Saturday, October 2, 2010

Foreclosure fraud fallout for real estate investors

This post is for everyone involved in any form of real estate investing. Direct investors are those who buy properties and then either rent them for monthly income or re-sell them for a one-time profit. Indirect real estate investors(some of whom do not even think of themselves as real estate investors) buy shares of stock in companies that make mortgage loans, write mortgage or title insurance policies or REIT’s that manage large property portfolios. Be aware the developing situation concerning mortgage and foreclosure fraud is going to cause problems for nearly everyone involved in even the slightest way.

The seven largest mortgage lenders in the country are now part of a federal investigation into foreclosure fraud. More federal investigations will follow this first one. Attorneys General for Florida, California and Connecticut have now started their own foreclosure fraud investigations. These state fraud investigations will also proliferate, at least in the states with the highest numbers of foreclosures. At least one U.S. Senator and one U.S. Representative are now publicly calling for the responsible federal agencies to bring criminal charges against companies and individuals found responsible for foreclosure fraud. Foreclosure proceedings in many states are already grinding to a halt. Homeowners are not being evicted and sales are not being allowed.

Some of the repercussions are already being seen. Some lenders have halted foreclosure evictions and sales in some states. Some states have halted foreclosure proceedings by certain lenders. Law firms specializing in processing foreclosure paperwork are being investigated. Mortgage loan insurance companies are starting to sue mortgage lenders for improper procedures and for not following their own in-house risk-avoidance rules. Title insurance companies are starting to refuse policies on property sales by some lenders. When these types of companies start getting nervous and turning on their own, things tend to escalate quickly.

*Investors who buy property in order to produce rental income
Hopefully you have title insurance on all the properties in your portfolio. Even if you do have title insurance, be prepared for possible problems with properties bought as foreclosures from the lenders under investigation. If there are problems, be prepared for multiple stalling tactics from the title insurance company while they try to pass the buck back up the line. If you own properties without title insurance you are in a very tough spot right now.

*Investors who buy properties for re-sale
This would be a good time to minimize inventory on hand. The big seven lenders are in the hot seat now but that spotlight is going to get wider. Be sure to get title insurance on every property purchased and try to re-sell while title insurance is still available for your buyers.

*Real estate stock investors
This would be a good time to consider moving funds into other investment sectors. The developing foreclosure fraud investigations are without doubt going to impact the share price of mortgage lenders, title insurance companies, mortgage loan insurance companies and mortgage/foreclosure paper processing companies at a minimum. Some effect of this already seems to be showing up in the markets. Without meaning to sound like a “chicken little”, this is going to get really ugly.

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