Your Cheat Sheet to the Foreclosure Crisis

Last week coverage of the foreclosure crisis finally catapulted from the best finance blogs to the mainstream media. Here’s your Cheat Sheet …

What is the Foreclosure Crisis?

US property owners allege “lenders and servicers have used falsified documents to foreclose on homes, sometimes when the banks didn’t hold titles to the properties.” Basically, banks didn’t follow the proper legal procedures to foreclose on property. Now there’s a tsunami of administrative chaos coming to shore.

What is a “Robo-signer”?

At the core of the evidence is a statistic that creditors and lenders were processing hundreds or thousands of foreclose documents a day. Given that a human being must comprehensively review all foreclosure documents (taking someone’s shelter is a big deal), the sheer volume of foreclosure filings could have been done only with a rubber stamp — hence the term, “robo-signer”.

What is the Moratorium on Foreclosures and How Will It Affect the Property Market?

Bank of America (BAC), GMAC Home Mortgage, and JP Morgan (JPM) have frozen their foreclosures to get a handle on the situation. This will immediately reduce a significant number of properties added to the sales supply. RealtyTrac said foreclosure sales were approximately 24% of all home sales during Q2 2010 (~248,000 homes).

As a result, property prices should either stabilize or decline less in the short term. Of course, when these properties hit the market, prices will decline further assuming foreclosures won’t be frozen until the markets regain full health.

Source: WSJ Pro

What About People Who Bought a Foreclosure?

This could get very ugly. Title is a very specific legal concept. If title becomes tainted, we will see tons of fighting over ownership.

We can already see “title insurers withdrawing from foreclosure sales from banks that have admitted to having affidavit problems.” As they walk away from initiating new title insurance, they are probably reallocating their teams to figure out how many bad titles they’ve insured.

Must Read: Chris Whalen’s Terrifying Presentation On The 2011 Foreclosure Crisis >>