Foreclosure crisis spreads

The foreclosure fiasco expanded this week, with major U.S. mortgage lenders imposing a moratorium on home seizures and 49 state attorneys general launching investigations into widespread paperwork flaws that could potentially invalidate millions of foreclosures. Bank of America, the nation’s largest bank, temporarily halted foreclosures nationwide while GMAC Mortgage, the fourth-largest mortgage lender, expanded its own moratorium from 23 to 50 states. Others imposed more limited freezes. The lenders are now reviewing paperwork to determine whether they hold clear title to properties they seek to repossess. President Obama resisted calls to freeze all foreclosures, arguing that such a move would paralyze an already anemic housing market.

Since the economic downturn began in 2007, lenders have sought to repossess 6.5 million U.S. residences, in many cases hiring loan-servicing firms to handle the voluminous paperwork. Former employees and homeowners allege that some loan servicers employed “robo-signers” who signed off on thousands of foreclosure petitions without verifying the information in them. The resulting confusion—and instances of fraud—could sow havoc among investors who bought securities based on mortgages.

What’s the big deal? said The Wall Street Journal in an editorial. So a foreclosure affidavit was “signed by the nameless, faceless employee in the back office,” when it really should have been signed by “the other nameless, faceless employee in the front.” That’s no scandal. As long as the banks did not commit a “substantive error,” foreclosures should proceed.

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It’s a very big deal, said Diana Olick in CNBC.com. Signing “documents that you never read”—especially when you are part of a trusted financial institution—undermines public confidence in the foreclosure process. An even larger problem is that in many cases, there’s no clear paper trail identifying a mortgage’s true owner. Without that document trail, how can investors in mortgage-backed securities “have faith that they really own what they think they own”? said Felix Salmon in Reuters.com. Get ready for a litigation free-for-all.