Late into 2010, the US economy struggled to recover from the recession that began in 2008; millions of workers kept looking for jobs; and families continued to fight to make ends meet. So, just when you thought things couldn't possibly get worse, it was discovered that millions of homeowners may have lost their homes in foreclosure illegally. The discovery may have long-lasting impacts on all of us.
The Scandal Exposed
What happened, exactly? Like any scandal and cover-up, the foreclosure debacle is a long, involved process that may take months or years to unravel completely. But here are some of the key points.
During the housing boom in the early to mid 2000's, banks and other lenders made millions of loans, mortgages, and refinancing deals with buyers and homeowners. Some claim many lenders practiced predatory lending and made loans and mortgages for homes buyers couldn't afford or based on inflated home and property values.
Regardless, as part of the boom, banks and lenders packaged thousands possibly millions of these loans and sold them to investors all over the world. In 2008-2009, the US economy hit the skids and the housing bubble burst. Millions of homeowners couldn't sell their homes because they owed more on the mortgage than what their homes were worth. Many more lost their jobs and couldn't pay their mortgages.
The Tipping Point
The result: Banks and lenders began foreclosing. This is where things started to unravel. With so many foreclosures happening at once, and with so many people and companies holding mortgages as investments, banks started cutting corners to make the foreclosure process work quickly. For example:
- Bank employees, foreclosure companies, and robo signers signed, approved, or notarized thousands of foreclosure documents per day, often without reading them or checking them for accuracy
- Foreclosure documents were forged, and non-existent titles and fake social security numbers were used
Why? Before they can foreclose, banks and lenders need to prove they have the legal right to do so. They have to have an ownership interest in the home. The problem is, many mortgages were sliced into many parts and sold to multiple investors, so it was impossible to find out quickly who actually owned the home in question.
So, in the end, the banks forged or created the documents they needed.
Governments & Banks React to the Scandal
The scandal has bank/mortgage giants like Bank of America and JPMorgan Chase and others to stop or freeze foreclosure actions in several states. Several US Senators sent a letter to President Obama asking the federal government to take action in the scandal, possibly by calling for a national moratorium on foreclosures.
Government agencies like the Federal Reserve Board investigated the problem. So did the attorneys general in 50 states. They also began taking hard looks at their state laws regulating mortgage lending.
Impact of the Scandal
The effects of the scandal may be long-standing and far-reaching. Of course, no one has a crystal ball and can predict with any certainty what the scandal's ultimate fall out may be, but here are some likely repercussions:
- Some banks immediately put a temporary stop on the resale of some foreclosed homes. This left buyers in limbo. Many buyers who bought foreclosed homes may not be able to close as planned and move into their new homes
- When the banks finally do start reselling, the US housing market - once viewed as on the road to recovery - may take a hit because of the flood of homes put up for sale at substantially reduced prices
- It's almost certain that banks and lenders will become even more selective when deciding who does and doesn't qualify for a mortgage. At the same time, increased safety measures in the lending process will likely mean buyers will pay more in fees and costs for their mortgages
- As of October 2010, stock prices for many major banks began falling, and the impact on Wall Street may spread as investors shy away from mortgage-backed investments
What You Can Do
Anyone in the the middle of foreclosure action or anyone who lost their home in foreclosure in the last year or two should talk to an attorney immediately. A little investigation will tell if the foreclosure is legal. The foreclosure scandal may result in millions of foreclosures being thrown out with the owners given a second-chance.
For Those In Foreclosure
Owners in the middle of foreclosures may be able to live in their homes for a short time without having to make mortgage payments. That alone may help thousands get back on surer financial footing.
Contact your lender (and an attorney!) immediately. Many banks are temporarily freezing foreclosures in many states, so you may be able to avoid foreclosure altogether. You may be able to work out a new deal with your lender if there's a problem with your paperwork or loan documents.
Watch Out for Scammers
Thinking of Buying a Foreclosure?
Buyers in the foreclosure market may need to sit tight for a while. Call the bank and find out if a home you're interested in is available for immediate sale. Also, talk to an attorney to make sure the original owner's paperwork is in order and that the bank actually has the legal authority to sell the home to you.
Also, make sure you get a thorough home inspection - many foreclosed homes suffer damages from neglect or get looted by thieves after copper pipes and wiring and other valuable materials.
There's nothing we can do now to stop the foreclosure fraud scandal. What we can do is take steps to make sure it doesn't happen again. All of us should contact our elected officials in the US House and Senate and state governments and urge them to pass laws to stop mortgage fraud and abuse.
Questions for Your Attorney
- I bought a foreclosed property two years ago. Will my title insurance cover any problem that arises from an illegal foreclosure?
- If my mortgage was foreclosed illegally, can I sue the bank or mortgage owner for what it cost me to move out and find a new place to live?
- If I can't get title insurance on a foreclosed property, can I still get an assurance of clear title? What are the risks of purchasing without title insurance?