House repossessions have ground to a halt in the US over revelations that many banks have been using dodgy legal documentation. The crisis has hit an already stricken housing market and could spread. Simon Wilson reports.
What's happened?
America is in the grip of a rapidly growing property scandal. Allegations have been made that lenders and loan servicers (ie, firms that act for lenders and/or have bought up distressed mortgage debt) have systematically used incomplete, unchecked ('robo-signed') and even falsified documentation to foreclose on home loans. Faced with a barrage of lawsuits, JP Morgan Chase has suspended all foreclosures, and sales of repossessed properties, in the 23 states where they must be sanctioned by the courts. Bank of America and Ally's GMAC Mortgage have done the same in all 50 states. Although an outright suspension of foreclosures has not yet been implemented, the US Justice Department has already launched an investigation, as have individual states.
What are the banks accused of?
Over the past couple of years a growing number of judges have been throwing out foreclosure cases over deficient documentation in some cases awarding outright ownership of the property to the distressed borrower. The current crisis blew up last month, when GMAC decided to halt foreclosures in 23 states. That was after an employee testified that he had executed 400 affidavits asserting foreclosure rights every day without even reading them, let alone checking that they were correct. Many of the current lawsuits relate to these questionable affidavits. These, ironically enough, are only necessary because so many lenders or loan servicers are unable to produce the original documentation to prove they own the debt and have the right to foreclose on it. Other common problems relate to falsely notarised documents and forged signatures, and still others to multiple ownership claims to a title.
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How many properties does this affect?
The scale of foreclosures in the wake of the US housing slump is far greater than anything seen here in Britain. That's largely because negative equity (where a mortgage exceeds the value of a property) is a much bigger problem. Many homeowners have little left to lose by handing back the keys and walking away. According to real estate data firm RealtyTrac, banks are expected to take over a record 1.2 million homes this year, up from one million in 2009. And there's plenty more in the pipeline: the process can take anything up to 18 months, and almost three million US homeowners received at least one foreclosure notice in 2009. Some analysts have predicted a massive 11.5 million foreclosures over the next few years. But even on low-end projections, foreclosed property accounts for a hefty slice of the overall American market.
How much, exactly?
In the second quarter of 2010, 24% of all home sales were foreclosed properties. And in August, according to the National Association of Realtors, that proportion grew to 34%. Some analysts put the figure even higher. Economists argue that the glut of repossessed homes has helped to depress the housing market and hence hindered the overall economic recovery. So a suspension of foreclosures could help. There is no doubt that it may well cause a short-term spike in prices as demand exceeds supply. It would also, arguably, be a good thing for those distressed 'underwater' borrowers who wish to remain in their homes. But many economists and commentators are warning that the brewing foreclosure scandal could have grave consequences in the
longer term.
What kinds of consequences?
A collapse in confidence in the banks' ability to quantify their exposure to bad debts, a fresh wave of write-offs in the sector, and a renewed housing slump that helps push the US economy back into full-scale recession. Some doom-mongers even predict a crisis of confidence in the whole system of land title in the US. They point out that mortgages have been diced and sliced, repackaged and sold on so many times that nobody properly understands where rights of ownership lie any more. As a result, title insurers are starting to turn down insurance on foreclosed homes. Banks don't lend money on houses whose titles can't be insured. And if banks don't lend, the market will collapse, no matter how many foreclosed homes remain unsold.
Isn't that a bit dramatic?
Nouriel Roubini, the academic well known for predicting the downturn, now thinks house prices, already 30% off their 2006 peak, have 10% further to fall. Given the importance of housing to the American economy as a whole, he puts the chances of the US economy slipping back into recession in the next year at 40%. The foreclosure crisis is still in its early stages, but the lesson of recent years is surely that emerging scandals in US mortgage lending cannot safely be ignored, no matter how overblown some of the early warnings might appear.
When repossessions go wrong
There are scores of current US legal cases in which lenders have foreclosed after agreeing a new repayment plan with the borrower. But there are also cases of lenders seizing properties they didn't actually own. Bank of America was obliged to apologise last month for repossessing a home in Fort Lauderdale in Florida. It had failed to notice that the homeowner did not have a mortgage with them, and that the previous owner had long since paid his off. In a separate case, it seized the house of a woman who had not missed any payments. Citigroup and JP Morgan Chase have also said sorry after trying to repossess homes they didn't own.
