The banks screwed up loan modifications and now they are screwing up the foreclosure process.
The banks were criticized when they resisted modifying past due home mortgages when the loan balance significantly exceeded the value of home. The banks were urged to modify those loans because it seemed that it was the best and only way for the banks to avoid taking huge losses on the loans.
The question was: Why not modify a loan at face value rather than foreclosing on the house and usually losing something like 50% of the amount of the loan? If only 25% of the modified loans work out the banks are better off. This is the process used to handle most troubled commercial real estate loans.
We know the banks flunked underwriting home loans. We knew that they were unable or unwilling to modify troubled home mortgages. We heard that they were not equipped to manage bank owned properties. Now we learn they can’t even manage the foreclosure process.
According to the courts in 23 states, in certain cases the banks made false statements, forged signatures, did not properly notarize signatures on foreclosure documents, and generally made a huge mess of the process.
The mess is big enough that more than 100,000 foreclosures have been halted. Some title companies are refusing to write title insurance on previously foreclosed homes. Some homes may be returned to the former previously foreclosed owners.
Three major mortgage lenders; Bank of America, GMAC Mortgage and JPMorgan Chase reported they are suspending foreclosures in the 23 states where a judge’s approval is required. In these states, they are also asking Fannie Mae to refrain from selling any of the foreclosed homes whose loans they sold to Fannie.
This whole mess will become a bigger problem if the courts find it impossible to determine who owns the mortgage on an individual home.
In some cases, the banks have outsourced the servicing and ministerial work of processing loans, including foreclosures, to the lowest bidder. No one knows if the banks have hired loan servicers and lawyers from China, Mexico, or India but nothing seems to be off limits if it is cheaper.
It is time for the banks to be responsible for their mortgage loan business and hire competent firms or employees to service the business. The banks are killing their reputation, the American public is quickly losing faith in these institutions, and the subsequent mess will clog the courts for years with mortgage litigation.
