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Will Foreclosures Be Erased?

A court in Massachusetts voided two bank foreclosures this past Friday. The decision has already created a ripple effect across the banking community. Will other courts also decide to void local foreclosures? Does this put an added burden on banks when they are trying to complete a foreclosure process? What will it mean to the real estate market? Let’s take a look. 

What actually happened?

Though the challenges addressed yesterday might have been brought to light by the robo-signing mess, that situation was not involved in this ruling. The question addressed here was much deeper than someone not checking paperwork. The question was whether the bank could prove they owned the mortgages they were foreclosing on.

There are set legal procedures that must be taken to transfer a mortgage from one person/entity to another. It seems that these requirements were not fulfilled by many banks over the last several years when mortgages were transferred quickly and often.

The court decided that, since proper procedures were not followed, there was no legal transfer of the mortgage to the new bank. If the new bank didn’t legally own the loan, they had no right to foreclose on it.

What does that mean to other foreclosures?

That’s the million dollar question! No one knows for sure. Will every foreclosure be voided? No. Will many? That depends on how the courts rule and how the banks react.

Bloomberg reported:

Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., called the decision “a landmark ruling” showing that at least in Massachusetts a mortgage “must name the assignee to be valid.”

This is likely to open the floodgates to more suits in Massachusetts and strengthens cases in other states,” Rosner said…

Although the decision was issued by a Massachusetts state court, it will be used by homeowners in foreclosure cases in other states, said Matthew Weidner, a St. Petersburg, Florida, lawyer who represents such homeowners.

“This is a very detailed, very specific indictment of an entire industry’s practices and procedures, and it’s an indictment that is going to send shockwaves throughout the entire mortgage, foreclosure, real-estate servicing industry,” he said.

Couldn’t this cost banks millions of dollars to correct?

Actually, it could cost billions. Market Watch reported:

Bank stocks fell sharply Friday as the highest court in Massachusetts reportedly ruled that two foreclosures were invalid because banks didn’t show they owned the mortgages.

The decision is the latest setback for banks after some lenders halted foreclosures in 2010 following claims they didn’t have proper documentation.

… “These cases fall generally into the class of mortgages where origination paperwork was mishandled or poorly documented,” Mitchell said, estimating that U.S. banks face between $80 billion and $120 billion of potential liability.

What does this mean to real estate?

If you are in the market to buy or sell, realize that the inventory of foreclosed properties that had been scheduled to hit the market in the first half of 2011 may be delayed. The New York Times reported:

An array of federal and state investigations into the way banks foreclose on delinquent homeowners has contributed to a sharp slowdown in foreclosures across the country…

The pace of foreclosures could be curtailed further by courts. In a closely watched case, the highest court in Massachusetts invalidated two foreclosures in that state on Friday…

If the slowdown continued through this month and into the spring, it could be a boost for the economy. Reducing foreclosures in a meaningful way would act to stabilize the housing market, real estate experts say.

Bottom Line

If you are in the foreclosure process and think your rights have been impaired in any way, you should perhaps get legal counsel.

If you are thinking of selling, this has increased the window of opportunity you have to sell before this ‘discounted’ inventory comes to market.

If you are buying, prices may not soften any further to later in the year. Many are predicting that interest rates will rise as we go through the year. If you are thinking of buying in the next six months, now might be an opportune time.

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2 replies
  1. Dirk Walker
    Dirk Walker says:

    I agree that less foreclosure supply will temporarily stabilize the real estate market. The other shoe to drop on this mess though would be the increased cost of credit. If banks can’t foreclose or have to delay foreclosure, which as mentioned will cost them billion of dollars, then they will have to increase the cost of borrowing to offset the losses. Higher interest rate and fees are certainly to follow.


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