Will Foreclosure Moratorium Effect Homeowners and Buyers?

The housing market crisis is still in full swing, and the current multi-lender foreclosure halt assures it won’t be ending any time soon. Speculations abound as to why there has been a halt on foreclosures, but a few things are for sure: foreclosures may likely effect you–the homeowner, buyer or seller–in some way, and the aftershocks of the foreclosure earthquake will be felt for a long time.

Lenders in recent weeks have initiated foreclosure moratoriums to apparently review paperwork processes–the result of lawsuits filed by disgruntled homeowners who claim the lenders illegally took their properties. While these lawsuits generally are more prevalent in judicial foreclosure states (where the lender has to get a court order before initiating foreclosure proceedings), we are seeing them more in non-judicial states as well. The basis for these allegations is fraud.

The fact is that moratoriums will not last forever, and lender-owned property inventory will need to be reduced. How will this effect the housing market and homeowners? Here are some possible scenarios:

Foreclosures will continue. There are simply  too many lender-owned properties, many not yet on the market. The Obama administration has attempted over the last several years to introduce programs to help struggling homeowners with alternatives, such as loan modifications. But these programs have not proven successful. Individual states have attempted to help residents with programs as well, but these have also not made much of a difference. At some point lenders will have to get these properties off their books.

New lawsuits could emerge as a result of findings. If lenders find evidence of fraud and foul play within the foreclosure process (which has already been documented) this will undoubtedly lead to another kind of lawsuit on behalf of current homeowners who purchased such properties.

While fraud could void a real estate contract in most states. Although most states, and most basic real property sale contracts, if agreed to, do require the parties to submit to arbitration, lender fraud could possibly be seen as non-arbitrable if the interests involved go beyond the parties’ interests and are more public. The triangle of past owner, lender and new owner may complicate things, as it places the lender in the middle and two innocent parties on either end. Could the current homeowners actually lose their homes? While this is doubtful it is something current buyers may want to  consider when purchasing bank-owned properties.

Working closely with a Realtor to make sure the proper paperwork is in order in the sale between current owner and lender can help alleviate future problems.

Housing costs could rise. As a result of the foreclosure mess it is likely housing costs will rise. Closing costs–like title insurance–could skyrocket.  Some big title insurers have ordered employees to refrain from issuing policies on lender-owned properties without proof of ownership. If the lender can’t produce the note that home may not get sold, leading to more problems for the lender and the neighborhoods. Interest rates will likely rise, as servicing loans will become more costly for mortgage providers. This will also effect homeowners who refinance their loans. Other costs could rise as well, but that will remain to be seen.

Home equity could drop further. With the continuation of foreclosures equity in many neighborhoods with lender-owned properties will decrease, as the lenders scramble to sell these homes to get them off their books. The harder it becomes to get them sold, the more likely lenders will continue to drop prices until someone–such as an all-cash investor–comes along and scoops the home up for a steal. With further drops in equity more current homeowners may end up underwater, which could lead to more foreclosures. As property values drop the vicious cycle will start over.

Vacation/second home property markets may suffer. These markets are already suffering, and the longer the housing market spirals the worse these markets will fare.

While I always try to be as optimistic as possible, the above scenarios are too real to ignore. Homeowners and buyers need to understand the future possibilities in order to make sound decisions now. Buyers have to be cautious and examine all variables when purchasing lender-owned properties. Lenders need to enforce strict guidelines when it comes to foreclosures in order to prevent future problems. We CAN strengthen the housing market again, but we all have to remain vigilant and cautious. It is still a fantastic time to buy, as rates are low and most home sales are open to negotiation. If lenders perfect a system by which they can transfer clean title then foreclosures could be advantageous, bringing buyers back to the tables.