The Congressional Oversight Panel that watches over the biggest bailout program today issued a grim “worst-case scenario” for the housing market — if the foreclosure paperwork mess, or so-called robo-signing, is found to be pervasive.
The ownership of foreclosed homes, and even securitized pooled mortgages, could be thrown into doubt and into a deeper legal morass, weakening an already sluggish housing market, according to the panel’s November report released today.
The best-case scenario has the mortgage documentation irregularities, under investigation by all 50 state attorneys general, proving to be an “overblown” issue, and the result of a handful of employees who “failed to follow procedures.”
But the panel has a considerably bleak worst-case outlook.
“The worst-case scenario is considerably grimmer,” the panel concluded. “In this view, which has been articulated by academics and homeowner advocates, the ‘robo-signing’ of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure,” the panel said. “In essence, banks may be unable to prove that they own the mortgage loans they claim to own.”
If documentation problems prove to be pervasive, the panel said, and “more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe.”
The following could occur in this worst-case scenario, according the panel:
- Borrowers may be unable to determine whether they are sending their monthly payments to the right people;
- Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments;
- Multiple banks may attempt to foreclose upon the same property;
- Borrowers who have already suffered foreclosure may seek to regain title to their homes and force any new owners to move out;
- Would-be buyers and sellers could find themselves in limbo, unable to know with any certainty whether they can safely buy or sell a home.
“If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions,” the oversight panel said.
The oversight panel is a watchdog over TARP, the Troubled Asset Relief Program, the government’s primary bailout vehicle. A portion of TARP is allocated to the Obama Administration’s much-criticized foreclosure prevention program, which is designed to reduce mortgage payments for desperate borrowers facing possible eviction. More borrowers, nearly 700,000 as of the latest count, have cancelled out of the modification trials than those who have qualified for long-term assistance.
The panel said that much of the risk banks face in not being able to prove ownership of mortgages stems from the rapid growth of mortgage securitization.
“Nowadays, a single mortgage loan may be sold dozens of times between various banks
across the country,” the panel said. “In the view of some market participants, the sheer speed of the modern mortgage market has rendered obsolete the traditional ink-and-paper recordation process, so the financial industry developed an electronic transfer process that bypasses county property offices.
”This electronic process has, however, faced legal challenges that could, in an extreme scenario, call into question the validity of 33 million mortgage loans.”
Read the Congressional Oversight Panel’s report.