A mushrooming crisis over potential flaws in foreclosure documents is threatening to throw the real estate industry into chaos, as Bank of America on Friday announced it would stop taking back tens of thousands of foreclosed homes in all 50 states.
The move, along with another decision on foreclosures by PNC Financial Services Inc., adds to growing concerns that mortgage lenders have been evicting homeowners using flawed court papers, without verifying the information in them.
Charlotte, N.C.-based Bank of America Corp., the nation’s largest bank, said Friday it would no longer complete foreclosures in all 50 states as it reviews documents used to process foreclosures. That applies to homes that the bank takes back itself and those that it transfers to investors such as mortgage giants Fannie Mae and Freddie Mac.
A week earlier, the company had said it would only do so in the 23 states where foreclosures must be approved by a judge.
The bank did so in reaction to mounting pressure from public officials inquiring about the accuracy of foreclosure documents. A document obtained last week by the Associated Press showed a Bank of America official acknowledging in a legal proceeding that she signed thousands of foreclosure documents a month and typically didn’t read them. The official, Renee Hertzler, said in a February deposition that she signed up to 8,000 such documents a month.
In Rochester and the rest of New York state, the full effects of the banks’ decisions remains to be seen.
“It’s pretty nominal” at this stage in the game, said Rebecca Case-Grammatico, senior attorney, who supervises Empire Justice Center’s Foreclosure Prevention Unit. “All they’re stopping are just the evictions and getting the judgments. As far as the actual foreclosure filings, there’s no impact on that.”
Case-Grammatico said attorneys have known for years about the existence of so-called “robo signers.” She said there has been a big push in New York attorney general’s offices statewide for a full moratorium on foreclosure sales, but she admitted she has mixed feelings on whether a moratorium is the best solution. While it would make a strong statement that banks must get their internal bureaucracies straightened out, she said ultimately neither banks nor the state appear to be actively pursuing something that will completely fix an apparently broken system.
On the other hand, “there are a lot of banks out there and lenders out there that are doing just fine and have nothing wrong with their policies and procedures,” Case-Grammatico said. “They should have the right to file foreclosures and should not be penalized for the sloppy work of these other lending institutions.”
As of Friday afternoon, the New York Attorney General’s Office had not launched an investigation into the banks’ papers, but many attorneys and consumer advocates are pushing for one, Case-Grammatico said.
Bank of America Spokesman Dan Frahm told The Associated Press that the bank still believes its documents are correct but wants to satisfy officials’ concerns. “Our ongoing assessment shows the basis for our past foreclosure decisions is accurate,” he said.
Senate Majority Leader Harry Reid, D-Nev., who had called for such a suspension, applauded the bank “for doing the right thing by suspending actions on foreclosures while this investigation runs its course.” Also Friday, Sen. Christopher Dodd, D-Conn, the chairman of the Senate Banking Committee, said he would hold a hearing on the issue next month.
“American families should not have to worry about losing their homes to sloppy bureaucratic mismanagement or fraud,” Dodd said. “Regulators at the federal, state, and local levels have a responsibility to uphold the law and protect consumers from unfair foreclosure, and lenders have a duty to not cut corners around the law.”
Banking and housing analysts, meanwhile, fear the foreclosure document problems could prolong the housing bust, and hundreds of thousands of inevitable foreclosures will be pushed off into some legal limbo for years.
“If you are looking at the key in this country to economic stability, it’s the housing industry,” said NAB Research banking analyst Nancy Bush. “This is a huge mess that helps nothing.”
And some analysts feel that uncertainty about foreclosures could make potential buyers change their mind about purchasing foreclosed properties. That’s because of fears that the former owners will turn around and sue.
However, there could be a silver lining to the problem. A delay in foreclosures could actually prop up home prices in the short term because fewer low-priced homes would pour onto the market in the coming six months. When those properties ultimately do go up for sale, the overall economy could be in better shape, said Mark Zandi, chief economist at Moody’s Analytics.
“The irony is, it may actually support the recovery,” Zandi said. “It may be that when those properties actually hit the market, the economy is in a better place,”
Also Friday, PNC said it is halting most foreclosures and evictions in 23 states for a month so it can review whether documents it submitted to courts complied with state laws. An official at the Pittsburgh, Pa.-based bank confirmed the decision on Friday, which was reported earlier by The New York Times. The official requested anonymity because the decision hasn’t been publicly announced.
PNC became the fourth major U.S. lender to halt some foreclosures. In addition to PNC and Bank of America, Ally Financial’s GMAC Mortgage unit and JPMorgan Chase & Co. have announced similar moves in the past two weeks.