Foreclosure Freeze Could Undermine Housing Market

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The latest foreclosure crisis is threatening to tie up the housing market for years.
    
Allegations of possible mortgage fraud against some of America's largest banks could result in thousands of legal challenges to foreclosures nationwide.
    
The scandal is the latest blow to an already unstable housing market.

Faked Numbers, Forged Documents

The crisis stems from allegations that financial giants Bank of America, GMAC and JP Morgan Chase forged documents and faked social security numbers.

Bank of America initially halted foreclosures in 23 states, but has now expanded the suspension to the whole nation.

Other banks may follow suit, raising the possibility of a nationwide freeze on foreclosures.  That would force banks to review the paperwork for hundreds of thousands of mortgages. 

"When you do a foreclosure and you're signing these affidavits, when you file any legal document, you have to have personal knowledge," explained New Jersey attorney Susan Last, who has filed a class action lawsuit in New York.

"None of these people have personal knowledge of the actual note," she said. "Nobody does anyways, because no one knows where the original note is or how many times it was transferred."

"It could have been transferred 20 times," she continued. "So the real party in interest is not Chase. It's not HSBC. It's not Bank of America. It's somebody else."

The legal challenges could cause some foreclosures to be overturned and others deemed fraudulent.   

Federal Probe

Lawmakers are calling for a federal investigation, saying the excuses coming from the industry are not credible.

However, Rick Sharga, senior vice president of marketing at Realty Trac, says the probe could delay a badly needed housing recovery - possibly for several years.

"If well intended people get involved and start putting massive legislative delays or moratoria in place, we could have a serious, serious effect on the housing market in that over 30 percent of all residential sales right now are foreclosure properties. And freezing those would have a devastating effect on the housing market in terms of sales and pricing," he explained.

The banks insist that most of the foreclosures involved homeowners who were behind on their payments. Even so, if the procedures that put them into foreclosure are deemed fraudulent, it will nullify those deals and require that the entire process start all over again. 

A Silver Lining?

In the short term, the freezes could actually help homeowners and the housing market.
    
Homeowners would have time to live rent-free and pay off some of their debt.  Also, prices might stabilize because so many homes are tied up in paperwork.  
         
Meanwhile, the attorneys general in at least six states are calling for foreclosure moratoriums and launching their own investigations.

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