Experts are now arguing that though the freeze on foreclosures nationwide will initially benefit homeowners and the economy as a whole, its long-term effects could wreak havoc on an already weak housing market. Following the disappointing month of August, which turned out to be the slowest month of new home sales since late 2003, home prices continue to drop in many parts of the nation, concerning professionals in the field and homeowners alike.
By stopping the foreclosures by the major lenders of homes in all 50 states, the number of sales is being artificially depressed. This is because not only are the foreclosures of homes who received faulty documents and unfair processing being halted; all loans through these major lenders - particularly loans sold to Fannie Mae - are being stopped indefinitely. While most Americans see foreclosures as a negative aspect of the housing market, the reality of the situation is that homes previously bought by speculators and then foreclosed on need to be reentered into the market, especially at a time when sales are so low all around.
This effect will be particularly painful for states with the highest rates of foreclosure sales, including California, Nevada and Arizona. Though the halt will save some homes that would have been wrongly foreclosed on, experts argue that the freeze will not make a big difference for most borrowers. The majority of homeowners who are in fear of or close to foreclosure proceedings are those who have not paid their mortgages for an extended period of time. A delay to review files for fraudulent documents will not change their situations, though it does buy some time.
Some fear that this effort will simply push the sale of distressed homes - which now comprise nearly a third of the current real estate market - into 2011 and 2012, effectively slowing the recovery process. This might get worse if other major lenders decided to follow suit and spread their foreclosure freezes to all 50 states, as Bank of America has just done. This might hurt the residential real estate market, which experts already estimate is receiving a 26% depression on house prices by the number of short sales and foreclosures.
Last week the Interstate Recognition of Notarizations Act was pocket vetoed by President Obama, effectively killing the two-page bill passed recently by Congress in at effort to promote interstate commerce because there was deep concern that it would undermine the legitimacy of foreclosure proceedings. Due to these and other expert concerns on the unintended consequences of the bill, Obama decided to pocket veto the legislation, meaning that he does not publicly veto it but chooses not to act on it, effectively ending all chance of debate or passage during this legislative cycle. The bill's passage through the legislature lacked any public debate, and after it made its way through Congress, experts agree the legislation could actually lower standards for foreclosure documents, an issue already at the forefront of the housing market debate.
With the Senate in recess until November 16th, the current hold on nationwide foreclosures might be extended through the rest of the year. The Attorney General of Ohio is already making moves to halt foreclosures on GMAC mortgages based on the allegation that they provided fraudulent documents to thwart the loan modification process for owners looking to keep their homes.
Senator Dodd, Chairman of the Senate Banking Committee, announced just last week that he will initiate an investigation into this case as well as the countless other foreclosure proceedings as soon as the Senate is back in session. More legislation may be in the works, but what that will entail will not be clear until the highly anticipated midterm elections.
