Using the Web and social media to sell real estate

The Federal Reserve is joining the bandwagon of the agencies and institutions that will be investigating the behavior of banks while originating loans during the heydays of the real estate bubble. Officers have apparently been signing off loan paperwork without even reading them (see the full story at Fed throws its weight into foreclosure probe). Banks are countering the accusation by saying there is little evidence that any foreclosures were improper, but investigators are replying that some of the documentation later produced could be forged.

The Federal Reserve gets into the foreclosure fraud investigation.

So far banks have tried to play the issue down, but the new stand of the Federal Reserve, that could impose penalties on banks, is letting them take the issue more seriously now. “The banking agencies are looking into whether companies had controls in place when foreclosure documents were signed and whether employees involved in the foreclosure process were adequately trained.” On the market side, buyers are already inquiring aggressively as to the availability of proper paperwork before they buy a house that has been foreclosed on. This puts a totally new slant on the market and reduces markedly the desirability of buying a repossessed property (REO – Real Estate Owned).

So we will see buyers shifting more into purchasing from an individual seller who has been holding his house for some time and there could also be a recoil on short sales since they are anyway bank-related and they depend on the availability of documentation that is possibly not there any more. For one thing, banks will have an hard time in general and that will translate in more complexity in the selling and lending process. Several sales could be canceled at the very last minute.

Apparently there will be no easy and fast solution to the issue and the experts say it will have to be solved eventually by the states, while the federal government is also going to probably have an hard time because of it:
Foreclosuregate: BofA Thanks WH For Caving. The original international investors who bought the loans that have defaulted and that lost a fortune on them could come back now and ask the US banks to buy these loans back since they might have been originated without following the proper procedures.

Iceland was one of the main purchasers of the securities built upon these potentially faulty mortgages and is not faring well at all an a country after the massive burst of the real estate bubble in the US (see
New Mortgage Crisis in Iceland: Could U.S. Be Far Behind?), this can very well lead to a bold move to recover their money now that the so called “foreclosuregate” is coming to light.

Things are sure changing in the world of real estate, you’d better watch closely the outcome as it unfolds.

Roberto Mazzoni

P.S. Add your comments about any real life experience you have on this.

Banks are back: Bank of America and GMAC Mortgage just stated they will resume to work on foreclosures after having stopped the process few weeks ago in order to check on mortgages and other documents. Allegedly Bank of America has verified over 100,000 documents and, while we don’t know what they found, they have decided to resume the frozen foreclosure process and continue with the litigation as needed.

Burning credibility in real estate tile equals burning money.

What is apparently going to happen is that there will be some kind of settlement with previous owners if the mortgage papers are missing, for example previous owners could be condoned the so called “deficiency judgement” that is the bank will formally renounce to try to collect from them the remaining balance of the loan and the owner will not get a 1099 (a tax income statement) so that he will not have to pay taxes on the money she has “gained” by not paying the loan in full (see the original article from the Orlando Sentinel).

Another outcome could be that present owners could have an easier time in renegotiating the existing loan terms. But what happens to the buyer on the other side? Let’s say that a bank forecloses without having the proper paperwork and there is no evidence that shows that they do have an interest in the property, they might still be able to negotiate the existing owner out of the house, but there can be a serious cloud on title for the new owner coming in.

A great percentage of real estate being offered on the market today, particularly in Florida, is connected to a foreclosure, therefore sound foreclosure paperwork is a must in order to maintain and re-establish credibility for local and international real estate investors. It cannot be simply reduced to a financial settlement between private parties (the bank and the current owner for example), but the federal government has to step in and define ways that will ensure future owners protection of their own rights (see Foreclosure Fraud For Dummies, 5: The Necessity of Government Action and Ways Out of The Crisis).

If not properly addressed, this can be a far more serious crisis than the real estate bubble of 2007. By the time the United States real estate market loses credibility in its ability to defend title and to warranty private ownership, international buyers are going to flee to other more secure destinations and the foreclosure glut is going to take much longer to clean up.

Here is a summary of the consequences that can ensue out of the mismanagement of loan documentation:

1) Government investigations: “the various parties accused of misleading the court could be investigated for fraud if there is evidence of systematic action designed to improperly speed up the foreclosure process at the expense of the defaulting homeowners.”

2) Civil suits: “there are likely to be two potential classes of plaintiffs pursuing civil suits against the banks and others for their roles: first, homeowners who earlier lost their properties to foreclosure in which questionable documents were filed, and second, title insurance companies that may be on the hook for claims by purchasers of foreclosed properties who now have a cloud on the title to their house. Each may claim that the faulty documentation in the foreclosure cases caused them harm.”

3) Mass litigation: “the potential liability for a violation includes triple damages and – music to any lawyer’s ears.

To get the full scope of the thunderstorm in the making, you can read The Gathering Storm Over Foreclosures. The effects aren’t going to be immediate. It usually takes 6 months before buyers and investors realize the tide is turning, but once is turned and the long standing trustworthiness of real estate title in the US gets tarnished, a major shift in the market is likely to occur.

Roberto Mazzoni

P.S. if you know or are aware of real solutions being developed in this area please share.

Several banks and loan originators have been very sloppy in taking care of their paperwork during the high time of the real estate bubble, let’s say between 2005 and 2007 and today properties are being foreclosed on without the proper documents or even with forged documents. The situation is fairly wide spread and there is no safe way of telling if the title is clear when you buy a property directly from a bank. Many major banks have frozen  their foreclosures throughout the nation in order to address this very problem, but there is not short term solution in sight because several different types of laws have been violated in the process and prosecution is expected to happen also on class actions.

Foreclosure fraud can undermine international real estate investing.

How did it work?

To gain an understanding of the complex system that brought is where we are today, you can read the following very well written articles that go in the detail on how it all worked out and the key role that the State of Florida in playing in the scene:
Foreclosure Fraud For Dummies, 1: The Chains and the Stakes that explains how the court system was fooled into accepting forged or non existing documents for their foreclosures.
Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important? that explains you why even having the original and proper mortgage document (that often is not there) will not do and how this could heavily affect investors.
How to Find the Owner of Your Mortgage which gives you practical tips on how to trace the paperwork back to its source.
Unfortunately there is a lot to know and understand about this subject and it is unlikely that title companies will catch up with it in the short term, so some of them already are refusing to issue title insurances on properties that are in some way connected to foreclosures.
What are the liabilities for you?

If you are an investor, you run the serious risk of acquiring properties and then have your title of ownership challenged down the road with little or no support from your title policy. If you are an international buyer or and international real estate investor you find yourself potentially mired down into a legal mess that would be very difficult to solve from a distance even if you had the rights to defend yourself and the cost of the defence would easily surpass any profit or cash flow you have gathered on the property.

If you are a Realtor you could be involved into a transaction that either can’t go through, because title companies won’t provide an insurance on the property, or that can be challenged down the road and you might have been liable for not disclosing material facts on the property of which you should have been informed (the foreclosure fraud story is all over the media now).

But what is more important here, I believe, is that this particular crisis, that is going to last for a while, until the have found a way to clean it up in a legal and orderly way, will reduce one of the attraction factors of the US real estate market for international investors and buyer: the protection of private property and the transparency of the transaction. People from all over the world have been purchasing  properties at very low prices counting on the protection of their investment, many of these properties where bought, remodeled and rented on a lease option basis. This whole flow or capital into the US was based on the reasonable certainty that the investment was going to be protected by a very solid and tested judiciary system that has always been protecting private property. With a significant percentage of foreclosures running the risk of being challenged what do you think will happen to this flow of money?

It is likely to flow elsewhere, in other countries or maybe towards properties that have been owned free an clear for some time by private sellers, or there will be a whole new market for people and companies providing services in checking out the legal status of a property.

Roberto Mazzoni

The Florida Association of Realtors recently published a study on the type of foreclosures existing in the State and the characteristics of the people involved in them. The study covers a three year period going from March 2006 to February 2009. It is somewhat dated information, but it helps to shed some light on trends that better explain also the condition of the Florida real estate market today (here is the site that is being used to collect the information http://www.floridafaceofforeclosure.com/).

The research revolves around three types of indicators, all used to monitor the growth of foreclosures:

1) Lis Pendens which is a document recorded in the court house that signals the beginning of the foreclosure process after the owner stopped making payments on his loan (mortgage). When the lis pendes is recorded there are still chances that the situation is rectified and that the owner pays what is due to avoid foreclosure (it seldom happens, though). In the foreclosure phase that follows a lis pendens, which can be fairly long, we can also have an attempt by the owner to renegotiate the loan or we can have a short sale, that is a sale to a new owner for less money than what was owed on the loan by the current owner.

Lis Pendens are growing much more than actual foreclosed properties in Florida according to a research published by the Florida Association of Realtors.

2) Notice of Sale is the second indicator that communicates the end of the foreclosure process and the fact that the property is ready to be sold at a foreclosure auction on a certain date.

3) REO (Real Estate Owned) are the property that have gone back to the bank after the auction and that the bank is placing back on the market for sale.

The three indications have been shifting very differently: Lis Pendens have been going up steadily until July 2008 and then they started to decline, in Florida. Their quantity has been more than three times bigger than the other two indicators, which shows that probably two properties out of three don’t terminate the foreclosure process, but stop much before the notice of sale. It is fairly well known that banks are withholding from the market properties that are ready to complete the foreclosure process so not to glut the market with bank owned houses (here you can read the full report).

So the trend of Notices of Sale has been pretty flat and also REO’s are running kind of scarce. Just to give you some rough figures: in January 2009, Lis Pendens arrived at approx 190,000, while REO and notices of sale where hovering respectively at about 6,000 and 8,000.

This trend, combined with the recent action taken by most banks that are halting foreclosure proceeds, is giving us an abundance of Lis Pendens that are not resulting into a formal foreclosure and an overall stalling or decreasing number of property being offered at auction or as bank owned homes. Prices are kind of stabilizing waiting for the next wave of REO’s and this can be a good time to invest provided you get do your research done as to the soundness of the title of the house you are about to purchase.

Roberto Mazzoni

More and more major lenders have suspended the foreclosure process in several parts of the US so to have the time to review their paperwork. There have been an increasing number of cases where the original paperwork by the bank proved to be inadequate and was challenged in court by the home owner during the foreclosure process. Whenever the paperwork was found to be faulty by the judge, the foreclosure case was dismissed and the bank had to find a way to negotiate its way out by giving concessions to the owner.

Mountains of foreclosures being stopped for paper work review.

Aside from slowing down the whole foreclosure procedure, this actually led to the impossibility of actually foreclosing on a number of properties and additional loss for the bank which was unable to collect on its loan and was also unable to acquire the property that was originally provided as a security for the loan. The faulty paperwork “scandal” was the result of the automated underwriting procedures that were used during the heydays of the residential real estate bubble and also from the slicing and dicing of mortgages multiple times with external investors, messing up the paperwork trail.

Now several major banks have begun a major revision of their paperwork so to make sure they are able to foreclose “before” they actually start their foreclosure procedure. This will give more time to troubled home owners that will be able to stay in their house longer, waiting for this review process to complete. It will also reduce significantly the number of bank owned properties available on the market, causing probably a temporary recovery on prices, although it will have the long term effect of prolonging the time needed to clear the foreclosure glut.

There are three possible outcomes that are being predicted by experts:

1. The review will clear up technical flaws in the paper trail and will allow banks to proceed faster with the suspended foreclosures once the paperwork is straight.

2. The outcome will be negative and banks will be tied up for a while cleaning their paperwork, delaying the full recovery of the market.

3.  Title companies will refuse to insure foreclosed properties because of potential clouds on title and this will completely freeze the glut for a while.

For one thing, the lending process will continue to be slow and complex until these issues are completely solved and both the banks and the home buyers will have restored full confidence in the solidity of foreclosed homes’ titles and in the stability of the market.

Roberto Mazzoni