So, let me get this straight — the Massachusetts Attorney General is suing some of the biggest banks for wrongful foreclosures in its state. Fine, we’ve heard that before. And since the ability to foreclose for non-payment is essential to a lender securing its interest in a property, Ally Bank announced this weekend that they have stopped buying loans in Massachusetts. Yes, the same Ally Bank which is owned 74% by the US Treasury Department.

The anti-foreclosure  movement has an ostensible goal of stabilizing the housing market by propping up home prices and keeping Americans in their homes. But the unintended consequences of these policies are impacting the broader housing market, hurting everyone, weakening the already struggling recovery.

The irony is palpable.

This post first appeared on Minyanville.

Our elected officials want to play financial adviser to distressed homeowners — and dole out terrible advice.

In their infinite wisdom, Congress is proposing yet another ill-conceived plan to slow foreclosures. The latest scheme is not simply misguided, but could be downright ruinous for American families.

Two Republican Senators from Georgia, Johnny Isakson and Tom Graves, introduced a bill to Congress that would give borrowers the green light to withdraw retirement money, penalty free, to make mortgage payments. According to HousingWire, borrowers could withdraw up to $50,000 or half their account value (whichever was smaller), from qualified retirement accounts without incurring the 10% penalty for early withdrawal.

In defending his plan, Isakson argued “This bill will help Americans who risk foreclosure use their own resources to make their mortgage payment on time without being penalized by the federal government.” Isakson neglected to add that families heeding his advice would likely not only lose their home, but lose half their retirement nest egg in the process. A lose-lose, if you will.

What is so very wrong about the concept that plundering your retirement account to save your house is a good idea, is that if a borrower has to dip into retirement money to make mortgage payments, he or she should not be making those mortgage payments in the first place. It is the definition of throwing good money after bad.

Congress has this very altruistic, yet economically illogical notion that to solve the housing crisis, all we have to do is keep people in their homes. No matter that millions of underwater homeowners are scraping by, pinching pennies to stay current on a home that won’t be worth more than the loan for a decade, if not longer. Pour all your disposable income into a sinking mortgage and there’s nothing left to spend on, well, anything else. Its bad economics at best, political theater and vote-pandering at worst.

The sad reality is that most foreclosures currently occurring, should be occurring. This is not a soulless acquiescence to banks like JPMorgan Chase (JPM), Citibank (C) and Bank of America (BAC) repossessing homes from struggling American families. It is reality. Congress claims that a strong housing market is essential to economic recovery, as it is. So why then do they continue to push legislation that prevents the housing market from actually recovery?

The real risk housing poses to the economy isn’t a flood of foreclosures over the next couple years that drives down home prices. The scarier thought — and in my view the most likely outcome given the current political climate — is that we are still talking about the foreclosure crisis in 2016. That is five more years of a stagnant housing market, sapping confidence from our already wounded collective psyche. A cinder block tied to our economy’s already feeble legs.

On a personal note, my company is deeper into the trenches of the foreclosure market than most would ever care to venture. And what I see, on a daily basis, is not hoodwinked families getting the American Dream ripped from their arms by fat-cat bankers at Goldman Sachs (GS). It’s not even reckless speculators getting their just desserts. As appealing as these media-friendly narratives may be, it is simply not reality.

Instead, the vast majority of today’s foreclosure victims are families who simply made a bad financial decision and are suffering the consequences. Their American Dream is long since over, foreclosure simply the final chapter. The end to what went from dream to nightmare, almost overnight. But because of the labyrinth of foreclosure-related logistics banks must navigate to actually repossess a home, the stress of looming foreclosure has dragged on for months, if not years. Sure, for part of this time some lived rent-free, but not many are socking that money away for big screen TVs and lavish vacations.

It surprises people to hear this, but my company receives countless calls from former homeowners post-foreclosure. We acted as agents of the banks, for all intent and purpose the actual people who took their homes. But we do it with grace and respect. Not everyone in the business does, but we pride ourselves in being different. And when they call, they sound relieved. Some are even happy. Some even refer their friends to us, urging them to call us for help in buying a home, or making an investment in real estate. I once watched a woman cry as she signed away the deed to her home. When I went back a month later to pick up the keys, she looked and acted like a different person, as if a giant weight had been lifted from her shoulders. She lost her home, but she got her life back.

Foreclosure is not the devil that the media, pundits and politicians make it out to be. It is a nightmarish process to go through, to be sure. But as a wise man once said, to get through this, we need to go through this. And its the same way with foreclosure. On the other side is freedom, a fresh start. A chance to rebuild.

And that’s why this bill irks me so much. Retirement money is generally untouchable, even in bankruptcy. And it certainly is rarely at risk during or after foreclosure. What gall a politician has to suggest that a struggling family deplete the only resources they may end up having after something that is, if you have to pay your mortgage with retirement money, inevitable.

Boutique Firm Is Second San Francisco-Based Brokerage to Go Green

In what touts itself as the greenest city around, an astonishingly small portion of San Francisco businesses actually behave that way. Perhaps it’s the onerous requirements for receiving a formal green certification. Perhaps it’s the time and money it costs to officially go green. Or perhaps it’s because people really don’t care.

Cirios Real Estate is trying to change all that.

On August 11th, the Potrero Hill-based boutique brokerage became only the second real estate brokerage in the city to receive the San Francisco Department of the Environment’s Green Business Certification. The Certification is issued to businesses that, through their day-to-day practices and procedures, meet the strict criteria established for the Green Business Program.

In order to qualify, companies must achieve pre-defined standards in the following categories: Waste Diversification, Source Reduction, Environmentally Preferable Purchasing, Energy Conservation, Lighting, Energy Management, Water Management, Water Conservation, Landscaping, Clean Air, Janitorial Cleaning, Company Owned Vehicles and Pest Management. An application can only be approved after an on-site inspection to ensure compliance.

“Frankly, it is shocking that more brokerages aren’t doing this. In San Francisco no less.” Cirios Partner Austin Nelson, who headed up the firm’s green initiative, was surprised to learn this summer that there was only one other brokerage in San Francisco with a Green Business designation. “I looked at the list of requirements and said to myself, ‘wow, we do most of this already.’ It’s really not that hard.”

According to the US Green Building Council, buildings use 70% of all electricity consumption and account for 12% of all freshwater use. That more real estate firms have not embraced the environmental movement speaks to the industry’s tradition of being slow to react to nascent trends. And in San Francisco, environmentalism is anything but a new thing.

About Cirios Real Estate
Cirios Real Estate is passionate about real estate. The company strives to help its clients build long term wealth through owning property. Headquartered in San Francisco’s thriving Potrero Hill neighborhood, Cirios’ clients include first time home buyers, local investment groups and real estate hedge funds. With an expertise in asset valuation and a focus on the Bay Area, Cirios makes opportunistic real estate investments and helps ensure that its clients make smart real estate decisions.

# # #

For more information about Cirios Real Estate, please contact Andrew Jeffery directly 415.217.0012 or ajeffery@ciriosre.com

This post first appeared on Minyanville.

In January 2008, when Lehman Brothers was still a company and Washington Mutual (JPM) was still making loans, I wrote of Bank of America’s (BAC) recent Countrywide acquisition, “Did Bank of America get the deal of the century or the biggest headache in recent financial history?”

As solvency issues swirl around the Charlotte-based behemoth, it appears the latter assessment was correct about then-CEO Ken Lewis’ big bet on Countrywide’s mortgage business.

At the time of the acquisition, Countrywide held $80 billion in mortgages for investment. Eighty percent of those, according to the Wall Street Journal, were either second liens or pay Option Arms. And remember, that was early 2008 when the financial crisis was still in diapers. Losses mounted, quickly eating up the discount BofA received on the purchase of what was once the nation’s largest private mortgage lender.

But investors can quantify asset writedowns. They may guess to high or too low, but as conditions change so can assumptions about losses. It’s fear of the unknown that spooks investors and causes liquidity scares like the one Bank of America is now so ardently fighting. In buying Countrywide, the bank inherited legal liabilities that while vaguely understood at the time, have only now truly become fully realized.

In the fall of 2008, as the fate of the financial world was anything but certain, Bank of America agreed to pay a whopping $8 billion in damages to 395,000 borrowers stemming from Countrywide’s shading lending practices. And the litigious party was just getting started.

Just this year, Allstate Corp (ALL) sued Bank of America over $700 million in mortgage securities it bought from Countrywide; a group of institutional investors including BlackRock (BLK) and New York Life Insurance Corp rejected an earlier $624 million settlement stemming from bad Countrywide loans; and most recently AIG (AIG) sued the bank over damages of more than $10 billion caused by Countrywide securities in which AIG invested.

Bank of American lashed out at AIG, alleging that the firm “recklessly chased high yields and profits.” AIG countered that “Bank of America continues to attempt to blame others for its own misconduct.” But now that taxpayer money is on the line in the form of a lawsuit from AIG, its a safe bet this suit will not go away quietly.

What’s really spooking investors, in addition to questions about the value of Bank of America’s assets, is what other legal liabilities are yet to surface. You can’t price what you can’t see, and if you can’t see a $10 billion lawsuit that hits the wires on an otherwise ordinary Monday morning, you’re forced to assume its just one of many coming down the pike.

Thanks to Countrywide’s questionable lending, the unfortunate reality for Bank of America is that it probably is.

We checked out the 21 most popular real estate search engines and found the ones below to have the most user friendly interfaces and timely housing information.

5. Ciriosre.com

More than just shameless promotion…awesome shameless promotion. Check us out. We have new and improved search widgets!

4. Realtor.com

This search engine has been in the game for quite some time now. Some may argue that realtor.com boasts quantity over quality. They have successfully maintained a hold on having the most accurate array of listings. Once you start digging around, realtor.com asks for more information (email, etc), a tactic that scares many users away.

3. Hotpads.com

Again, the top spots go to the sites that have the most attractive user interfaces. Hotpads.com is so easy to navigate, and mark favorites on maps. It’s a great ‘rookie’ search tool.

2. Redfin.com

We have to admit, this site is the most aesthetically appealing and user friendly. Searching for a home online is daunting, but Redfin seems to have mastered the art of the online home search. Mapping tools, schools stats, and area averages. The site does an excellent job extrapolating data and putting it in charts and graphs.

1. Your Agent

We had to say it! These sites are great tools but they still lag behind the MLS, which is the gatekeeper of all things active, pending and sold. Call that Realtor friend of yours to find out why your dream home is suddenly lost on realtor.com.

Looking for a house can be fun, exciting, daunting and stressful. But before you start walking into houses and falling in love with the ‘perfect’ house, it’s time to figure out what you can afford, what you want to pay, and your 7 year timeline.

1. Check your credit/Fix your credit

Time to log onto Equifax.com and check out your FICO score that helps determine your interest rate and buying power.

2. Pre-Approval

First up: meet with your lender to look at your credit history, debt, current income, assets, etc. He/she will crunch the numbers and come up with an approval amount.

Next: Understand that a pre-approval does not necessarily mean you can or want to spend that much. Try to think in terms of setting a price ceiling for a monthly payment rather than a purchase price.

Make sure your lender is running taxes on the correct city and county. These can vary greatly and affect your monthly payment.

3. Understand the real costs of owning a home

We don’t want to rent forever and watch thousands of dollars disappear from our very eyes. But, as renters you enjoy certain perks. Below are some of the hidden yet very real costs for a homeowner.

Property Taxes

Interest

Insurance

Water

Garbage

Assessments (HOA and Condo)

Repairs (new washer, water heater)

4. Have a realistic timeline

Right now, home prices have fallen drastically. Since we are facing high inventories, figure out how long you can realistically live in the property you are purchasing. Our advice is, if you plan to live in the home, imagine yourself there for at least 5-7 years. If you plan to move before then, can the rental income cover your mortgage? Have your agent run the numbers and see if the property can turn into a positive cash flow as a rental.

5. Start saving

The down payment is daunting enough. Add in a chic suede couch from EQ3 and that ridiculously overpriced armoire from Pottery Barn, and you may as well try to save for two down payments.

Home ownership can be gratifying and a sound investment. But let’s not fall in love with an idea until it can be a reality.

This post first appeared on Minyanville.

It wasn’t so long ago that foreclosure relief programs had near-unanimous support in the political community. There were elections afoot after all, and something had to be done about the millions of homeowners facing the loss of their home.

But as data continue to show that loan modification and short sale initiatives are floundering and austerity emerges as the buzz word for the upcoming 2012 elections, such programs are on the chopping block. The House of Representatives passed two bills last week that evidence the lack of support for foreclosure prevention programs that have failed to stabilize the tattered housing market.

Last Thursday, the House voted to end the Federal Housing Administration’s short refinance program, which aimed to help borrowers refinance their underwater mortgages, and on Friday passed a bill killing a Housing and Urban Development program that provides interest-free loans to homeowners who have lost their jobs. But as HousingWire reports, any push to terminate the programs may not make it to the finish line. A source within the Senate called the bills “dead on arrival” and the Obama administration said the president would veto the bills if they make it to his desk.

Meanwhile, House Republicans and even some House Democrats are working on similar bills to kill the Home Owner Modification Program, or HAMP, and Home Affordable Foreclosure Alternative, or HAFA, which push banks to modify delinquent mortgages and accept short payoffs, respectively. A short payoff (also known as a short sale) is when a bank allows to the homeowner to sell the home for a lower value than the mortgage. Both programs were Obama-led initiatives that promised relief for troubled borrowers. Actual results have been underwhelming, at best.

The specter of ending borrower assistance programs is a mixed bag for big banks like Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC), who still retain billions in exposure to delinquent mortgages. On the one hand, less federal pressure to accept short sales and complete loan modifications could mean that banks take fewer losses in the near term.

On the other hand, homeowners eligible for assistance would are almost certainly end up in foreclosure if the programs get nixed. Foreclosure remains the least “profitable” exit scenario for banks, as carrying costs, home price depreciation and liquidation expenses make taking a loan through the entire repossession process a costly endeavor. A higher foreclosure rate means that banks would likely increased losses from a larger portion of their delinquent loans ending up real estate owner, or REO.

Certain real estate investors however, would cheer this possibility, as recent foreclosure moratoria stemming from last year’s robo-signing scandal has left foreclosure buyers starved for projects.

In the long run, winding down ineffective foreclosure prevention programs is the healthiest option for the housing market and the nation’s homeowners at large. The longer millions of distressed mortgages loom on the horizon, the longer a true recovery in the housing market will be forestalled. Without federal pressure, banks are more likely to make modification and short sale decisions based on economics, rather than politics.

Despite being now five years into the housing downturn and with prices nationwide down by more than 30%, buyers remain wary due to the vast uncertainty about how the logjam of potential foreclosures will play out. And until the we clear the overhanging supply that will be seeping out into the market, real estate will continue to be a drag on the economy.

This post first appeared on Minyanville.

It doesn’t make nearly the headline fodder as revolution in Egypt (or Wisconsin), but the fate of the mortgage interest deduction, or MID, is a hot topic in housing finance circles this budget season. And while eliminating the MID may sound like a popular, hard-line approach to expensive government subsidies for the housing market, the stark reality is that the MID is not going anywhere anytime soon.

The new Obama administration budget calls for stemming the benefit homeowners get by writing off interest on mortgages. Specifically, the president wants to limit deductions for homeowners earning more than $250,000 in annual income. Meanwhile, deductions on up to $1 million in mortgage debt, loans on second and third homes, and home equity lines of credit would remain in place. The MID isn’t the budget’s largest line-item, but it is no small potatoes, either.

Estimates vary, but the consensus is that the MID is around a $100 billion per year budget item. However, only one-third of homeowners actually get to take the deduction because many homeowners don’t itemize their deductions, missing out on one of the highly touted tax benefits of owning a home.

Lining up to defend the MID are powerful real estate and mortgage special interest groups, eager to promote home ownership (and of course member commissions). They argue that at a time when the housing market is already so shaky, removing this incentive to own real estate would undermine the feeble recovery that already appears to be faltering. Unsurprisingly, the National Association of Realtors, or NAR, the powerful real estate lobbyist group, is up in arms: “NAR opposes any changes that would limit or undermine current law.”

On the other side are a smattering of economists who aren’t sure the MID has much of an effect anyway. And if it does, the tax savings could be put to much better use. In a recent Financial Times piece, Robert Pozen pointed out that in Australia, Canada, and England, countries with similar demographics and legal structures to the United States, there is no MID yet home ownership rates remain higher than ours (which currently stands at its lowest in more than a dozen years).

Others believe that the MID and other subsidies via Fannie Mae and Freddie Mac — in addition to accommodating interest rate policy that has helped boost mortgage-lending profits at money center banks Wells Fargo (WFC), JPMorgan Chase (JPM), Citibank (C) and Bank of America (BAC) — allocate too many precious public dollars to housing. Far better to invest in innovation, or pretty much anything that can’t be boiled down to four walls and a roof.

Ultimately — and unfortunately because much of the discussion over US housing policy falls into this same category — the debate is futile in the near future. The MID in its current form reduces the cost of a home by about 20%. If this sounds astounding, do the math. The mortgage payment for a buyer putting down 20% to buy a $300,000 home and taking out a 5.0% mortgage is $1,288. The buyer gets to write off the $12,000 in annual interest paid, reducing his or her taxes by $3,000 assuming a 25% tax bracket. That’s $250 per month, making the buyer’s effective monthly mortgage payment just over $1,000 per month. The equivalent monthly payment pencils out to a home that costs around $240,000, or 20% below the original $300,000.

Current government policy states an explicit desire to prop up home prices, so expecting a policy that would almost immediately give property values a 20% haircut is untenable, at best. Even the current proposal will have a hard time surviving; a similar one last year got shot down by a Democrat-controlled Congress. Far better to focus near-term efforts on resolving the Fannie Mae and Freddie Mac debacle, as the only way the housing market can truly heal is with a functioning, liquid, private secondary market. As long as the zombie-like Fannie and Freddie are allowed to hang around, housing will remain in a painful limbo.

This piece first appeared on Minyanville.

Almost five full years into the housing downturn, it’s still cool to be bearish on real estate. But cool isn’t always right: Despite headwinds such as looming shadow inventory, a lackluster job market, and geopolitical instability, there are plenty of reasons why rose-colored glasses may be the real estate eyewear of choice.

Below are 10 reasons why it may finally be time to be bullish on housing … but first, one huge caveat.

The local bottom that the broad housing market experienced in April 2009 may yet be surpassed to the downside. If it is, housing bears will pound their chests, stubborn pessimism vindicated. They will be mistaking the trees for the forest. This recovery, which in many areas remains in full force, has been, and will continue to be, highly local in nature. Fundamentally strong markets have thrived, while weak ones have languished. National, state, and even city-level indicators have been masking trends that are ongoing on a neighborhood level. This will continue, and those that ignore it will miss out on countless opportunities.

So without further ado, 10 reasons to be bullish on housing:

1. Jobs. Housing follows jobs. Period. And while the job market is still bunk in many areas, pockets of strength are emerging. After Google announced it would be hiring as many as 6,000 new employees, the Silicon Valley powerhouse received 75,000 applications in two weeks. The company is looking to retain talent in its fight against local rivals like Apple, Salesforce.com and Yahoo, along with social media upstarts like Facebook, Twitter, and Zynga. If housing really does follow jobs, the San Francisco Bay Area may prove to be a bright spot in 2011.

2. Jobs. At the risk of being redundant, housing follows jobs. Consumer confidence is close to reaching last spring’s high point, the most optimistic the US has felt since 2008. And while hiring hasn’t restarted in earnest, firing has slowed to a drip. If you haven’t been fired yet, chances are your job is reasonably secure. Job security drives optimism, planning for the future and … home buying.

3. Pent up demand among young adults. Consider this: 2006 college grads entered the labor market just as home prices began to collapse. Those who still have a job kicked and scratched their way through the Great Recession and are now 27, perhaps married or getting there and kids may be on the horizon. Some were even smart enough to save some money. According to a graph produced by economist Tam Lawler and posted on Calculated Risk, today’s young adults are under-represented as homeowners compared to historical norms, and a disproportionately large chunk are living at home. As the job market crawls back to life, this trend is likely to reverse. And if the apartment market’s snappy performance in 2010 is any indication, it already has.

4. Foreclosures. Frankly, I’m getting tired of people claiming that an impending flood of distressed real estate is going to torpedo home prices. If you’re making that case, ask yourself if you really, truly have any idea what you’re talking about. Banks are rational actors, and as much as Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and the rest are demonized, they rarely willfully destroy the value of their own assets. Which is exactly what flooding the market with bank-owned properties would do. Coupled with political pressure and an ever-increasing maze of foreclosure litigation gumming up the repossession process, foreclosed inventory will continue as its steady stream. It will take years (around four based on current estimates) to work through shadow inventory, but there will be no flood.

5. Inflation. While much is made of inflation in the media, few pundits actually understand it. Inflation expectations, not inflation, is what we should be worried about. Things get scary when consumers start believing that prices are rising, or about to rise. Rational economic actions take hold, and rather than filling their tanks when empty, drivers fill whenever they pass a gas station. The expectation of higher prices, not higher prices themselves, is what changes economic actions. Rising inflation expectations pull demand forward, pushing up prices in an inconvenient self-fulfilling prophesy. Historically, real estate has been a rather good hedge against inflation. As people start to get nervous about inflation, they buy real estate. For more on how good a hedge real estate has historically been against inflation, see my firm’s analysis a few weeks ago: If You Fear Inflation, Should You Buy Real Estate?

6. Higher rents and low interest rates. Ask a prospective tenant in a major metropolitan area how the apartment search is going and the response will not be pleasant. Rents are rising, inventory is down, and landlords are back in the driver’s seat. And despite a recent bounce, interest rates remain historically low. High rents and low interest rates push would-be renters towards buying, particularly in areas with job markets that are relatively less weak than the country at-large.

7. A booming apartment market. Investors are snatching up multifamily properties as positive demographic trends, low interest rates, and perceived values attract professional and amateur buyers alike. Homeownership is at a 10-year low, young adults are moving out of their parents’ basements and into apartments, and leverage is fantastically cheap. What more could an apartment buyer want? The multifamily space typically recovers first, and if history is rhyming in even the smallest way, this is good news for housing.

8. Investor appetite remains strong. From fedora-hat donning, Hawaiian-shirt wearing, clipboard-scribbling, earpiece-whispering professional investors at the courthouse steps to vulture funds armed with hundreds of millions of dollars, investor demand for real estate remains robust. Distressed opportunities — across all types of real estate — have come to market slower than expected, which means buyers have had more time to hit the pavement and raise money. With limited opportunities, competing buyers are driving up prices of distressed assets: For every well-priced foreclosure there are a dozen all-cash buyers looking for a deal. And don’t forget the baby boomers, the first of which turn 65 this year. While many are eying a trade-down into a smaller, more retirement-friendly home, even more are looking for reliable fixed income to pay for rounds of golf and tennis lessons. More than a few gray-hairs view real estate as their path to comfort during the golden years.

9. The stock market. With the Dow Industrials above 12,000 and the S&P 500 topping 1,300 for the first time since mid-2008, IRAs, 401(k)s and trading accounts are feeling fuller than they have in years. The wealth effect is in full effect, as buyers look to sell stock for a down payment and the confidence to pull the trigger on a new home.

10. Confidence. If you’ve made it this far without either scrolling down to question my sanity on the Minyanville message boards or falling asleep, I salute you. And for the precious few readers who are still with me, consider this very important question: Do you feel better or worse about the US economy, and more importantly your own personal economy than you did two years ago? This is not a political statement: Challenges remain, to be sure, but we Americans are a stubbornly resilient, optimistic bunch. Confidence is relative, and for a country that has been through economic hell and back since 2008, we are in remarkably better shape. Confidence in the present builds confidence in the future, and confidence of all types increases risk-taking activities. Admittedly when you have seen the depths of despair, a single ray of dim light can feel like high noon, but it doesn’t matter. Confidence is a trajectory, a transitory voyage through time that is more accurately measured against where you just were than looking at the last time you were here. The fact that most people believe that we’re no longer headed for apocalyptic collapse is, as they say, a good thing.

This post first appeared in: Cirios Trends – Special Edition: 2010 Real Estate Roundup

A 2010 housing market recap would be incomplete without a rundown of what has become known as “Foreclosure-Gate,” a foray into the procedural minutiae of distressed mortgage servicing.

In September of this year – in the midst of the crucial mid-term elections – several large banks, including Ally Bank (formerly GMAC), Bank of America, and JPMorgan Chase, acknowledged problems with their foreclosure procedures. Bank employees, in addition to third party mortgage servicers and legal vendors, were found to have signed as many as several thousand documents a day, at times without personal knowledge of the facts they were attesting to in courts.

The practice became popularly known as “robo-signing” and sparked fresh political wrangling over the process by which Americans are forcibly removed from their homes.

In the wake of press reports and political backlash, lenders froze foreclosures and initiated internal reviews in the hopes of swiftly (and correctly) resuming foreclosures. The review process, however, has been anything but swift.

All 50 state attorney generals filed suit against transgressing lenders, in no small part because many were up for reelection at the time. By late November it was rumored that both sides were working towards a settlement. Some reports speculated the settlement could include: 1) a fund that banks pay into to compensate borrowers whose mortgages were wrongfully foreclosed; 2) banks eliminating the dual track of simultaneously reviewing modification requests and advancing the foreclosure process; and 3) a third party mediator review of cases where borrowers claim a foreclosure was in error.

As of publication, no actual settlement has been announced and repossession proceedings in many states remain delayed.

As reported in the Washington Post, mortgage industry representatives, including executives at Fannie Mae and Freddie Mac, have testified in front of Congress that mortgage servicers and the law firms filing foreclosure actions are to blame. Vendors, for their part, argue that Fannie and Freddie set policies and procedures that encouraged the sort of cost cutting automation now blamed for the errors.

In the rush to provide competitively priced services and reduce overhead, mortgage servicing companies and foreclosure filing law firms introduced high levels of automation to the document-intensive foreclosure process. The rub, however, was that human
reviewers would have to handle more and more files, with less and less time dedicated to each one.

For example, the ABA Journal reported on December 3, that a Pennsylvania law firm, Goldbeck McCafferty & McKeever, was accused of the unauthorized practice of law for non-attorneys routinely preparing and filing foreclosure suits without direct attorney oversight, including signing the purported attorney’s name themselves. In other instances, it has been learned that reams of documents were signed via stamps and that the signers had not actually read the documents they were signing.

Further revelations as to the mechanical foreclosure processes in place are likely to increase, which could continue to cause undesirable consequences to the entire housing market.

First, foreclosure freezes have resulted in delays in the healthy clearing of housing inventory via foreclosure. According to ForeclosureRadar, in Arizona, California and Nevada, the number of properties hitting the auction blocks has dropped more than 30%.

Second, investors that were buying distressed loans and foreclosed homes at auctions have become more cautious. For vulture investors buying defaulted loans and flippers buying REOs at auction, speed is essential to their investment return models. If more homeowners are successful in delaying foreclosures due to shoddy paperwork by servicers and law firms, what is to stop homeowners from attempting further delays even after an auction sale? This notion of continued delays has investors tweaking their pricing models to the downside.

Third, individuals buying REO properties on the open market have been more hesitant to purchase foreclosures due to the media’s regular coverage of the Foreclosure-Gate debacle. Many would-be buyers have begun to believe that if they purchase an REO, they could later lose the home to a former owner filing a lawsuit claiming they were incorrectly foreclosed upon. If fewer investors and homebuyers are interested in purchasing REOs, more REOs will languish unsold on the market, further eroding prices.

Unsavory as it may seem to be profiting from foreclosures, these players are vital to the process by which over-leveraged housing stock is flushed through the system. This price discovery is the only way a sustainable bottom in home prices will be found.

These consequences point towards further downward price pressure in the broad housing market. Until banks are able to legally move forward with the clearing of the large inventory of foreclosures, a true recovery in the housing market will not take root.