Disclosures at the end of September 2010 that some big mortgage processors filed affidavits without proper scrutiny in thousands of foreclosure cases drew anger from congress and advocacy groups, with some prominent lawmakers calling for foreclosures to be halted in all 50 states. For example, in October Rep. Maxine Waters, called for a nationwide moratorium on home foreclosures accusing banks of “massive collusion and fraud” for putting people into mortgages they couldn’t afford. Possible Las Vegas foreclosure fraud is under the microscope.

Much of this is driven by political posturing with the US mid-term elections coming up in November. For example, Democratic Senate Majority Leader Harry Reid, who is locked in a neck-and-neck re-election contest with tea party-endorsed Sharron Angle in Nevada, has called for a moratorium.

The U.S. Attorney General Eric Holder has said the Justice Department is looking into the allegations, but he stopped short of opening a formal investigation. The Attorney General and bank regulators in all 50 states have announced a joint investigation into questionable foreclosure practices, including forged documents, apparently bogus signatures and questionable notarizations, but there are significant economic reasons why this is unlikely to develop into a complete halt.

The history of the issue is:

• Since 2004, Florida Legal Aid attorney April Charney has been arguing on behalf of borrowers that those initiating foreclosure proceedings on behalf of securitized pools of mortgage loans had no right to do so, because they couldn’t prove they actually owned the debt.When lenders wish to foreclose, the law typically requires them to produce original, signed documents including the mortgage and loan note. While the mortgage documentation is on file at the local courthouse, the note is often lost or misplaced, particularly if the mortgage has been sold and securitized.
• In 2007, a federal judge held that Deutsche Bank lacked standing to foreclose in 14 cases because it could not produce the documents proving that it had been assigned the rights in the mortgages when they were securitized.
• In June 2010, in a Maine foreclosure case, a GMAC loan officer admitted in a sworn deposition in Pennsylvania that he signed off on up to 10,000 foreclosure documents a month for five years. He said that he hadn’t reviewed the mortgage or foreclosure documents thoroughly. This lead to a number of mortgage companies to halt foreclosures in the 23 states that have a judicial foreclosure process.
• In the first week of October 2010 Bank of America announced that it was halting foreclosures in all fifty-states while it reviewed its foreclosure process for defects. Now several lawmakers on Capitol Hill are calling for other banks to initiate nationwide foreclosure freezes—a move which the Obama administration is currently opposing.
• Bank of America’s temporary halt on foreclosures has reduced the number of properties coming up at the Las Vegas trustee sales by 50%, but as Nevada is a non-judicial state it is not expected that other banks will follow suit, or that the Bank of America moratorium will continue for an extended period.

The majority of states in the country allow banks to foreclose on defaulted mortgages without going to court. They simply deliver the borrower a notice of the foreclosure sale. This non-judicial process, followed by Nevada is far less prone to the issues that have been raised around judicial foreclosure where banks are typically required to produce a sworn and notarized affidavit of a loan officer and submit the mortgage documents.

In non-judicial states, banks aren’t required to submit anything to the court until they are sued by a homeowner seeking to stop a foreclosure. That means that they are far less likely to submit fraudulent documents, since the process has already been slowed. Nonetheless, banks may still find themselves swamped by challenges. Thus the situation in Nevada is that foreclosures may slow down for one of three reasons:

1. Political/legislative demands
2. Self-imposed review of procedures
3. Increase in borrowers contesting foreclosures and asking to see the note to slow down the process

Each of these is unlikely for the following reasons:

1. At the current time the Obama administration is resistant to any foreclosure moratorium, and to have one would make no sense economically: it would slow the market correction, extend the period of uncertainty, reduce future bank lending as capital ratio concerns arise, penalize pension funds, insurance companies and investors who hold mortgage-backed securities, and further weigh on mortgage giants Fannie Mae and Freddie Mac thus putting taxpayers at greater risk of losses.
2. The banks need the income from foreclosures. A combination of delinquent loans and lack of income from foreclosures would have a negative impact on their balance sheets
3. The majority of borrowers are not sophisticated enough to initiate “show me the note” defences

Whilst banks will delay foreclosures to mitigate future fines, the reality is that far more homeowners are behind on their mortgage payments than are even in foreclosure. The clear problem in the housing market today is not Las Vegas foreclosure fraud, but negative equity. With around 80% of people upside down on their mortgages the painful unwinding of the speculative bubble is set to continue for some time.

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