Saturday, October 16, 2010

Real Estate Investors start to feel the effects of foreclosure fraud

There is a wide, deep, blue sea of foreclosure problems just starting to be explored. Investigations into foreclosure fraud by the federal government, state governments and the lending banks have had major effects on the real estate world. Until very recently there had been little to no change at the local level. That has changed during the past week.

Real estate investors and others purchasing property at courthouse auctions are seeing large portions of the daily docket cancelled. On some days the entire docket is cancelled and there are no foreclosure sales. This is a big change from dozens to hundreds of properties each day.

It can now be a last minute scramble to find a title company willing to issue insurance on foreclosure sales. Most investors have a deep network of title companies, but some foreclosed properties are just no longer insurable because of questionable titles. This situation is bound to get much worse in the near future.

As more news of foreclosure fraud and the questions it is raising reach the main-stream public, people will become more skeptical of buying foreclosed properties, with or without title insurance. And who can blame them. How many title insurance companies would be able to survive if they had to pay off on even one quarter of the policies written on foreclosure sales during the past two years?

There might actually be a kernel of good news hidden in this mess. Non-foreclosure real estate sales will look more desirable compared to foreclosures, even at a higher price, and closings will be possible. Prices will probably stabilize or even rise slightly as a huge amount of foreclosed inventory is removed from the market as (at least temporarily) unsalable.

This situation should give real estate investors, lenders and title insurance companies a chance to take a long, hard look at their business models and make the changes needed to move forward. Investors by nature tend to be very adaptable and take such changes in the business landscape in stride. Lenders and title companies will have to return to older, tried-and-true ways of financing and transferring property.

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