Turn On The Lights, Watch The Roaches Scatter, Part 7

Gee, this mortgage paperwork thing is starting to get a mite bit out of control here, isn't it?

Attorneys general in at least six states, including Massachusetts, Iowa, Florida and Illinois, are investigating improper foreclosure practices. Last week, Jennifer Brunner, the secretary of state of Ohio, referred examples of what her office considers possible notary abuse by Chase Home Mortgage to federal prosecutors for investigation.

The implications are not yet clear for borrowers who have been evicted from their homes as a result of improper filings. But legal experts say that courts may impose sanctions on lenders or their representatives or may force banks to pay borrowers’ legal costs in these cases.

Judges may dismiss the foreclosures altogether, barring lenders from refiling and awarding the home to the borrower. That would create a loss for the lender or investor holding the note underlying the property. Almost certainly, lawyers say, lawsuits on behalf of borrowers will multiply. 

Ding ding ding!  Here's your nightmare scenario for the banks.  Thousands, if not hundreds of thousands of foreclosures are dismissed and the borrower is awarded the deed to the home.  Banks lose billions in real estate assets on the books.  That huge flushing sound you hear is the banking industry testing those new too big to fail regs.

In Florida, problems with foreclosure cases are especially acute. A recent sample of foreclosure cases in the 12th Judicial Circuit of Florida showed that 20 percent of those set for summary judgment involved deficient documents, according to chief judge Lee E. Haworth.

“We have sent repeated notices to law firms saying, ‘You are not following the rules, and if you don’t clean up your act, we are going to impose sanctions on you,’ ” Mr. Haworth said in an interview. “They say, ‘We’ll fix it, we’ll fix it, we’ll fix it.’ But they don’t.”

As a result, Mr. Haworth said, on Sept. 17, Harry Rapkin, a judge overseeing foreclosures in the district, dismissed 61 foreclosure cases. The plaintiffs can refile but they need to pay new filing fees, Mr. Haworth said. 

This is just one judge in one state.  How many more lawsuits and foreclosure changes will the industry go through?  What bank in their right mind is going to risk foreclosure proceedings now?  Who is going to risk buying a foreclosed property if you can't be sure the bank really is able to foreclose and sell to you?  That entire sector of the housing market vanishes overnight.

The almost-dead housing market is now deep into corpse territory from this.  That's going to lead to a massive drop in housing prices...no buyers.  Can't be sure if the seller actually has the deed anymore, so you can't risk buying.  Game over.

Now the press is starting to get wind of how lethal this is going to be to the economy, and a month before the midterm elections to boot.

Strap in, kids.