Extended foreclosure freeze could add pressure on hurting housing market

An extended halt of foreclosure proceedings could put additional pressure on an already strained housing market as federal and state officials press banks for answers on possible problems with mortgage paperwork.

The issue has snowballed during the past two weeks as four banks — Bank of America, JP Morgan Chase, Ally Financial's GMAC mortgage division and PNC Financial — have all suspended home seizures in the 23 states where courts oversee foreclosures. PNC added itself to the list on Friday, while Bank of America announced it was halting foreclosures in all 50 states to examine its process.

"The moratoriums, both state-mandated and self-inflicted, can be incredibly destructive to the fragile recovery of the housing and housing finance markets," said Anthony Sanders, a professor of real estate finance at George Mason University. "Consumers looking to get back into housing are even more fearful than before. This can lead to further house price declines."

The move by banks has added to growing concerns that mortgage lenders might have continued with the foreclosure process despite questions surrounding flawed court papers and missing documents. The main issue is with "robo-signers," middle managers who sign affidavits allowing banks to repossess homes that are in default without fully reviewing the documents.

Several of those managers have admitted in depositions that they signed off on thousands of foreclosures without looking at much more than the date on the forms.

Charlotte, N.C.-based Bank of America will probably need to suspend proceedings for several weeks to scour tens of thousands of foreclosures, Bank of America chief executive Brian Moynihan said Friday in a speech to the National Press Club in Washington. PNC Financial is planning on a month-long freeze.

“We just want to clear the air,” Moynihan said. He said the bank hadn't found any widespread problems in the foreclosure process, but "we'll go back and check our work one more time."

Sanders said the concern isn't with the voluntary halts like Bank of America's as much as with investigations at the state level that can cause moratoriums to "extend beyond a reasonable period for procedural review and cause great harm."

A growing number of states — Delaware, Texas, Maryland, Ohio, Connecticut, Florida, North Carolina, Iowa and Illinois — have asked banks to halt foreclosures until any problems are solved, which could last well beyond the end of the banks' investigations.

Those freezes could delay the housing market's recovery and a moratorium could be "lengthened significantly" depending on whether the problems are widespread, said Mark Zandi, chief economist at Moody's Analytics. He added that he thinks it's likely a paperwork issue created by an overwhelmed system.

Even if problems are found in the process during the banks' reviews, Sanders said, most of the people who lost their homes would have gone through foreclosure regardless of the paperwork problems because they were behind on their payments.

"If these moratoriums and investigations find that the number of missing titles is small, then someone needs to explain the damage done to the housing market and homeowners trying to move on with their lives," Sanders said.

Lenders took possession of a record 95,364 homes in August and issued foreclosure filings to 338,836 homeowners, or one of every 381 U.S. households, according to RealtyTrac Inc., an Irvine, Calif.-based data vendor.

The foreclosure crisis is five years old and could take as long as three more years to wind down, Zandi said.

The housing market recently got a boost from a federal homebuyers tax credit that expired at the end of April, but summer sales plummeted despite near record-low interest rates.

The issue of bad documentation isn't new — the problem of missing titles first emerged in 2007 in Ohio when Deutsche Bank tried to foreclose on defaulted homeowners — although it has taken on a new life less than a month before the midterm elections that could see Democrats lose their hold over the majority in Congress.

Despite the flurry of activity in states, federal officials have seemed reluctant to step into the fray and make any policy decisions, with most calling for banks to look into issue.

Senate Majority Leader Harry Reid (D-Nev.) and House Oversight Chairman Edolphus Towns (D-N.Y.), along with other lawmakers including Speaker Nancy Pelosi (D-Calif.), have called for a halt of activity in their states and nationwide while investigations are ongoing.

Senate Banking Chairman Chris Dodd (D-Conn.) said Friday he would hold a hearing next month on the issue.

Attorney General Eric Holder said last week that the mortgage division of the Financial Fraud Task Force is investigating the problems.

President Obama vetoed a bill last week that could make it more difficult for banks to complete paperwork and speed the foreclosure process, providing that extra time for some homeowners.

Bill sponsor Rep. Robert Aderholt (R-Ala.) said "there is absolutely no connection whatsoever" between his bill and "the recent foreclosure documentation problems."

The bill requires that documents be recognized in any state or federal court that is notarized by hand or electronically. The House passed the bill in April by "voice vote" and the Senate passed it unanimously Sept. 27, without any debate.