This was too good not to re-post. A write-up by economist Bill Fisher of Mortgage Coach about the recent foreclosure crisis. An excellent take on the situation. Enjoy!
The Sinkhole by Bill Fisher
Imagine we're all living in a giant condominium development, skyscrapers crammed with condos, all in a very large ring. At the center of this ring, where landscaping was being developed and possibly more units were to be built, a huge sinkhole has suddenly appeared.
No one has been able to fathom its depth just yet. It just seems like it could keep going and going. Around the sinkhole, a big fence has been erected in the apparently vain hope that it will keep people and buildings from falling in. And signs have been installed all around the fence, reading: "Danger! Foreclosuregate!"
We have a problem here!
As you well know, major banks are postponing their foreclosures, worried that there may be a problem or two with the paperwork involved in existing (and future) foreclosures. Because the volume of foreclosures has been so heavy, lenders have rather understandably sought shortcuts in processing them. One such shortcut, in some cases, has involved getting employees to sign off on thousands of documents that simply haven't been read. Another is to assume documents exist, like valid deeds in the hands of the banks, when they don't.
Any delay in processing foreclosures means, at this point, holding back about 25% of the sales of properties in any given month. That slows down the market, needless to say, as well as: throwing an untold number of transactions into doubt, costing holders of senior financing extra money as they are forced to service junior financing to hold their senior position, and (perhaps a good thing in the long, long run) raising questions about the foreclosure systems. Many are calling for our nation to have one system, not several.
According to economists, the longer a foreclosure takes, the more it costs everyone-from those doing the foreclosing to those trying to sell their own homes. It has been shown relatively satisfactorily that the real estate market (in California, for example), with non-judicial foreclosures (that is, not requiring a judge to run the foreclosure process, which greatly lengthens the process) has reached bottom and begun its recovery far earlier than the markets in judicial foreclosure states like Florida.
Last week I heard the estimable Mark Zandi of Moody's Analytics say he thought it wouldn't take more than three months to sort out the documentation for existing foreclosures. That seems optimistic, primarily because this is a bowl of honey that will attract litigation flies in great volume. We're bound to see lawsuit upon lawsuit, as people seek to negate the loss of their home or, more to the point, to find some financial advantage in the situation.
Nonetheless, the bad situation will pass. The big question, to my mind, though: How will we sort through the streamlined deed-holding system called MERS (Mortgage Electronic Registration Systems) and actually find anything that will stand in court? And how will we work through the varied ownership of mortgage tranches (pieces of mortgages) to find the people with actual ownership authority over failed loans?
What a mess! Meantime, however, the stock market continues to rise and interest rates to ease on the likelihood that the Fed will go forward with its quantitative easing. This provides the illusion that everything is wonderful.... It isn't.