Foreclosure Crisis Stalling Home Sales, Threatens Larger Economy

Correction appended

While some homeowners may be glad to challenge a foreclosure, the rapidly expanding crisis of alleged foreclosure fraud has stalled home sales across the nation.

Since GMAC, JPMorgan and Bank of America have suspended foreclosures in 23 states in response to discoveries about incorrectly approved paperwork, hundreds of thousands of homes now remain in limbo. The New York Times describes a Florida woman's case as emblematic: She thought she had bought a foreclosed home and was ready to move in with her son, when Fannie Mae, the nation's largest mortgage buyer, said she couldn't. The legality of the foreclosure was in doubt.

Mistakes made during rushed lending processes in the years leading up to the housing crash are now being exposed, said Janet Tavakoli, founder and president of consulting firm Tavakoli Structured Finance, in the Washington Post.

In what will likely be the first of a wave of lawsuits, Ohio's attorney general is suing GMAC for alleged foreclosure fraud.

Other analysts predict doom. Christopher Whalen, managing director at Institutional Risk Analytics, said the recent lockup of foreclosures is "only the start of the crisis" that will reach every corner of the U.S. economy, according to MarketWatch. He added that the country is less than one quarter of the way through the foreclosure process.

As Bloomberg reported last month, delays in foreclosure proceedings will wound the larger housing market, as uncertainty will prevent prices from reaching a bottom.

Still, given the irresponsible practices that some lenders have admitted to, these delays may be necessary to protect consumers. President Obama yesterday chose not to sign a bill that would have made it more difficult for homeowners to challenge foreclosures.

Correction: An earlier version of this article incorrectly cited Tavakoli as attributing the explosion in mortgage loans to investors' "hunger for securities." The Huffington Post regrets the error.

Comments

[ArabianMoney]

07:14 AM on 10/12/2010

Nothing less than part II of the subprime crisis - sounds like nothing, except it means nobody can buy or sell a home... see: http://www.arabianmoney.net/gold-silver/2010/10/10/toxic-real-estate-titles-threaten-second-us-banking-crisis/

[evalela]

01:33 PM on 10/11/2010

Bullcrap,it keeps people in their homes that have every right to be there,realators were a part of this lending debacle as well,they made record profits,now people owe more on their homes then they're worth,how do you think that happened,because realtors steered them to these predatory lenders just so they could get their commissions then walked a way!!!!!

[itolduso]

12:39 PM on 10/11/2010

By "threatens the larger economy" do they mean their bonuses?...cause that's the only 'recovery' I can see- banksters and enablers are making money- the rest of the country is S.O.L! It's time the banksters joined us 'little people' in the misery.

[rlst]

04:41 AM on 10/10/2010

The Statute of Frauds requires any instrument affecting ownership to land be signed in writing by the party charged. It was passed in England in 1677, all American States, and common law countries. The Big Banks put billions of other people's money they managed -- none of the decision makers put up their own money -- in subprime mortgages and sold them to investors as securities. But they did not verify the Bank in fact owned the mortgages they were selling as securities.

Do not believe the Big Bank's cries of disaster. Since the Banks cannot prove they own the mortgages, the homeowner can easily have his title to the real estate cleared. Rather than roll the dice on the existence of a signed mortgage, Big Banks will have to do what community banks did when they owned mortgages: look at the homeowner's finances, reduce the interest or even principal, and take lesser payments.

JP Morgan/Chase, Citibank, Bank of America etc.are not loaning money to consumers. They are sitting on their revenues enabled by the federal TARP money as capital surplus investing it in Treasury bills, securities, and high grade short term corporate debt. The Banks inability to prove ownership to mortgages will reduce consumer debt which will give strapped homeowners more money to spend. The shareholders of Big Banks will take a loss on their stock, but the United States economy as a whole will be better off. Big Banks preach the free market; let them live with it.

[Freewheelin Franklin]

07:20 AM on 10/10/2010

I do believe the big banks when they cry "disaster". It's their own disaster they are worried about. Here we are 2 years later, and the banks are still insolvent, they haven't deleveraged, and there's still a boat load of toxic assets on their books that are hidden, thanks to changes in accounting rules. These banks need to go into a resolution trust, the mortgage securities unwound, ant t he assets sold, or auctioned off, at "fire sale" prices, if need be. The "savings" on the purchase of the assets can then be passed on to struggling homeowners, in some cases, and in other cases, properties can be sold at reduced prices. It's the shareholders and bond holders of the big banks that need to take the hit, not the taxpayers. That's the way Capitalism is supposed to work. There are 8100 OTHER banks in this country that didn't make bad mistakes, or perpetrate fraud on their investors and clients.

[Mafdet]

03:40 PM on 10/10/2010

I suspect you are right. At a minimum what you say makes sense. But I can't get my head around who will own these houses once they are foreclosed on.

Didn't the consumer banks sell these mortgages to say, a Lehman? And then Lehman took the mortgage it bought for a dime, divided it a 1000x and with a 1000 parts of 1000 other such mortgages made 1000 securities they claimed were worth, like, a million dollars. And then they took THOSE to a corrupt US government official who looked up from viewing porn long enough to give each of those worthless securities a AAA rating. And then Lehman dumped those through 433 affiliates and Enron-like shell companies over the course of a decade on unsuspecting Europeans who thought they were socking money away in conservative savings accounts for their kids' educations and their own retirements? And Citi did this through more than 2000 shell companies over a decade. And Goldman through more than that. And Chase through more than that.

So just one mortgage has garnered someone a ga-jillion dollars already. But the question is. Who owns the asset once the house is foreclosed on?

[Freewheelin Franklin]

07:16 PM on 10/10/2010

Well, they've had two years to unwind these securities. Apparently, nothing is being done. N-n-n-nothing, is being done. Nobody wants to know. They want to sweep it under the rug and hope it all disappears. Like when you forget to pay a parking ticket. You just hope it all goes away. Then, one day you get pulled over for something stupid, and BAM, you're sitting in the county jail.

[castlerider]

04:05 PM on 10/09/2010

Looks like each of these cases is going to need to have a judge reconcile the case and find proper value after all.

They didn't want to even consider this 2 years ago, although wiser minds brought up the need.

Not a moment to lose.... The sooner they get started, the sooner they can mark some progress, and bring in proper values..

[Jophoenix]

01:12 PM on 10/09/2010

for the home to deflate to market value is the only way out. let it all fall down most of us have
reduced pay longer hours so blackmail no longer holds any meaning at least we will be in the same ship starting over as to keeping the current prices it's a no started unless your on the disney
channel have you not notice your income is reduced whit 20 per cent down and real guide lines
always said one weeks pay for the mortgage or 10 days pay with that said what can you
realistically afford

[diddleydee]

12:53 PM on 10/09/2010

Fear not. Ben is the captain of QE2. We will all be saved. Just like when Greenspan kept rates low to inflate real estate. Thank goodness we have Ben!

[Intolerantcentrist]

10:58 AM on 10/09/2010

Might find this informative… humorous and infuriating.

http://www.thedailyshow.com/watch/thu-october-7-2010/mortgage-bankers-association-strategic-default

[justsaynosarahp]

11:53 PM on 10/09/2010

Great pull - missed that one.
Love the irony of moral hazard.

[USNDC]

10:54 AM on 10/09/2010

Compromise !

Maybe it is in everybody's best interest to "compromise" and get this crippling issue resolved.

Let me start with the Banks !

You blew up our financial system ... destroyed our economy ... received hundreds of billions of taxpayer dollars ... and yet you refuse to take a haircut on any of this mess ?

I say pass the Bankruptcy Cramdown Bill ... and let the courts begin discharging "upside down" mortgage debt ... and give the Banks the haircuts they deserve.

[castlerider]

05:22 PM on 10/09/2010

Hear hear! I wholeheartedly agree.

Fanned.

[midasw]

07:57 AM on 10/09/2010

History once again repeats itself, this time in the eyes-bigger-than-stomach department. I worked on Wall Street, as an associate and then corporate finance partner of Lehman Brothers, during the great 1960s boom. Trading and commission volume exploded at the end of the decade, but we lacked the people, the training and, above all, the technology to process the volume. Record-keeping was still Dickensian: paper slips translated on to punch cards and so on. We found ourselves looking at stacks of slips recording unsettleable trades - mainly "DK" (another firm "Doesn't Know" the trade you have a record of executing with them) and "Fail" (Fail to Receive/Deliver the securities involved in a trade) - that rose the height of the Eiffel Tower. The NY Stock Exchange took one look and put us on short rations. The expression on we partners' faces when we realized what this could do to our personal net worth said it all. The problem's always the same. Proper processing costs money, which cuts into bonuses.

[justsaynosarahp]

11:55 PM on 10/09/2010

Well, this time they stepped in a pile of MERS. No reason we should clean their boots.

[speakingout]

12:45 AM on 10/09/2010

You can't put a bandaid on a gaping wound. The only way to stop the bleeding is to stop the foreclosures. The banks don't have to foreclose, they can re-write the loans and put the interest on the back of the loan. They used to do this years ago, but the truth is, the mortgages weren't the problem. The banks don't want to admit that they borrowed against our mortgages and leveraged themselves 10 times over. When the overseas investors stopped buying the toxic pools, the roulette wheel stopped and their party was over. Only they ended up with debt THEY couldn't pay for. so they rang the fire bell and got TARP money. They have already been paid 2 and three times on these mortgages. They are just greedy and want it all. It's time for a new financial system that is fair and equitable. Everyone should be able to get a mortgage at the same rate. No one should have to pay 9+% for a home loan. That was just pure bankster greed. They are disgusting and should be in jail for destroying millions of homes and llivelihoods. You politicians had better NOT bail them out one more dime. We need to cut off DC's credit card and start diverting the money to the PEOPLE. So we can start businesses and NEW manufacturing companies to make America thrive again.

[Lorianne]

12:37 AM on 10/09/2010

HR3808 Now ACTUALLY Vetoed
http://market-ticker.org/akcs-www?post=168627

[Lorianne]

12:34 AM on 10/09/2010

Mortgage Bankers Association Strategic Default

The Mortgage Bankers Association strategically defaults on its loan after shaming homeowners who do the same.

http://www.thedailyshow.com/watch/thu-october-7-2010/mortgage-bankers-association-strategic-default

[Janet Tavakoli]

09:36 PM on 10/08/2010

This HuffingtonPost article misrepresents my position. I never said this to the WashingtonPost: "Investors' hunger for securities based on mortgages drove the banks to originate and sell mortgages at too fast a pace, leaving them now vulnerable to lawsuits from those investors, Tavakoli added." Investors didn't drive the banks to do anything; the banks brought this on themselves. You can read my comments in the original article here: http://goo.gl/52lx

The Washington Post's Ezra Klein did a followup interview, ""This is the Biggest Fraud in the History of the Capital Markets," which you can read here: http://goo.gl/ZCBp

Here’s an excerpt from my interview with Mr. Klein:

Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago...And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.

Many investors now are waking up to the fact that they were defrauded.

[DinSfla]

10:04 PM on 10/08/2010

Janet,
You always knew this was going to blow up in their faces one day!

I enjoy reading your articles.

DinSFLA
http://stopforeclosurefraud.com/

[Andrew C Orr]

10:37 PM on 10/08/2010

So what type of legislative 'Hail Mary' are the banks concocting during their recess? You know that this is their only avenue. As all the states start suing and uncovering the fraud, the banksters will try and get favorable legislation, similar to HR 3808, passed to do an end-around homeowners.

Why can't they appoint William Black as an independent prosecutor? He rid such a great job during the S&L crisis.

[Michael Lissack]

09:30 PM on 10/08/2010

How Fannie and Freddie can Fix the Economy -- Quickly

The Insight: Short Sales are Artificially Increasing Supply (lowers prices) with no offsetting increase in demand (further lowering prices)

Why? Most short sellers DO NOT want to sell their home they want to stay (if the payments were affordable) thus they are not looking for a new home absent being forced to sell short. Under Fannie and Freddie rules when they do sell short they are FORBIDDEN from BUYING for 2-5 years. Thus in Florida alone perhaps 500,000 to 1 million homes are artificially on the market and that same 500,000 to 1 million buyers are NOT in the market

The solution: Fannie and Freddie fund the transaction costs of converting short sales into debt-for-equity swaps (please see http://fixhousing.blogspot.com which explains how).

What happens: The existing loan is converted to three pieces: a loan for 80% of current value (which will be current since the homeowner will pay) on the same terms as the original loan, a zero-interest loan for 20% of current value (essentially the current equity above the 80% loan), a PARTICIPATION interest in future appreciation

Immediate benefits: perhaps 2,000,000 homes exit the marketplace, and on those homes the mortgages will become liquid and performing in 13 months which helps the banks which wrote the loans

This is a BUSINESS solution to a business problem which has been corrupted by politics.