What You Need to Know About Flawed Foreclosures

Photos: Life on the Economic Edge Spencer Platt

With public anger continuing to heat up over the dubious practices mortgage lenders have been using to push through foreclosures, all 50 state attorneys general have launched a joint investigation into the matter. Sloppy paperwork, inaccurate documents, and problems with notarizations on mortgage assignments have led to uncertainty about whether lenders really do have the notes to homes that are foreclosed on. While many Democratic leaders have called for a national moratorium on foreclosures to allow time to straighten out the process to make it fair to homeowners, the Obama administration has resisted a federal move to halt the procedures nationwide, fearing that a freeze might backfire and cause housing prices to plummet even more. Dean Baker, housing expert and codirector at the Center for Economic and Policy Research, answers questions about why these foreclosure problems are only now being addressed, how a moratorium can help, and what a homeowner should do for protection.

Why are the foreclosure paper-trail irregularities coming to light now?

It's politics. We do have an election. Congressman Alan Grayson of Florida pushed the issue of improper foreclosures, and it got picked up in the press. Other members of Congress realized this was a way to be on the side of homeowners against banks, and when you are in an election year that is a good place to be. I'm not faulting them for it. The first I heard of improper foreclosures being a big issue was about two years ago in Ohio. The timing of an election raised this to national prominence.

Housing expert Dean Baker. Keith Ivey / flickr.com

Do you think a national moratorium on foreclosures would help the situation?

Yes. The biggest help is that it would establish more confidence in the market and people would be sure that homes were being properly transferred. If you buy a foreclosed home, you would have confidence there would be no title fights down the road and someone else couldn't make a claim to the house you are living in. No one wants to be in that situation.

How would a national moratorium work?

Foreclosures would stop for a limited period of time. It wouldn't have to be long, but just long enough to go over the procedures. Parties would be able to reconstruct the transaction to make sure there is a clear title to the foreclosed home. In the vast majority of cases, homes that were foreclosed upon were done so properly. There will be cases where it's such a mess that homes can't be on the market for years down the road, but hopefully that won't be many cases.

How long would a moratorium need to last?

I think three or four months would be enough. Not every house would be cleared in that time but a lot would be, and there would be confidence that if a house went through the foreclosure process it has been properly vetted and there is a clear title. The moratorium time-frame could be imposed on a state-by-state basis. So states like Nevada, with a lot of foreclosures, might take longer. We clearly have a lot of problems, but I'm hoping it isn't so bad that we are starting from scratch. We just need a system in place where procedures are followed.

The Obama administration has said it is against instituting a national moratorium. Why?

Treasury Secretary Timothy Geithner said there would be dire consequences with imposing a national moratorium on foreclosures. But we have this huge shadow inventory of foreclosed homes that banks are sitting on anyway. Say you have the foreclosure process on hold for three or four months. I'm not sure why that would matter. Most banks have already been holding houses back because the market is glutted. A moratorium wouldn't prevent banks from selling homes out of their inventory—just not the ones that are being foreclosed upon now. It is really hard for me to see how a moratorium would cause major disruptions in the banking system. It's strange that you have House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid calling for a moratorium when President Obama doesn't.

What if we don't have a national moratorium?

Not having one leaves this cloud. Bank of America, GMAC's Ally Bank, and other banks have issued their own moratoriums. Banks are not charitable institutions but are doing this because they cannot guarantee they were following the proper procedures. Without a national moratorium, I would be concerned that some banks are going ahead with foreclosures and are not following the books, and there will be problems. Then banks will probably have to sell foreclosed homes for less. That could create real problems for the market and drive down prices.

What should a homeowner do today?

You should do what you can to find out directly if there is a clear title to your home. Petition to see the mortgage note. Make sure you have a good title insurance policy. Most of us have no idea what the title insurance says, but you want to know what it says. If there was fraud in the process, you want to make sure your title insurance covers that. They all have certain outs they don't cover. Which means you have to read through the policy and get a good real-estate lawyer to help you understand it. It's worth it.