In a recent column, we explored the issue of alleged "robo-signing" of documents by individuals chosen by lenders to handle foreclosure proceedings.

Major lenders, including Bank of America and JPMorgan Chase, have suspended foreclosures because of inaccuracies in processing (BofA announced on Oct. 18 it would renew foreclosure operations). In some situations, foreclosure trustees reportedly have been allowing assistants to sign affidavits (sworn documents of fact) and other papers.

The robo-signing issue is the latest component in a larger foreclosure problem. The moratorium will keep more foreclosures from coming on the market, and thus delay the clearing of the "repo" inventory en route to real housing recovery.

The questionable processing, though, raises search costs to title insurance companies and erodes trust in a lending system built on trust and confidence.

Some analysts say the moratorium is not necessarily "bad timing" because the number of foreclosed homes available for sale needs to be balanced with normal inventory. And, the number of imminent foreclosures continues to rise.

According to Kurt Pfotenhauer, CEO of the American Land Title Association, the trade association that represents the nation’s title insurance companies including Fidelity National, First American, Stewart and Old Republic, the volume of foreclosed and distressed homes that have not yet reached the market represent a "shadow" inventory numbering in the millions.

When a very anxious 2008 finally came to an end, there were approximately 871,000 foreclosed, or "real estate owned" (also known as bank-owned or REO) homes in the United States, up from 414,000 at the close of 2007. More than 5 percent of all "performing" mortgages were 60 or more days delinquent.

TransUnion, the huge credit and information-management company, expected the percentage of performing mortgages in default to double in 2009 because more adjustable-rate mortgages (ARMs) and option-ARM loans clicked in to their adjustment mode. These adjustables (approximately $321 billion strong) that are scheduled to reset before 2012 were initially predicted to increase the number of bank-owned homes to more than 2 million.

ALTA says we are now at three times that number — and counting. Most of these properties are vacant, creating a drag on neighborhoods and lessening the desire of many other homeowners to hang on.

In a survey this year, Seattle-based Zillow, an online real estate marketplace, found that nearly a third of homeowners would have considered putting their homes up for sale if the market were better. Nationally, that would mean between 11 million and 30 million homes that aren’t listed but are waiting on the sidelines.

Stan Humphries, Zillow’s chief economist, used the iceberg analogy when describing today’s shadow inventory of homes.

"The portion of the iceberg below the waterline is inventory that’s waiting to come into the market at some point," Humphries said. "And as it bleeds into the market over time, it continues to put downward pressure on prices."

Another trickle-down problem has been determining who actually owns a foreclosed property and when they gained ownership.

Ted Jones, chief economist for Stewart Title, said he is concerned that interest rates could rise if title companies cannot prove the actual owner of a foreclosed property.

Given the inaccuracies in foreclosure processing, coupled with the inability of lenders to foreclose without both the deed of trust and promissory note in hand, title companies could walk away from deals because they fear lawsuits. Original notes are typically sold into the secondary market and are difficult to locate.

"If a lender can get title insurance to lend on a previously foreclosed property, then the interest rate was simply a function of the borrower’s credit rating, the loan-to-value ratio, and that rate was essentially the market rate of interest," Jones said.

"Now, however, without the availability of title insurance, the interest rate now includes the risk that the new owner does not have the same bundle of rights on ownership in the property. So to get a loan today without title insurance requires a significantly greater risk premium, which is reflected in a greater interest rate."

The situation does not appear to be getting better. In a report titled "Option ARM-ageddon: The Real Reset Risk," Barclays Capital researchers predicted that a majority of the existing loans would reset in 2010-11 and monthly payments would jump 60-80 percent. By comparison, most subprime resets caused only an 8-10 percent payment shock.

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