Pete the Banker: Mortgage Morass Metastasizes

October 22, 2010

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by Pete the Banker
Can You Foreclose if You Can’t Prove Who “Owns” House?
With an already massive supply of delinquent and foreclosed homes weighing upon the housing market as “shadow inventory” due to the Administration’s HAMP (Home Affordable Modification Program) and HOPE NOW (Home Ownership Preservation of Equity) programs, the financial institutions servicing securitized mortgages have used faulty automated approval process (robo signing) in dispatching delinquent loans without adequate review and approval during the foreclosure process.  Secondly, years earlier, the original lender failed to provide adequate documentation showing the sale of individual mortgages which were subsequently transferred into securitized pools, making proof of current ownership of the now defaulted loans difficult. Now, because of these issues, the court system has resisted approving contested foreclosures citing this lack of proper documentation.
Flood of Home Inventory
Ally Bank, Bank of America, Fannie Mae, Freddie Mac and Wells Fargo which now service affected loans are all involved in the servicing controversy which ultimately will make worse an already massive potential inventory of homes for sale on the market. The Wall Street Journal says mixing the financial industry with the legal process is causing a clash of cultures: 

“The unfolding foreclosure-processing debacle is causing bank stocks to slide and putting millions of delinquent borrowers in limbo. But how disruptive the crisis ultimately becomes—for homeowners, the housing market and the broader economy—depends on how quickly a number of technical problems and legal challenges are resolved in the months ahead.  In  essence, fast-paced modern finance is colliding with the much slower machinery of the U.S. legal system. While finance aims for efficiency and maximized profits, the courts demand due process. [Here]” 

 Of the broader situation, the New York Times says the current system can’t cope with the problem,

“…neither Congress nor the administration has found a way to address an even more fundamental problem: What government and banks need to do to finally stanch the flood of foreclosures wreaking havoc on the lives of millions of Americans and threatening the recovery. …According to the latest figures, 4.2 million loans are now in or near foreclosure. An estimated 3.5 million homes will be lost by the end of 2012, on top of 6.2 million already lost. Yet the administration’s main antiforeclosure effort has modified fewer than 500,000 loans in about 18 months. [Here]”

But the Administrations who up until now hasn’t been shy of intervening in the financial industry and mortgage market suddenly backs off dealing with this ever growing mortgage morass.
“The Obama administration is insisting such a broad delay would hurt the economy. [Here]”
Red Tape Will Cause Red Ink
Regardless of the ultimate outcome of the latest legal challenges engulfing the housing industry and capital markets, in the intervening period the housing industry will continue to suffer, delinquent borrowers facing foreclosure will face continuing delays with little likelihood of keeping their property, investors in Residential Mortgage Backed Securities will continue to lose more money and purchasers of formerly foreclosed homes are likely to become mired in uncertainty about the validity of their purchase.
 
Is this really the Administration’s promise of Hope and Change? 
 

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