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Foreclosure Crisis May Jeopardize Loan Closings

The nation’s foreclosure crisis has resulted in loan closings being scuttled in some regions of the nation and fears are mounting that if the situation isn’t rectified soon it will damage the one area where lenders are posting stellar profits: new originations.

John Walsh, CEO of Total Mortgage Services, Milford, Conn., said Connecticut’s recently installed 60-day voluntary moratorium on foreclosure sales caused his firm to scuttle REO-related closings over the past two weeks with more cancellations in store for this week.

“The unintended consequence of this is that some people won’t get to buy houses,” he said. “This is not a good situation,” he told Managing REO.

He added that the moratorium will allow delinquent borrowers to “stay in their houses longer” but the TMS chief believes ultimately they will lose out once foreclosures and REO sales start up again.

If and when Connecticut attorney general Richard Blumenthal obtains a binding 60-day moratorium on all foreclosures in the state, the move could cause delays in closing REO transactions.

Cary Sternberg, president of Excellen REO, a national asset management company, said because of the action by the Connecticut AG “undoubtedly some sales will fall through altogether due to buyers’ unwillingness to wait.”

Since the vast majority of sales in the current market are distressed, either short sale or REO, Sternberg said, “they will be clouded by the specter that has been created with potential title issues.

“The real fly in the ointment will not be the lenders, but rather the title insurance companies,” he told National Mortgage News.

“The lenders will not close without title insurance and the title insurance companies will be reluctant to cover a title issue created by a faulty foreclosure. And if they exempt such an occurrence from coverage, then the lender or buyer’s attorney will not let the borrower close.”

Christopher Dannen, president of the Connecticut Mortgage Bankers Association, said the association would not want to see foreclosures being conducted without the proper due diligence.

“Now the industry has another black eye because we have people who are foreclosing that should not be foreclosing.”

Dannen is vice president, residential lending sales manager of People’s United Bank in Bridgeport, Conn.
The bank’s September pipeline is up 72% over September 2009 due mostly to the significant refinance boom the company is experiencing, he said.

“Originations have been very strong. We’ve had some of the best months we’ve had in a long time…we’re still doing short sales.”

The bank had an REO closing canceled recently where a large, national bank had foreclosed on a property and was selling it to a borrower at People’s United Bank.

“Two days before, the seller canceled the sale because of all these issues around the improper foreclosing of properties. So, this large bank that owns it felt they couldn’t turn around and sell it because they felt something was not right. The poor purchaser ended up losing the house.”

Personally, Dannen said he doesn’t think foreclosures will affect the overall origination business any time soon.

“It will eventually affect inventory on the market. There will be more inventory and I guess you could say it will affect us if there’s more inventory and prices drop further. There will be a delay of inventory coming on to the market,” he said.

JPMorgan chairman and CEO Jamie Dimon said that a temporary halt in foreclosures will not have much of an impact on the housing market but qualified that by saying “if the crisis ends in three to four weeks.
“If it went on for a long period of time, it will have a lot of consequences—most of which will be adverse on everybody,” the JPM chairman said.

His company is now reviewing 115,000 loans that are in foreclosure to ensure the notes were processed properly. The bank is halfway through its review.

“From what I have read and heard, a moratorium on foreclosures puts a moratorium on short sales and the whole market,” said Gene Tricozzi, director/past president of NYAMB, Northern Funding Corp.

“Twenty-five percent of the sales now are foreclosed properties. If you put a moratorium on it, that can only slow the market down even more.”

For now, it’s “too early” to know “how deep of a shakeup” the document scandal actually was in reality, added John Commons, director/past president NYAMB, Lynx Mortgage Bank.

“How many documents were signed just to have them signed? Will this impact the people you already threw out of these homes? Are there huge class-action suits to come? It’s too early to know.”

Several others megabanks are reviewing their foreclosure practices, including Ally Financial, Bank of America, PNC Financial and Wells Fargo, to name a few.

B of A has temporarily halted foreclosures in all 50 states. Others have halted them in the 23 states where foreclosures must be approved by a judge.

The disruptions are apparently not affecting all areas of the country. Bill Dallas, CEO of Skyline Financial, Calabasas, Calif., said he does not believe the crisis has hurt home sales in his state, but all the media attention “has added grist to the mill of confusion.”

“Foreclosure-gate,” as it is sometimes called, is now almost a month old. The crisis started a month ago when Ally Financial revealed that it had suspended certain foreclosures in 23 states and would review its policies and procedures after allegations arose that it was cutting corners on paper work and using “robo-signers.”

Late last week attorney generals in all 50 states agreed to coordinate efforts to investigate the nation’s foreclosure mess by setting up a special task force.

The attorney generals have set a goal of determining whether servicers violated state laws by cutting corners when filing their paperwork.

But the group fell short of calling for a national foreclosure moratorium, something the Obama White House also opposes.

Meanwhile, the foreclosure crisis is also hurting the secondary market for nonperforming loans.
Investors and brokers who participate in that market say the asking price for certain NPLs has fallen since foreclosure-gate started, but view it as a temporary development.

“It has caused a pregnant pause,” said one investment banker who represents sellers, “and it likely will increase due diligence and seller reps and warranties.”

The advisor, who requested his name not be published because he is working on several deals, said the chief cause for concern centers around “the uncertainty of title.”

— Jennifer Harmon contributed to this report