17 October 2010

Local Ripples appear as Big Banks halt Foreclosures

St. Louis Post-Dispatch

Metro East real estate agent Kathy Shemwell thought it was a done deal. She had a signed contract to sell a foreclosed home in Caseyville.

GMAC, the mortgage company that owns the property, had approved the contract for the home listed at $105,000. The buyer's mortgage was approved. He'd lined up contractors to do repairs.

They were a few days from closing this month. Shemwell's commission check was practically in hand.

Then came the phone call; GMAC was putting the deal on hold.

"We're in limbo," said Shemwell. "We're afraid many other buyers will be disappointed, too."

What's the problem? "It's the moratorium," says Roger Roddy, the agent representing GMAC in the deal. GMAC is among several big players halting foreclosures, or foreclosure sales, in states such as Illinois, where court approval is needed to repossess a house. (Missouri doesn't require a court proceeding.)

Bank of America, the nation's biggest mortgage servicer, made its moratorium nationwide.

Lawyers defending homeowners had discovered a nasty secret: GMAC, Bank of America, Wells Fargo, JP Morgan Chase and perhaps other banks had been using "robo-signers" to sign thousands of court documents filed in foreclosure cases. Bank employees - some with little training - were swearing to the accuracy of records they'd never read in order to keep the foreclosure train rolling. One frazzled worker approved 10,000 foreclosures a month.

Mortgage servicing departments have long been a glamourless backwater of banking. They were overwhelmed when homeowners began defaulting by the millions in 2007, and they're still stumbling and bumbling today.

For three years, homeowners behind on their payments have been complaining about mass confusion at mortgage servicers, including those at the nation's biggest banks. Paperwork is lost, faxed in and lost again; agreements are made and mysteriously canceled; callers can never get the same person on the phone twice, letters from the bank contradict what their representatives say on the phone.

Until now, that's mainly affected people trying to keep their homes by working out mortgage modifications. This month, the organizational chaos began spilling out the other end of pipeline, calling into question the legality of foreclosures in 23 states that require court approvals.

It's not clear how long the foreclosure moratoriums will last, or whether they'll spread to other mortgage companies. In the meantime, some think the moratoriums will delay the recovery in home prices.

Banks often sell foreclosed properties cheap in order to get them off the books. That lowers the value of homes nearby. The quicker the foreclosure mess is over with, the faster prices can recover.

The banks say they're halting foreclosures so they can check their procedures, indicating that they will resume later. "All this does is delay the inevitable," says attorney Dan Engle, who co-chairs the real estate practice at Thompson Coburn in St. Louis. "All we're doing is prolonging the residential housing slump."

On the other hand, problems with foreclosures could encourage banks to modify more mortgages - accepting lower monthly payments rather than seizing homes.

While halting new foreclosures, banks seem to be taking different approaches to properties they already own. GMAC was halting pending sales, but Bank of America and other operators were still putting foreclosed properties on the market last week, real estate agents said.

That's a good thing, says real estate agent Roddy of Remax Preferred in Swansea. Better to sell houses then to let them sit untended. "No one is mowing the lawn, or keeping the sump pump running," he says.

Meanwhile, the confusion may frighten buyers away from foreclosed houses. In theory, a homeowner whose property was taken based on falsified papers could demand it back - even if it's now owned by someone else.

"That's highly unlikely," says attorney Engle. After all, people who can't make their mortgage payments can't afford lawyers.

In most cases, the homeowner really was far behind on mortgage payments, he notes. The issue is whether the bank could produce the paperwork to prove its right to foreclose.

That can be tricky, given that mortgages are packaged into securities by the thousands, sliced into pieces and sold multiple times, leaving the ownership trail a jumble.

Title insurance is the buyer's protection, says Engle. Title insurers must cover your loss if your ownership is challenged, and that applies to properties bought in foreclosure. As of last week, title insurers were still issuing policies for foreclosure purchases.

It's rare that a bank takes a property that it's not entitled to, but it does happen, says lawyer Greg White, who defends homeowners in foreclosure cases. If the home's been sold, judges will usually protect the innocent buyer.

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