We’ve Had Foreclosure Halts, Frauds, Spikes–What Next?

“FREE HOMES” courtesy of our Flickr pool’s photocoyote

What’s it all mean? The latest concern over messy mortgage paperwork injects more uncertainty into people’s already uncertain lives. The Seattle Bubble reports “foreclosure notices are still rising rapidly year-over-year.” FBR Capital Markets analyst Paul Miller says foreclosure delay losses could range from six to ten billion dollars. Any delay in processing will simply drag out the larger real estate market reset.

But the burning question once again–as with the subprime loan meltdown–is what the size of the problem is. Are these errors that can be corrected, or have lenders fast-tracked themselves into writing unsecured loans?

When I first heard that banks were halting foreclosures, I thought, naively, that they were attempting some kind of homeowner assistance program. But it turned out that banks have been illegally foreclosing on homeowners, through what’s known as “robo-signing“or otherwise cutting corners.

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In Washington state, Attorney General Rob McKenna says that investigators responding to complaints have found “inaccurate documents, conflicts-of-interest, faulty chains of title and failures to provide the disclosures and conduct mediations required by law.” He’s asked 52 Washington foreclosure trustees to suspend action on any “questionable” foreclosures.

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This isn’t necessarily good news for the 41,000 Washington residents facing foreclosure, reports KIRO. No one’s forcing the issue of loan modification. Days after Bank of America announced that it was suspending foreclosure, reports have surfaced that BofA is continuing “the foreclosure process” but holding off on judgments and sales.

When TheStreet spoke with Institutional Risk Analytics managing director Chris Whalen, Whalen emphasized that only about one-quarter of the foreclosures have been worked through, and that he expects Bank of America to have to repurchase some $40 to $50 billion in loans, then dump the houses back on the market. This, he says, will increase the deflationary pressure from drastic shrinkage of property values, and thus property tax revenues. Further, he argues that without restructuring the banks–he calls the major players a “cartel”–we’ll be locked into deflation.