Recently, another controversy in the mortgage industry has drawn attention. This time it is regarding the falsification of documents and affidavits used in foreclosure proceedings. With the nation’s top lenders freezing foreclosure activity while investigations continue, some of the newest victims are buyers and Realtors of distressed properties. Foreclosures create a significant book of business for home sales in hard hit areas – as much as 30% or more of the sales market.

Home sales this past summer hit the lowest levels in ten years, and in some markets, like Florida and Nevada, the active housing market is full of foreclosures. The uncertainty is also causing chaos for all home sales. Experts tell us that home prices could bump up slightly on the short term, but that a glut of foreclosed properties post-freeze will hurt the general status of the market in the long run.

While some markets are obviously hit harder than others, the moves by some of the nation’s largest lenders – Bank of America, Chase, Ally Financial and GMAC Mortgage is systemic, now affecting proceedings in all 50 states. Fannie Mae has responded by pulling foreclosed homes off the market and many title companies are refusing to issue title policies, making the homes unsellable.

Widespread investigations at either a state or national level will further paralyze a market that already shows few signs of life. Foreclosed home sales at least pump money into the market and generate real estate activity. The foreclosure inventory competes directly with new construction and if both inventories rise or stay unchanged, the construction industry will effectively shut down in some areas.

Mark Zandi, chief economist at Moody's Analytics, noted that today’s latest crisis is likely to have an impact for the next two years. "It'll probably push out the distressed sales into 2011 and 2012," he said. Delays of large foreclosure inventories will slow long term recovery.

Additional market uncertainty will keep more hesitant buyers on the fence as they wait to see what foreclosed homes might be coming back on the block. Prolonged delays in getting foreclosures moving again can also hurt long-term prices and futures as investors will look to other markets.

 

 

 

/kh