The current state of the mortgage mess

Since the very beginning of the mortgage foreclosure crisis two years ago there were rumblings of fraud by the lending institutions. A very few isolated cases of proven fraud made local newspaper headlines. More information has been available on-line at web sites and blogs specializing in consumer issues, mortgage/financial issues and real estate. Until the past few weeks this news stayed very much under the radar and out of the national network television/national newspaper headlines. That is beginning to change.

Mortgage fraud is a much more important to real estate investors. Many investors were holding rental and/or lease-option/owner financed properties which were financed by major lending institutions/banks. The investors were also hit hard by the bursting housing bubble and facing foreclosure on financed properties. This is a business for investors and they were much more inclined to fight back, researching the lenders’ legal requirements for foreclosure and hiring attorneys to protect their vested interests in financed properties. Most homeowners facing foreclosure, however, were broke(could not afford their mortgage payments), ignorant of the law, unaware of the rights as borrowers and not inclined to try to fight a big bank(no money for attorneys’ fees).

It makes a lot of sense to have rampant mortgage fraud in the current situation. The lenders were not any more prepared for the massive way of mortgage defaults that swept over the country than were the homeowners. The necessary procedures, personnel and knowledge were just not there. Many of the lenders relied on outside companies to handle the paperwork for foreclosures and those companies were not any more prepared than the banks themselves for the sudden tidal wave of defaults.

This situation resulted in many corners being cut and legal requirements being ignored in order to be able to keep up with the increased flow of foreclosure paperwork. County court systems were also not prepared and did not pay enough attention to the paperwork presented them during foreclosure proceedings. Now, even though there have been complaints from the very beginning, these issues are coming to light in the mainstream media because of federal investigations into the practices of the mortgage industry.

The big lenders want to shrug off these illegal practices(mortgage fraud) as merely “technical issues”. Court decisions on issues of legal procedure, however, tend to place a great deal of importance on “technical issues”. It will be very interesting to see if any of the lending companies, processing companies or individuals involved ever face criminal prosecution or if any of the affected former homeowners ever receive any recompense.

One widespread “technical issue” that has come to light is bank officers signing affidavits without personal knowledge of the truth of the information contained in the affidavits as required by law. Unauthorized bank and processing company personal forging the signatures of bank officers on foreclosure paperwork also appears to be common and accepted practice and is also illegal. Large volumes of foreclosure papers seem to have been signed without a notary present to witness the signatures as required by law. These are very serious issues. The presence of any of these issues in any given foreclosure procedure would be legal grounds for the dismissal of that foreclosure. Tens of thousands of foreclosures seem to have been pushed through the court system in this way. It is fraud on a massive scale and it happened because the lenders either were not aware of the proper procedures or did not feel they had the time to follow the proper procedures. Ignorance of the law and time issues are not normally well-received excuses for fraud in other areas of business and should not be considered adequate excuses for mortgage lenders.

Now we wait to see where things go from here. If the federal government does the right thing and decides to prosecute lenders and processing companies and individuals for fraud, it will get very messy and drawn out and clog the court systems for years. And what can possibly be done for the former homeowners, who have already been evicted from their homes and the houses sold at foreclosure auction or privately by the banks? Or will it all just get swept under the carpet as an unavoidable consequence of the housing bubble fall-out and the feeling that banks are already under too much pressure?

Where does housing go from here?

The “housing crisis” in the U.S. has been a major blow to almost every homeowner, every real estate investor, every bank and financial institution writing mortgages and the financial system as a whole. Things are slightly more stable than six months ago. “Slightly” is the key word and the stabilization might well be only an illusion.

The federal government has done a lot to “help” through actions of the Federal Reserve, HUD, FHA, Fannie Mae and Freddie Mac, and direct bailouts to most of the mortgage lenders. Most of the changes seem to have allowed the pain to be less over a much longer time period. The bailouts let the financial institutions get back to profitability quickly without going bankrupt. All of the iterations of HAMP and other programs to help borrowers have instead also mostly helped the financial institutions. Changes to the way banks can report foreclosed and repossessed properties also benefitted the banks and not the homeowners.

Now homeowners trying to sell are still slashing the asking price to find buyers so prices are still falling in most parts of the country. Borrowers that were in trouble are still in trouble whether they were some of the lucky few granted rewritten mortgages or refinancing or not. Homes are still being foreclosed upon in record numbers. The inventory of REO residential properties for sale is growing and the “shadow inventory” of REO properties held by banks but not on the market is growing even faster. Buyers are going away to wait for better times or sitting on the sidelines waiting for even better prices. Private real estate investors are caught in the middle of the mess along with everyone else, getting “great” deals on foreclosure auction properties and seeing profit margins shrivel up before they can get the house back on the market.

There are a few bright spots though many would not see anything very good about them. Lenders, finally pushed into a corner by ballooning foreclosure inventories, are starting to seriously consider more mortgage rewrites and refinance packages to make existing deals realistically affordable for homeowners and avoid further foreclosures. Real estate investors are finding a large pool of takers for houses they are unable to sell for a profit by offering to rent, rent-to-own or lease-option instead.

Real stabilization and reduction of the REO inventory will only come when buyers agree that asking prices are fair and are not likely get any lower. This is classic free-market economics. When that point is reached it will still take several years for inventories of homes to reach reasonable levels again as many people who want to sell now are waiting for that time before listing their home. There is still some market for new-construction homes but it is small and remain that way until the existing-home situation is solved.

So, to the question asked in the title: “Where does housing go from here?” The sensible answer would seem to be: “Not very far and not very quickly.” This problem is just going to have to work itself out, almost certainly over the course of the next several years. It just is not going to matter very much what else the federal government does or the banks do or real estate investors do or anyone else does. The “housing crisis” was created by nearly everyone involved trying to get rich quick and the fallout and pain is going to last for a long time. Those who were prudent and kept the risks in mind have not been hurt nearly as badly as those who let greed drive the risks right out of their minds. Hopefully the one thing we can all count on after going through this is that lenders and borrowers will both learn important lessons from it. Don’t try to take that to the bank!