By Ben Mook
As calls for a moratorium on foreclosures and sales of foreclosed homes continue to grow, so do the calls for it to be as short as possible to avoid hindering a housing market still trying to recover.
Pressure on banks and processing firms to suspend foreclosures over concerns of paperwork errors has continued to mount since Bank of America said Friday it was halting foreclosures and foreclosure sales nationwide. On Tuesday, JPMorganChase and GMAC, which had already halted foreclosures in 23 states, agreed to expand their review of documents to all 50 states. But the banks are still only halting foreclosures in the original 23 states.
The National Association of Realtors on Tuesday called on the U.S. Treasury Department, the U.S. Department of Housing and Urban Development and the Federal Housing Finance Agency to ensure the foreclosure review process is completed as quickly as possible.
“There are valid foreclosures that should move ahead quickly, and we shouldn’t lump them in with mortgages that are suspect,” NAR President Vicki Cox Golder said. “That would cause deep problems in an already fragile market and throw many families into uncertainty.”
The problem started with banks and foreclosure processing firms that signed court documents that had unverified or false information in an attempt to speed up the foreclosure process. Politicians at the state and local level, along with a group of what could be as many as 40 state attorneys general have been calling for moratorium to some degree.
As the likelihood of a moratorium, either imposed by the banks, or by the government, increases, so has the concern about what it would mean for the real estate markets across the U.S. Rick Sharga, a senior vice president at foreclosure listing service RealtyTrac Inc., said nationwide about 30 percent of all recent residential sales have been of foreclosed properties.
“If you just pull those out of the system, 30 percent of the sales, what does that do to the market?” Sharga said.
Sharga said that without a moratorium, the review process could be wrapped up relatively quickly.
“This will be put to bed in 90 days, give or take, if they’re allowed to clean up their own mess,” Sharga said. “If not, this could turn into a long, messy process.”
Many experts say they are concerned that a protracted moratorium will not only hurt what have been popular foreclosure sales, but will also affect real estate inventories.
“The disruption comes at a bad time, particularly to the extent that affected institutions are trying to work through the fallout of the real estate collapse and nonperforming assets remaining on their balance sheets,” SNL Financial analysts Robb Soukup and Robert Clark said in a report issued Tuesday. The report said the largest banks in the U.S., those with more than $5 billion in assets, had on average about 4 percent of residential loans in foreclosure.
According to Clear Capital Inc., a Truckee, Calif.-based firm that tracks home prices across the U.S., about 23.2 percent of homes on the market across the U.S. were bank-owned at the end of September.
But in some areas, bank-owned properties make up more than half the inventory. For example, 58 percent of the inventory in Atlanta is bank-owned, while Las Vegas and Orlando, Fla., were at 42 percent. Some areas, like Pittsburgh, Bridgeport, Conn. and New York had less than 8 percent of their inventories owned by banks.
If a moratorium is enacted and it lasts longer than 30 or 60 days there is concern about what will happen when the foreclosure process can begin again.
“If you have a moratorium that lasts a long time, than you could really turn off the [bank-owned] spigot,” said Alex Villacorta, a senior statistician with Clear Capital. “And, these foreclosures are going to come to market at some point, and worse, they could all come back at the same time. That is not really going to help anyone.”
Deborah Ford, who heads the undergraduate Real Estate Program at the University of Baltimore, said a moratorium could be good news for consumers, but bad news for the housing market.
“It stops the flow of these houses and gets them out of the [sales] pipeline,” Ford said. “A lot of these houses will be sitting around with people in them or not in them, and the banks won’t know what to do with them. There’s a huge supply of houses out there, and if these are then going to be pulled off the market and just left, they’ll still be there next month and next year, and we won’t know what to do with them.”
Overall, Ford said, the foreclosure crisis has multiple layers.
“There are so many problems I don’t know what the answer is,” she said. “What’s causing this is that the banks are just not up to the paperwork. There are questions about mortgages that were sold off and who holds them and who signed them. .. And the banks have got hundreds of thousands of houses sitting there and they don’t know what to do.”
The solution, she added, could be painstaking.
“I think the only thing to do is the banks are going to have to start slogging through all this paperwork one house at a time,” she said.
If this process takes a long time, or a long-term moratorium is enacted it could impact inventories across the country.
“Right now, if there is a moratorium and it is short and sweet, the effects are going to be minimal,” said Jaime Peters, an equity analyst with investment research firm Morningstar Inc. “If it drags on, you might start seeing the effects on the housing market as a whole.”
Duane Fouts, an associate broker with HomeSmart Realty in Phoenix and the Arizona Association of Realtors president-elect, said any uncertainty could derail recent progress in Arizona regarding bank-owned properties.
“It is creating a cloud of uncertainty,” Fouts said. “A long-term moratorium will not bode well for investors or for people looking to buy.
“There has been a shift in Arizona the last two to three months from short sales to bank-owned property sales,” he added. “How long will that last, with everything going on, I don’t know.”
Dan Cottingham, a partner at Cottingham Chalk Hayes Realtors in Charlotte, N.C., said the moratorium might not be as bad as some predict, as long as the foreclosed homes on backlog are put back on the market in the right way.
“Some say it will be devastating, flooding the real estate market with all these foreclosed homes,” he said. “But we’ve already done that. I still think the appetite for foreclosed homes is going to be very high. And by the time banks put the foreclosed property back on the market – and it might be three weeks, it might be three months – they’re going to be better organized, give quicker answers and be much more careful with the paperwork.”
Cottingham said that while prices of foreclosed homes will likely drop once the moratorium ends, in the meantime prices on distressed properties are likely to increase. A distressed property usually fetches a price below market value, such as in a short sale, which is often done to avoid foreclosure. About 30 percent of home sales in the Charlotte area involve distressed homes, he said. When it reaches 45 percent, prices drop, he said.
Daily Record Business Writer Melody Simmons and Mecklenburg Times Staff Writer Sam Boykin contributed to this article.