Much of the US economy is tied to real estate. Buying and maintaining a home creates a very big ripple that impacts lots of industries and jobs. Certainly, the bursting of the speculative bubble in building and lending has resulted in a devastating chain of events including an increase in home foreclosures.
In the economics textbooks I had to study back in college, the theory is referred to as “creative destruction” as industries change and assets are repositioned. In reality, we’re dealing with individuals and families and it is a painful process.
In news accounts and on our own streets, we can see the impact as families who once were proud homeowners or even responsible tenants are forced to leave their homes as part of the foreclosure process. And foreclosures continue to have a negative impact on real estate values.
Aside from the pain it is a necessary process to get to a floor in prices that will help lay a foundation for stable or future increasing prices. And as the pendulum swings in the positive direction it will hopefully lead to a virtuous cycle for an improving economy.
Between here and there, between continued gloom and future hope, there’s some scary ground still to cover and put behind us. Just like in the horror movie where the heroine is within sight of safety when the bad guy pops up again, we now have to look over our shoulder at some little noticed trends that threaten the nascent recovery.
Recently, the entire foreclosure process has been forced to grind to a halt in many communities because of the “robo-signing” of foreclosure notices by many of the nation’s largest banks and mortgage servicing companies.
But besides this well-reported issue there are other developments that are easily overlooked by those not involved in the industry.
- No Title Insurance: Mortgages are secured by collateral. In this case that means the land and buildings that sit on it. Evidence of this comes in the form a deed that describes the location and the chain of title showing who owned it and what loans or liens have ever secured it. A loan cannot be closed without the lender being able to secure “title insurance” which protects the lender in the event that there is a claim by someone or some bank that says that the new bank’s borrower really doesn’t own it. And right now title insurers are protecting themselves by avoiding issuing any insurance on any property that has a foreclosure in its history of ownership.
- Uncertainty Leads to Gridlock: Nearly 20% of all real estate sales in August 2010 have been of distressed properties. With the prospect of increased litigation and the drying up of lending sources, this will lead to fewer sales.
- Legal Challenges to Evictions and Foreclosures Have and Will Increase: Such legal challenges will make it harder to clear the backlog of foreclosed inventory. Costs to potential buyers and banks to defend claims will increase and make the idea of buying a “bargain” foreclosure property very expensive.
- Banks Face Higher Unknown Costs That Threaten Their Survival: Aside from legal costs, the potential for fines and other penalties imposed by courts for the alleged fraud perpetrated by “robo-signings” means that banks will need to set aside more in reserve against this potential outcome and have less available to lend to consumers and businesses.
- The System of Electronic Trading of Mortgages Is in Question: In the fast-paced world that we live in, we prize speed, convenience and efficiency. To help make the processing of lending and refinancing more efficient, the banking industry created the Mortgage Electronic Registry System (MERS) to allow banks to sell, package and transfer mortgages and mortgage servicing rights among them. But one of the results of the “robo-signing” scandal is that courts may scrutinize MERS and rule that it really doesn’t own the underlying mortgages and has no right to transfer them. If that happens, that will call into question who actually owns the loan.
- Without clear ownership rights, then it calls into question who has a right to foreclose on a property.
- If the lender is not really the lender, then homeowners can and have started ignoring the eviction and foreclosure attempts by these lenders.
- If it is questionable about which bank owns the loan, then that devalues a big source of bank income from servicing the billions of dollars of mortgage, tax and insurance payments that it handles every month, a source of revenue to the bank and an important part of its valuation which will now also come into question.
However this plays out, it looks like the lawyers will be busy for a long time. And the rest of us are left with a very big cloud over our head trying to recover from something way worse than any witch or pirate appearing at the front door this Halloween.