As the "robo-signing" fiasco continues to unfold, questions about the legitimacy of completed foreclosures and those under way could mean millions of troubled homeowners face uncertainty until the crisis is sorted out.
The news that, at least in some states, foreclosures are being put on hold while lenders and title companies decide if their court actions were conducted properly, could mean people facing foreclosure may be able to stay in their homes payment-free for a while longer while lenders figure out where things stand.
Already, in Florida, it takes an average of 578 days to foreclose, beginning from when the lender sends the owner a notice of default, says Grant Nelson, a real-estate and mortgage-law expert at Pepperdine University law school. Florida, the epicenter of the foreclosure crisis, is where most of the current trouble seems to reside.
That trouble was uncovered in lawsuits by some homeowners, mainly in Florida. In several suits, clerks at lending companies acknowledged that, although they signed court papers to take away people's homes, they didn't actually look at the documents.
"All this means that people going through foreclosure are going to get more free rent," Nelson says.
Read: Readers react to foreclosure-document mess
The revelations are likely to trigger lengthy investigations into whether foreclosures were done properly and, if not, who actually owns the homes at this point, experts say. Lots of time will be spent and lots of lawyers will get paid, they predict. Meanwhile, people living with foreclosure hanging over their heads will continue in limbo for even longer periods while it all gets sorted out.
Read: Foreclosure buyers: Does your purchase have a tainted title?
And even though the process could set back a real-estate recovery, it will eventually be sorted out, experts predict. Nelson says that lenders are unlikely to walk away from homes for which they're owed money, especially since most mortgages now are insured by the U.S. government, through Freddie Mac, Fannie Mae, the Federal Housing Administration or the Department of Veterans Affairs. If the homeowner doesn't pay, the insurance eventually kicks in.
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Nelson and others say that, after the red tape is unraveled, lenders will resubmit the previously flawed foreclosures. Some homeowners have been successful in fighting their foreclosures in court. But most truly have fallen into default on their loans and so, when the legal technicalities are solved and the lenders foreclose again, they'll probably lose the home, Nelson predicts.
Which states?
Four lenders — JPMorgan Chase, GMAC Mortgage, Bank of America and Wells Fargo — are under the spotlight for supposed document flaws. News reports have said that the flawed foreclosure cases are in 23 states where courts oversee foreclosure. (In many states, no courts are involved and the lenders are able to repossess a home with a mortgage that's in default without going to court.)
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The lenders haven't released which states they're concerned about.
Rick Sharga, senior vice president at RealtyTrac, which keeps track of foreclosure statistics, news and legal issues, says that 48 states allow judicial foreclosures. But some allow only courts to handle foreclosures while others use both processes.
Here's Sharga's "best guess" of the 23 states involved. These are ones that allow only judicial foreclosures, or that mostly do them in courts:
- Connecticut
- Delaware
- Florida
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- New Jersey
- New Mexico
- New York
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- South Carolina
- South Dakota
- Vermont
- Wisconsin
