Their gripe, a fair one, is that lenders have been fatally unresponsive and in too big a hurry to turn them out. Deferring foreclosure might give them a second chance.
Various types of moratoriums are now in place, especially in the 23 states that put foreclosures through the courts. Several state attorneys general have begun probes of the foreclosure business.
What does this mean to people buying and selling homes? Plenty.
It will take even longer for the real estate market to recover. The record inventory of homes in foreclosure hangs over the housing market like a sword, says Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications. Until it’s cleared, sales and prices won’t return to a healthy track. The paperwork errors might delay foreclosures for just two or three additional months, if the lenders merely have to clean up their act, Cecala says. But if massive legal challenges develop, the housing depression could drag on for several years more.
Owners who haven’t been paying their mortgage might have many more months to stay in their homes before they’re forced out. Already, it’s taking an average of 478 days before foreclosure begins, according to LPL Applied Analytics, because the system is so clogged. People who fight eviction might last even longer. They’re unlikely to recover their homes, however, even if a court agrees that the documentation was bad. Once borrowers get more than six months behind on payments, they rarely catch up, Cecala says. As a practical matter, they use those extra, non-paying months to put their finances back in order.
Owners who think that fighting foreclosure will bring lenders to the bargaining table are probably mistaken. They’re hoping for a cut in the interest rate and in the amount of the loan. But two-thirds of the loans outstanding are bundled into mortggte securities and they’re governed by contract, Cecala says. Investors rarely agree to take less than they’re owed. The servicers will merely correct their paperwork and file for foreclosure again. In egregious cases, courts might order the lenders to pay the borrower’s court costs.
If you’ve recently bought a home that was foreclosed, your investment should be safe. Your purchase is covered by title insurance. In the unlikely event that a former owner returned to challenge the foreclosure, the insurance company has to defend you in court. If a judge reversed the foreclosure, your money would be returned, with interest. All of this is highly hypothetical. Once they’ve lost their homes, the former owners will move on. They couldn’t afford their mortgage before, and almost certainly won’t be able to catch up on that old loan.
If you’re negotiating for a house that’s currently in foreclosure, your purchase might grind to a halt. Title insurers are looking more carefully at the properties they accept. Old Republic National Title, for example, reportedly told its agents that, for now, it won’t write policies on homes foreclosed by GMAC and JPMorgan Chase. The company declined to comment.
If you’re buying a pre-foreclosure, get title insurance before you sign. These homes have been scheduled for foreclosure but the owners are still living there. If they have some equity in the property, they’ll be eager to sell at a bargain price that nets them at least some money beyond what they owe the bank. If they’re underwater, they’re looking for a short sale, where the bank agrees to accept less than it’s owed. As long as you can get title insurance, your purchase is safe.
If you’re buying at a foreclosure auction, you run more than the usual risk. This is the land where specialists roam. Search the title yourself, says John Reed, Author of How to Increase the Value of Real Estate. Do it on the afternoon before the sale, to catch as many last-minute liens as possible. You can’t get title insurance until after you buy the property, so you’re running the risk that an insurer might have doubts.
Sloppy documentation isn’t just an artifact of the recent real estate frenzy. When I bought an apartment in 2004, my lawyer discovered an error in the chain of title. I went through with the transaction but put a substantial part of the purchase price into escrow, not to be released until the problem was fixed. That gave the person who sold the apartment a major incentive to clean up the paperwork, which he did in about six months.
For investors, a bad title could be a buying opportunity. The documentation problem is invariably solved, Reed says. You might be able to pick up the property at a bargain price, rent it out, and realize a profit when the title is eventually cured. In real estate, there’s no mistake that doesn’t do somebody good.
‘
Tags: foreclosure, mortgage, mortgage title insurance
Ms Quinn: Why is it the banks and mortgage writers, and all of the total people who designed and sold toxic and illogical mortgages or fractions and parts of mortgages to differnt owners, making so many too toxic to hold or handle, why have they got away with this theft and dishonest practice? The taxpayers and society and economy in general is eating the loss after loss, along with a few mortgage default persons who did not deserve to get forclosed, etc? Its like the Fed. government and top officials have rewarded the villians and punished law abiding citizens, etc. What is your view, and how do we endure such greed and incompetence and self centered impacts on USA?
jim . 10-6-2010
Angelo Mozilo of Countrywide was just forced to pay a $47.5 million fine (it’s actually $67.5M but the bank indemnified him for $20M of it). But in general, the bankers have picked our pockets and made off with the money. The SEC got Mozilo because he was issuing optimistic public statements while selling his stock and indicating, through emails, that he knew his bank was in trouble. The govt needs something specific, as it had on Mozilo, to prosecute. There’s nothing illegal in taking outside risks and inflicting social harm, while paying yourself well. It’s infuruiating.
There may be some successful cases, however, where specific wrongdoing re: mortgage foreclosure is involved. But it’s more likely to hit the institutions than the individuals involved or, if individuals, only low-level players who signed affadavits wrongly.
What about the cost for title insurance? Home buyers who purchase title insurance do not shop for it. Settlement companies select the title insurance companies and consumers pay the premiums, usually without selecting the insuace company and price. Why is title insurance like this? What are the real costs, fees, magins, and commisions on title insurance and how are those prices set? Are consumers getting a fair deal? Title insurance is often one of the large costs line items you find on a HUD-1 at settlement.