Fraudulent foreclosure practices, a.k.a. “robo-signing,” uncovered now nearly two years ago, opened a new wound in the foreclosure crisis that was in the process of healing.
At big bank mortgage servicers and in courts in many states, the foreclosure process ground to a halt, and the pipeline of delinquent loans swelled to historic levels. Lawsuits abounded and lengthy settlement negotiations on all levels of government began.
Nearly two years later, the foreclosure mechanism is just starting to move again.
Foreclosure starts, the first phase of the process, rose nearly 12 percent in May month-to-month, according to a new report from Lender Processing Services. Foreclosures sales, when the property goes back to the bank or to a bidder at the courthouse steps, rose 10 percent.
The ramp-up, while still way off the volumes of 2010 (pre-robo-signing), is largely due to the $25 billion settlement reached early this year between 49 state attorneys general and the nation’s largest mortgage servicers.
It all comes down to consumer protections versus a speedy recovery to housing. Whether it’s lenders trying to save borrowers from foreclosure through modifications and principal reduction, or laws trying to protect borrowers from faulty foreclosure processing, or inventive ways to change what is owed on a mortgage, the plain fact is that many borrowers simply cannot afford the homes they are in.
The majority of the 5.5 million properties whose mortgages are either delinquent or already in the foreclosure process will end up on the auction block.
There is a strong argument that the housing market needs to heal itself before it can grow again, no matter how painful that healing process may be. Clearly American consumers were not well-protected during the historic housing boom, nor during the ensuing bust. Laws needed to be changed, and banks needed to be held accountable and punished for fraudulent practices.
The question now is: When do we step back and let the wounds of this crisis heal?