Foreclosures Resume, Scandal is Over?

It was only in October that the foreclosure scandal broke. I joined the chorus of bloggers reporting on allegations of widespread fraud, chiefly involving sloppy paperwork. As a result, most of the large mortgage servicers voluntarily suspended their foreclosure operations until a further investigation could be conducted. Apparently, that review has been completed, and it’s now back to business as usual.

Bank of America, JP Morgan, and GMAC Mortgage have decided to resume foreclosures: “We announced a temporary suspension of evictions and foreclosure sales in the 23 judicial states several weeks ago so we could commence the appropriate review. As cases are being reviewed and, when needed, remediated, the foreclosure process moves forward as appropriate.” Given that September – prior to the voluntary suspension – was a record month for foreclosures, topping 100,000 for the first time, November will probably set a new record, as servicers move to clear their backlogs with renewed vigor.

In hindsight, one has to wonder if reporters and lawyers weren’t a little too glib in promulgating the “foreclosure-gate” scandal. To be sure, sloppy paperwork is certainly a problem, and everyone agrees that lenders need to be more thorough in processing foreclosures. Still, the consensus is that almost all foreclosures to date have been legal, even if there were serious flaws in the paperwork: “The overwhelming majority of the cases will be that the loan was seriously delinquent and needed to go to foreclosure.” In other words, the foreclosure epidemic was and is being driven by fundamental factors: a weak economy and unaffordable mortgages. Clerical errors don’t change that.

There were a handful of alleged cases of borrowers being foreclosed upon who either didn’t have mortgages or were current in paying their mortgages, but these cases represent extreme examples. More common are cases of foreclosure involving mortgages that are in some stage of being modified, which is certainly unfair, but apparently not illegal.

At this point, the fact that the fraud was largely technical in nature has been acknowledged by almost everyone. According to Shaun Donovan, Secretary of HUD, “From the evidence we have so far, this is not a systemic problem that cuts across all mortgagors or all servicers.” As a result, the Federal Government did not speak out when most of the major servicers announced that they would resume foreclosures, and has decided against issuing a superseding national moratorium. As tragic as foreclosure may be, the consensus is that the process should continue moving along, at least for “vacant homes and homes where loan modification programs have already slashed payments significantly–by 25%, for example–but borrowers still can’t pay.”

With their political capital largely exhausted and having suffered a defeat in the mid-term elections, there isn’t much else that the current administration can do to further prevent foreclosures. For the sake of the housing market, this might be a good thing. The sooner the shadow inventory clears, the sooner housing prices will hit rock bottom, goes this line of thinking.

Unfortunately, it may not be in the best interest of those being foreclosed upon. If you find yourself in that position, it’s natural that you should want to do everything that you can to try to prevent foreclosure. Seeking legal counsel (in order to uncover any improprieties in the process) might be a good option, but unless you have a legitimate case, you may succeed only in forestalling the inevitable.