Stephen Foley: Chaos in foreclosure process will buy time for economic recovery
Saturday 09 October 2010
US Outlook: The most surprising thing about the chaos enveloping the foreclosure process on millions of homes in the US is that it has taken so long to reach this point.
Homeowners who have become seriously delinquent on their mortgages have finally found a legal get-out, thanks to the discovery that banks have been playing fast and loose with the paperwork needed to get them out of their houses. In some instances, banks have been getting the necessary notary signatures from companies that use auto-pens and robo-signing to approve hundreds or even thousands of foreclosures in one day, without checking over the material.
This scandal comes on top of all the confusion over who exactly owns anyone's mortgage these days, in a system where loans were bundled together, carved up and parcelled out to investors the world over. For borrowers savvy enough to get themselves a lawyer, there are now plenty of options for challenging the repossession of their home.
The furore has only kept growing, becoming a doorstep issue in the midterm elections. Unions and pressure groups called for a national moratorium on all foreclosure proceedings, saying that "predatory" banks are "auto-penning away the American dream". President Barack Obama has refused to sign a previously innocuous Bill that would make it easier to outsource foreclosure processing across state lines.
Until recently, the vast majority of struggling borrowers have been resigned to dealing with their lenders themselves, fighting as best they can, availing themselves of whatever advice they can get about government-backed refinancing options, but ultimately buckling under whatever decision a bank might make on the future of their home. That won't be happening any more, and banks have not been slow to tell which way the wind is blowing.
Bank of America placed a moratorium on all foreclosures across the country yesterday, extending a halt that it had already imposed in states where courts have to approve a repossession. PNC, another of America's biggest banks, joined JP Morgan Chase and Ally bank in imposing a moratorium in 23 states.
It is hard to miss some very positive consequences. A record 1.2 million US homes were expected to be taken over by banks this year, up from 1 million last year and 100,000 in 2005, and the glut of homes on the market has been a key reason prices have remained depressed.
As the foreclosure process lengthens, first as a result of the moratoria and then as a result of more rigorous administrative work, sales of foreclosed homes will be trickled out over a longer period. It makes a double-dip in US housing, still the key worry of economists and bankers, even less likely.
Banks have already eaten billions of dollars in provisions against delinquent mortgages, and the industry argues that flaws in their foreclosure processes are largely technicalities, which won't much affect who ultimately gets thrown out of their home. It is an unedifying spectacle, but like the federal government's foreclosure relief programme and the home buyers' tax credit before it, this all buys time for the US economy to continue its slow crawl towards recovery.
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