Original Source
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Associated Press
Mon Oct 11, 8:48 am ET
Foreclosure freeze could undermine housing market
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By MICHELLE CONLIN, AP Real Estate Writer
NEW YORK - Karl Case, the co-creator of a widely watched housing market
index, was upbeat three weeks ago. Mulling the economy while at a meeting at
a resort near the Berkshires, Case thought the makings of a recovery were
finally falling into place.
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"I'm a 60-40 optimist," he said at the time.
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Today, Case's mood is far more subdued. In scarcely two weeks, he and other
housing analysts have watched as the once-staid world of back-office bank
procedures has spawned a scandal that threatens to further unhinge the housing
market.
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Allegations of possible mortgage fraud against financial giants GMAC, JPMorgan
Chase and Bank of America read like a corporate thriller: forged documents,
faked Social Security numbers, phantom titles, disappearing paper trails,
"robo-signers" and mortgages sliced and diced so many times that nobody really
knows who owns them.
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On Friday, PNC and mortgage servicer Litton Loan Servicing joined those three
financial institutions in suspending some foreclosures while they review how
documents were handled. Bank of America, which had already announced a halt
for 23 states, expanded the suspension to cover the whole nation. If other
banks follow suit, it raises the specter of a national foreclosure moratorium.
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In all, the banks will have to review the paperwork for hundreds of thousands
of mortgages. On top of that, class action lawyers and state attorneys general
have filed lawsuits and called for foreclosure moratoriums.
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In the near term, the freezes could actually benefit both homeowners and the
housing market. Homeowners would have time to live rent-free and chip away at
their debt. Prices might stabilize because so many homes are penned up.
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But the long-term implications are grave. Only a month ago, housing watcher
Mark Zandi, chief economist at Moody's Analytics, predicted that a housing
recovery would be under way by the third quarter of next year. Now he believes
the foreclosure scandal could prolong the housing depression for at least
another few years.
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The alleged document fraud could open up the entire chain of foreclosure
proceedings to legal challenge. Some foreclosures could be overturned, others
deemed outright fraudulent.
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Before a housing recovery can occur, all those foreclosed properties have to
be re-scrutinized by the banks and then sold. With any foreclosure-related
deal open to legal challenge, that inventory could be taken off the market
while the legal challenges make their way through the courts.
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That's not to mention the questions being raised about missing paper trails on
mortgages owned by people who have never missed a payment. What started as
simple paperwork bungling in a Pennsylvania office park now threatens to bring
to a standstill the nation's entire foreclosure machinery.
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The development is especially troubling given how large the foreclosure market
is. Before the scandal erupted, forecasters at John Burns Real Estate
Consulting predicted that 41 percent of residential sales this year would be
on distressed properties. Typically, distressed properties account for 7
percent.
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Since housing is the engine that in the past seven recessions has pulled the
economy out of recession, any further damage couldn't come at a worse time.
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"As far as I'm concerned, anything that slows the foreclosure process is a bad
thing," Case said this week.
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The debacle injects yet more uncertainty into a frail recovery that is still
trying to find its strength.
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"This is definitely one of the last things anyone needed to have to deal
with," says Diane Pendley, managing director of Fitch Ratings.
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The news that GMAC, recently renamed Ally Financial, and JPMorgan Chase and
Bank of America were stopping foreclosure proceedings in 23 states was merely
the beginning. Federal lawmakers are calling for a federal investigation,
saying the excuses from the industry are not credible, and on Wednesday the
Ohio attorney general filed a fraud suit against GMAC, calling it "the tip of
an iceberg of industrywide abuse." GMAC denies the allegations.
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In at least six states, attorneys general are calling for foreclosure
moratoriums and launching their own investigations. And this week, the
attorneys general of up to 40 states are expected to announce a joint
investigation into banks' use of flawed foreclosure paperwork.
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A person briefed on the investigation said over the weekend that an
announcement of the 40-state investigation could come as early as Tuesday. The
person spoke on condition of anonymity because the investigation was not yet
public. Iowa Attorney General Tom Miller will lead the investigation.
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The Obama administration is studying the situation. Problems with foreclosure
procedures were discussed during two recent conference calls involving
officials of the Treasury Department, Department of Housing and Urban
development, White House and other agencies, an administration official said
on condition of anonymity.
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A top White House adviser questioned the need Sunday for a blanket stoppage of
all home foreclosures, even as pressure grows on the Obama administration to
do something about mounting evidence that banks have used inaccurate documents
to evict homeowners.
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"It is a serious problem," said David Axelrod, who contended that the flawed
paperwork is hurting the nation's housing market as well as lending
institutions. But he added, "I'm not sure about a national moratorium because
there are in fact valid foreclosures that probably should go forward" because
their documents are accurate.
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Axelrod said the administration is pressing lenders to accelerate their
reviews of foreclosures to determine which ones have flawed documentation.
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"Our hope is this moves rapidly and that this gets unwound very, very
quickly," he said.
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Lawyers who have already filed class action lawsuits in Maine and Kentucky are
now signing up entire neighborhoods as new clients. They're hiring private
eyes to track down former industry employees and holding marathon conference
calls to strategize on how to get every speck of dirt on the banks that they
can.
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The low-level bank employees in question were supposed to have reviewed
mortgage documents in detail. Instead, they say they never so much as glanced
at the papers. Nor did they even know where the papers were.
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"They were just so haphazard and so gloriously incompetent to save a few
pennies here and there," says Barry Ritholtz, director of equity research at
Fusion IQ. "But a few pennies times millions of documents is a billion
dollars."
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The banks insist that most of the people involved in the foreclosure deals
were legitimately behind on their payments. But even so, if the procedures
that put them into foreclosure are deemed fraudulent, it will nullify the
deals and require that the entire process start all over again.
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The financial institutions insist that, in most if not all cases, there was no
fraud, the borrowed missed their payments and the foreclosures are justified.
Delays may occur, they say, but the outcomes will be the same. Moreover, they
insist they are strengthening their procedures. They are chalking up much of
the controversy to possible shoddy paperwork.
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But the pronouncements have done little to assuage those connected to the
mortgage industry, and the uncertainty is spreading fast.
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On Sept. 23, Standard and Poor's warned of a possible downgrade on GMAC. The
next day, Moody's Investors Service also placed GMAC on a watch. On Sept. 29,
Fitch Ratings said it was reviewing the mortgage servicers' practices.
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Perhaps most worrisome was the news on Oct. 1 that title insurer Old Republic
National - which provides protection to the homebuyer and mortgage provider in
case any unpaid taxes, questionable ownership or other problems turn up - had
ordered its agents to cease offering policies on foreclosed properties owned
by GMAC or JPMorgan Chase. On Oct. 7, another title insurer, Stewart Title,
issued an internal memo making it incredibly difficult - if not impossible -
for an agent to write a policy for any foreclosure property connected to any
of the now-tainted banks.
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"Right now everyone in the industry is trying to understand the scope and
breadth of the problem, and is looking to lenders to get their paperwork in
order so that sales can resume," says Kurt Pfotenhauer, chief executive of the
trade group American Land Title Association.
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Meanwhile, real estate agents who specialize in selling bank-owned properties
say the market is locking up. Dorothy Buse, a Coldwell Banker agent in the
Orlando, Fla., area, said that out of the 200 foreclosures she has listed for
sale, 40 are now in the foreclosure freeze. Of the 40, 12 that were already
under contract are now on hold.
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"There's nothing within my power - or my staff's power - that we can do,
except try to reassure them that we're working on this," Buse says.
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In addition, legal challenges are mounting. On Sept. 24, a district court
judge in Maine threw out a ruling in favor of GMAC to foreclose on a house
owned by an unemployed mother of two. Now that case will go to a bench trial
in Portland.
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The court also sanctioned GMAC about its paperwork process, noting that "this
case is not the first time that GMAC's high-volume and careless approach to
affidavit signing has been exposed."
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Michael Holmes is one of the thousands of mortgage holders whose house was put
into foreclosure by the now infamous "robo-signer," the GMAC employee who
signed 10,000 foreclosure affidavits a month. On Oct. 1, GMAC informed Holmes
that the foreclosure on his Belfast, Maine, home had been put on hold. The
bank didn't say for how long.
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The temporary halt has done little to subdue Holmes' stress. He spent the past
year and a half fighting to get a loan modification from GMAC, a process he
says yielded a file the size of a Manhattan phone book and virtually no
response from the bank. He also claims he received no written notice of a
foreclosure.
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Now Holmes, a former hospitality executive at such Boston hotels as the
Ritz-Carlton and the Copley Plaza, says he wants to fight to keep the
Victorian he grew up in. But from one day to the next, he doesn't know what
will happen.
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"The one safe place you have is your home," Holmes says. "It's your comfort
zone, and to have that in limbo, it feels like the wolves are on my porch."