Foreclosure Fiasco Could Lead to More Bank Bailouts

(NECN: Peter Howe, Randolph, Mass.) When you hear about banks suspending home foreclosures because of massive paperwork problems like "robo-signing" of legal documents, it's not just a bureaucratic fiasco -- in the worst-case scenario, it's a double-dip real-estate meltdown leading to another huge round of taxpayer bailouts of banks.

That was the blunt warning Tuesday from a powerful congressional watchdog delivered as the Senate Banking Committee grilled big banks over foreclosure processing problems.

In recent weeks, moves by Bank of America and others to suspend foreclosures while they clean up legal paperwork problems have markedly slowed the number of foreclosure auctions in New England and across America. "It's a pretty significant decrease in the volume of residential foreclosure sales in the state,'' said Daniel McLaughlin of Daniel McLaughlin & Co., a veteran auctioneer who's handled 12,000 realty auctions and Tuesday was running the bids for a condominium foreclosure in Randolph.

In the short term, it's good news for New Englanders and Americans struggling with financial problems who won't have their houses seized. But the glut of foreclosed homes and delinquent borrowers living in their homes is like a giant cloud of uncertainty hanging over a real-estate market struggling to hit bottom.

In a report issued Tuesday, the Congressional Oversight Panel warned that in a worst-case scenario, if banks are stuck with thousands of homes they can't quickly foreclose on, and shoddy paperwork around mortgages they sold to Wall Street to bundle into "collateralized mortgage obligations" and other securities leaves it unclear who really holds the note, banks could lose billions of dollars more as real estate values plummet, and the country winds up looking at another $700 billion or more banking bailout.

"In essence," the panel warned, "banks may be unable to prove that they own the mortgage loans they claim to own ... If on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions.''

Timothy Warren, CEO of The Warren Group in Boston, publishers of the authoritative New England real-estate-industry weekly Banker and Tradesman, said he doubts it will get that bad. "Certainly lenders have been sloppy in their practices, and that's led to a lot of problems, but I think the remedy to that's just more paperwork and more correcting of what they did wrong in the first place,'' Warren said.

Dan McLaughlin said he sees signs that foreclosure activity will step back up in January -- bad news for people who face losing their homes, but on balance, good news for recovery of the real estate market and economy. "This stuff," he says, referring to properties whose owners are badly delinquent on their mortgage payments, "has to get through the system before we have a recovery and unfortunately this robo signing has delayed that from happening. There's no question we have to work through foreclosures before the market in general can realize any type of bounce or appreciation.''

With videographers Dan Valente and John J. Hammann

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