Foreclosure stoppage wreaks havoc on property market

The consequences of a foreclosure moratorium by some of the nation's largest lenders are rippling through the Bay area, shaking up an already fragile real estate market. Buyers of foreclosed homes either can't or won't finish the process. Distressed homeowners are in limbo, unsure how the temporary freeze will affect them. And a clogged court system is dealing with thousands of canceled hearings for cases on hold.

"This could have a dramatic, widespread affect on our market," said Chris Lafakis, an economist who covers Tampa for Moody's Economy.com.

All this comes after four lenders halted pending foreclosures after questions arose about potential sloppy or fraudulent paperwork. GMAC, a unit of Ally Financial, was the first to say it had learned that a processor was signing without reading. JPMorgan Chase did so a week later, then Bank of America halted proceedings. At first, each of the three lenders said it was stopping foreclosures in only the 23 states that require permission from a judge to foreclose. But last Friday, Bank of America changed course, saying it had halted foreclosures in all 50 states.

The action is putting pressure on the other two lenders to do the same, although they haven't yet. Even lenders who haven't found anything wrong with their foreclosure proceedings are under pressure to look deeper.

Some in Congress have requested a nationwide foreclosure moratorium, and the White House on Monday urged lenders to speed up their reviews. Allegations of fraud have led to a Florida attorney general's investigation into four foreclosure firms. This leaves homebuyers, such as Joshua Cooper, stuck in the middle. Cooper was set to buy a four-bedroom bank-owned home in Wesley Chapel later this month. He paid for inspections and has already purchased appliances for the home. His four children, eager to get their own bedrooms, were excited about the upcoming move.

But then last week Cooper received a phone call informing him that the lender was taking the home off the market.

"It's so disheartening," Cooper said. "I won't get any of that money back, and now I have to start all over again to find another house. My lease on our apartment is up in January, and I'm running out of time."

Buyers aren't the only ones in limbo.

Title insurance companies are reluctant to offer "clear title" guarantees on foreclosed homes. Without that, home purchases are dead.

This comes at a time when home sales are in the typical summer slump, and home prices are still falling. The real estate community isn't sure how to respond to the moratorium, said Peter Murphy, a consultant with Tampa-based Home Encounter, a real estate consulting firm and brokerage that tracks local real estate trends.

"The market doesn't know what to do," he said.

About 15.5 percent of all foreclosed homes for sale in Tampa, Hillsborough, Pinellas and Pasco counties have been taken off the market since lenders began their moratoriums, Murphy said.

Murphy is concerned about what the uncertainty will do to home sales and sales prices. He fears potential buyers will sit on the sidelines and prices will end up falling more.

"It's going to look like prices are going up at first," Murphy said. "Folks will think it's a recovery, but when these homes come back on the market all at the same time, they be worth less and prices will fall again."

Murphy thinks foreclosures need to move forward so the market can improve and home values can recover.

"These are technical mistakes," he said. "No one is arguing that these people are delinquent. These people need to be foreclosed on. We need to get them through the system."

Circuit court judges, directed by the Florida Supreme Court to clear 62 percent of their foreclosure backlog, are facing uncertainty now, too. Hundreds of final foreclosure hearings have been canceled in circuit courts in Pinellas and Hillsborough Counties. "I'm very concerned," said Pinellas/Pasco Chief Judge J. Thomas McGrady. "If we can't go forward on these hearings, we won't meet our goal. That said, we want to do it right."

There is also a concern, McGrady said, that cases already through the system could wind up back in court. If cases were approved based on faulty paperwork, former homeowners could challenge the decisions, he said. Meanwhile, Cooper, whose home deal was killed last week, said he's unsure what do. He's looked at foreclosed homes offered by other lenders, but he's worried they may institute foreclosure moratoriums, too.

Even though foreclosures are usually a better deal, he says, they just may not be worth it now.

"Maybe it would be safer going with a short sale, even though that means you have to wait longer," Cooper said. "I would certainly rather buy than throw money away renting, but this is troublesome."