Will Foreclosure Freezes Fix the Housing Market?

Last Updated Apr 26, 2011 9:09 PM EDT

This post was updated on October 4.
On Friday, Bank of America announced that it would suspend foreclosures in 23 states while it "amended" filed paperwork. That makes B of A the third major bank in two weeks to put its foreclosure process in limbo. Two days earlier J.P. Morgan Chase announced it would freeze foreclosures on more than 50,000 homes currently in receipt of a foreclosure filing. Last week, Ally Financial Inc. (the former GMAC Mortgage) also froze foreclosures.

All three banks have admitted to problems in the processing of foreclosures, including the use of so-called "robo-signatures," employees who job it is solely to sign foreclosure docs, without reviewing the paperwork.

Experts say that most of the major banks have plenty of problems with foreclosures. That comes as no surprise to the tens of thousands of CBS MoneyWatch readers who have closely followed and commented on my many "Loan Modification Hell" blog posts. If you read the comments, it's clear that these three banks are not the only ones with a problem.

Today, Ohio's Secretary of State Jennifer Brunner asked federal prosecutors to investigate foreclosure irregularities in her state. Ohio has been pushing lenders to do better. On September 17, Ohio Attorney General Richard Cordray announced that the state court had affirmed its case and legal strategy of holding loan servicers accountable in the foreclosure crisis. (Check the comments on the "Loan Modification Hell Lawsuits" post.)

So, will Chase's and Ally's foreclosure freeze ultimately fix the housing market? That's one theory put forth in today's New York Times. But, I'm not so sure. What will happen in the short run is that all of the banks will put a moratorium on the foreclosures. Law firms that have become foreclosures processing machines in places like Florida, will have a lot of extra time on their hands.

I suppose, in the best of all worlds, slowing down or freezing foreclosures might actually force lenders to take a harder look at ways they might keep folks in their homes, like doing more loan modifications. That would reduce the so-called "shadow inventory" and keep housing values from crashing again.

Again, that's the best possible scenario. I think it's too soon to tell. And, there's a lot that's going wrong with the economy right now (jobs, anyone?) which could complicate the view in your rose-colored glasses.

Right now, those who have Chase and GMAC on the top of their loans are getting a reprieve. I'll follow this over the weekend on the blog. Please leave your comments, thoughts and suggestions.

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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.
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    Ilyce R. Glink is an award-winning, nationally-syndicated columnist, best-selling book author and founder of Best Money Moves, an employee benefit program that helps reduce financial stress. She also owns ThinkGlink.com, where readers can find real estate and personal finance resources.