The new foreclosure scandal that has engulfed the housing market in recent days might well be considered the flip side of the tsunami of toxic mortgages that led to the housing bubble a few years ago, and then the global financial meltdown in 2008. The economy has yet to recover from the crash, yet it now is being buffeted again by its scandalous backfire – the so-called “robo-signing” of tens of thousands of home foreclosures without legal certainty that foreclosure documents used to kick people out of their homes and put those houses up for sale have been properly processed and fairly administered.
The decision by the Bank of America Corp. Friday to put a moratorium on all foreclosure sales in all 50 states is the latest indication of the widening severity of the foreclosure mess. Bank of America, the nation’s largest bank by assets, is the first bank to stop all foreclosure sales.
Its action follows moratoriums by J.P. MorganChase & Co. and Ally Financial Inc., the parent company of GMAC Mortgage, to halt foreclosures in 23 states that require court approval of foreclosures. A fourth large lender, PNC Financial Services Group, has also suspended sales of foreclosed home for 30 days.
There is fallout on other fronts, too. President Barack Obama used a pocket veto Thursday to stop a bill that critics reasonably believe would aggravate the rising number of improper foreclosures. The bill sailed through the House on a bipartisan voice vote last April, and passed the Senate by unanimous consent just last week. But given the rash of complaints and plans for state investigations over improperly documented foreclosures, the Obama administration correctly decided this week that the bill, which would have mandated states to accept foreclosure documents notarized in other states, likely would aggravate the crisis.
It is patently obvious that the millions of bad mortgages that were the faulty foundation and source of the financial implosion would lead ultimately to a lethal wave of foreclosures. Yet it seems perverse to discover that the banks that got stuck with so many bad mortgages would be just as careless in unloading them through a procedural system that was as flawed as the original loan-making.
Lenders should have known that it was not physically possible for the people processing the foreclosure documents to churn out such a volume of work in such a short time frame. They should have suspected that the rapid, robotic processing of foreclosure documents – which reportedly were often incomplete and not read – entailed the same slipshod disregard for qualifications, procedures, verification standards, laws and customer rights that the original faulty loans involved.
The cumulative result, and early investigative findings, suggest that buyers and sellers have been treated just as badly at this end of the toxic mortgage pipeline as they were when lenders were packing that pipeline to rush inherently flawed securities to market in 2007 and 2008.
There are better ways to handle the wave of foreclosures. Trouble is, lenders have ignored them. The Obama administration has repeatedly urged lenders to negotiate mortgage modifications – chiefly reductions in the principal amount owned and payment schedules – to enable mortgage holders to stay in their homes. In many cases, such measures, by limiting losses and uncertain resale values, would be economically beneficial over time to lenders, banks and the larger economy. Lenders should be required to analyze the value of mortgage modifications and to accept standards for required modifications until the housing market is stabilized.
Keeping houses out of foreclosure would bolster the regular housing market by limiting a lower-price surplus of foreclosed homes. That would spur standard home sales and, at the same time, provide broader economic stability and more confident consumer spending.
Regrettably, both the administration and Congress have refused to mandate mortgage modification or arbitration, leaving any such efforts voluntary. The current foreclosure scandal proves the risk and economic damage of dumping homes wholesale into the foreclosure mill, and the price of congressional and administration laxity in allowing that to happen. It’s not too late to implement better policies.