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Increased Scrutiny Slows Foreclosures

In what has been characterized as a boost to the economy by some real estate experts, foreclosures have slowed considerably, leading to a possible rise in home prices. The diminishing supply of foreclosed homes has been linked to federal and state investigations into lender practices.

A Massachusetts court recently voided two foreclosures after finding that U.S. Bancorp and Wells Fargo had failed to prove they owned the mortgages on which they foreclosed. Other state courts are issuing similar rulings in the wake of the infamous robo-signing scandal – whereby individuals were hired simply to sign thousands of documents without proper certification or notarization – invalidating scores of foreclosures by rendering loan and other documents defective.

Lenders’ fears of increased scrutiny by federal regulators and possible fines or sanctions led to a 21 percent decrease in foreclosure filings from October to November 2010. Lenders still claim, however, that their foreclosure procedures are sound. This is despite results from investigations that have unearthed substantial problems such as lenders’ failure to explore all required options before foreclosing on federally insured mortgages. Another investigation conducted by the Justice Department through the Executive Office for U.S. Trustees is also looking into foreclosure documentation errors and procedures by law firms and their lender clients.

A drop in foreclosures would help stabilize the housing market by increasing the price that buyers would pay for homes coming on the market and by boosting confidence in the housing market. The investigations and proposed changes in home loan modification programs such as the federal Home Affordable Modification Program (HAMP) have spurred some lenders into avoiding foreclosure proceedings and working with borrowers to permanently modify their loans to more affordable levels. Reducing the supply of inventory, especially foreclosed and REO homes, leads to higher prices.

Arizona, a leader in foreclosure filings nationwide, has seen its home prices fall 54.5 percent since 2006. A respite from declining prices would be welcome, although some economists predict that the slowdown is only temporary. About four million homes across the country are in serious jeopardy of foreclosure.

Other experts are skeptical that reform measures or investigations would result in saving the millions of homes already in serious delinquency. Foreclosure bidders in Arizona are also unconvinced and expect foreclosure to resume its pace once the lender investigations are concluded, settlements are reached, reforms are in place, and defects in foreclosure procedures are remedied.