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Mortgage Foreclosure Crisis Might Help Homeowners, But Hurt the Recovery

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The foreclosure crisis has been in the news a lot lately as the problems with some of America's biggest mortgage banks continues to unravel.  Clerks have been "blind stamping" and robo-signing off on foreclosures without really looking into whether that is an appropriate remedy, which has sparked investigation by several states' attorneys general into what is going on.  This has sparked litigation by homeowners across the nation as they contest foreclosures on any one of three major flaws:
  • The foreclosure action itself was "robo-signed," thus forcing the mortgage conmpany "back to the drawing board to cure the problem before proceeding (this is, at best, a temporary measure, unless the investigation reveals one or both of the two other problems);
  • The bank is missing certain documents that would ordinarily be used to prove its case.  In the past, an affidavit would be signed saying that they had the documents at one time, but now they were either lost or destroyed, but now these affidavits are being challenged; and/or
  • The mortgage itself was packaged as an investment, and the issue of who is the actual owner of the note cannot be readily determined.
As to the first challenge, Bank of America and GMAC are claiming that these problems are behind them and are looking to start up their foreclosures again.  However, the other two may continue to haunt them.

In fact, as reported in the New York Times yesterday, this may have an overall detrimental effect on the housing market and the economy.  As stated in Flaw #3, many of these notes are mortgage-backed securities.  When combined with Flaw #2, it can get worse.  As the article states, "If investors lose confidence in the ability of banks to document their ownership of mortgages, the financial industry could suffer staggering losses."  The article goes on to state:

"Katherine M. Porter, a law professor at the University of Iowa and an authority on mortgage servicers, said it was likely that "a very large number - perhaps virtually all - securitized loans made in the boom period in the mid-2000s," contained serious paperwork flaws, did not meet underwriting standards or have not been serviced properly in foreclosure proceedings.  "Mortgage servicing is a high-volume industry. . . Its personnel have relatively little training, weak supervision and are under pressure to cut costs and boost profits."

This can also affect the housing market.  As the article stated, distressed properties make up one quarter of all home sales, and as a result of Flaw #1, potential buyers are becoming highly skeptical of whether the banks have good title to the home they are trying to sell.

The bottom line here is that homeowners need to look to how to get themselves out of their own economic crisis of being behind on their payments and/or unable to afford their current payments without a modification.  The flaws discussed here can well create a temporary reprieve from foreclosure, as well as motivate mortgage comnpanies to be more reasonable about modifications, but the long term effects of the mortgage crisis prevent this from being a long term solution.  If you need help, you should contact an attorney to discuss your options.

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