The Obama administration does not support a national foreclosure freeze, but attorneys general in as many as 40 states are reportedly planning this week to announce a joint investigation of loan servicers’ foreclosure practices that could have similar repercussions.
The fallout from the "robo signing" scandal, initially confined to 23 states where courts have jurisdictions over foreclosures, expanded in dramatic fashion Friday with Bank of America’s announcement that it would stop foreclosure sales in all 50 states until it completed a review of its foreclosure procedures.
Bank of America and four other loan servicers have slowed or halted some foreclosure proceedings in 23 judicial foreclosure states in the wake of allegations that workers processing files for the companies signed affidavits that contained information they had not personally verified.
Other loan servicers taking action to date are GMAC Mortgage, JP Morgan Chase, PNC Financial Services Group Inc. and Litton Loan Servicing.
Lenders maintain the issues that have been raised are procedural, and that they will ultimately be able to demonstrate that they had the right to take action against borrowers they have foreclosed on.
Bank of America said Friday that its ongoing assessment of the company’s past practices "shows the basis for foreclosure decisions is accurate."
Federal regulators and attorneys general in several states have already put lenders on notice that they should discontinue foreclosures unless they are sure their procedures are in full compliance with the law.
Groups including the Center for Responsible Lending, the NAACP and National Council of La Raza have called for a national foreclosure moratorium, and some lawmakers have taken up the cause.
The robo signing scandal is already slowing the flow of real-estate owned properties onto the market in states like Florida, and some analysts say it could delay a housing recovery if it drags on long enough.
Federal Housing Administration Commissioner David Stevens told the Washington Post in an e-mail Sunday that the Obama administration is opposed to a national moratorium, saying "we must be careful not to over-reach and apply a remedy that will make the underlying problem of foreclosures worse."
A senior Obama advisor, David Axelrod, made similar comments on CBS "Face the Nation."
"I’m not sure about a national moratorium, because there are, in fact, valid foreclosures that probably should go forward, and where the documentation and paperwork is proper," Axelrod said.
But state attorneys general in both judicial and non-judicial foreclosure states are preparing to launch a joint investigation of the robo signing scandal to be led by Iowa Attorney General Tom Miller, the Associated Press reported, citing an anonymous source briefed on the plans over the weekend.
While some lenders have voluntarily taken steps to halt some foreclosure proceedings and suspend foreclosure sales, others — apparently more confident about their foreclosure procedures — have not.
A national foreclosure moratorium — or action by state attorneys general that had a similar effect — could magnify the slowdown in the flow of REO properties onto the market.
In the short run, that might help stabilize prices in communities hard hit by foreclosure, by restricting inventories. In the long run, some fear, the robo signing scandal could drag out the process of recovery.
"Stretching out the foreclosure process would reduce the number of houses dumped on the market over the next six months, which could help firm up housing prices in the short term and put some extra support under a sagging economy," Washington Post business columnist Steven Pearlstein said in a column published over the weekend. "But everyone should understand that the longer the foreclosure process goes on, the longer it will take for the excess supply of houses to be absorbed, for prices to stabilize and for the real estate market to return to something closer to a normal equilibrium."
The Securities Industry and Financial Association today issued a statement warning that a foreclosure moratorium would have "catastrophic" damage to the housing market and economy. The mortgage market, investors and the health of the economy "are all inter-related," SIFMA CEO Tim Ryan said.
"If mistakes have been made in relation to foreclosure processing, SIFMA firmly believes such mistakes should be corrected," Ryan said. "It is imperative, however, that care be taken in addressing these issues to ensure that no unnecessary damage is done to an already weak housing market and, in turn, that there is no further negative impact on the economy."
Another crucial question is whether title insurers will continue to insure title on REOs and other foreclosed properties.
Old Republic National Title Insurance Co. has reportedly stopped insuring title for properties foreclosed on by JP Morgan Chase and GMAC Mortgage (the company refuses to confirm or deny reports based on internal company memos, citing a "policy of not speaking to the press").
The Associated Press reported Friday that Stewart Title Guaranty Co. has issued guidelines to agents "that make it difficult to write policies on property foreclosed upon" by JP Morgan Chase, Bank of America, OneWest Bank and GMAC Mortgage.
A spokesman for Stewart Title told Inman News that the bulletin "provided our issuing offices and underwriters guidelines and standards to enable them to insure REO transactions in jurisdictions where foreclosing lenders or state attorneys general have not issued a moratorium. Stewart stands ready to insure these transactions in accordance with these guidelines."
The spokesman said the company stands behind an earlier Oct. 5 statement, in which the company said it would ask for assurances from lenders on REO properties being sold that "the lender holds the appropriate loan documents and that all required foreclosure processes have been followed in accordance with applicable laws and regulations."
The American Land Title Association, a trade group representing title insurers, has said homeowners who have purchased foreclosed properties have "numerous defenses" against any claims by former owners.