As more of the country’s biggest financial institutions and mortgage lenders are pulled into the ongoing controversy involving questionable foreclosure processes, many predict the situation could have a chilling effect on the country’s already battered economy and real estate market.
Some, though, say it could have a bright side.
Last week, Charlotte-based Bank of America announced it was suspending foreclosure sales in all 50 states after the company received a letter from North Carolina Attorney General Roy Cooper asking it to do so. Cooper said he was launching an investigation into 14 mortgage lenders, including Bank of America. The investigation was prompted by national reports that some mortgage companies have been using foreclosure processes that might be illegal, the attorney general’s office said.
In letters sent a week ago today, Cooper called on the lenders to suspend foreclosures in North Carolina until they could show that their foreclosure affidavits procedures comply with the law. Bank of America spokesman Dan Frahm said in an e-mailed statement that foreclosure sales will cease “until our assessment has been satisfactorily completed.”
How long the moratorium on foreclosure sales will last is unknown. But Jennifer Frontera, a Realtor and broker at Wanda Smith & Associates in Charlotte, said that if it’s more than just a few weeks, it could have a “long-term negative impact.”
Frontera said a moratorium lasting several months would cause thousands of foreclosed homes to bottleneck in the pipeline. When the moratorium is finally lifted, those homes will flood the market. “That oversupply will have a downward effect,” she said. “Prices will drop, and it will cause a lot more properties to go into the hands of attorneys, the system and the courts. And this causes a burden for everybody.”
Moreover, if the situation persists, Frontera said it’s likely to create even greater confusion among homebuyers. “Consumers will lose confidence regarding a purchase and may wait to see what happens, which will have a negative impact on the market.”
Richard Buttimer, finance professor at the University of North Carolina at Charlotte, said the impact the foreclosure pause will have on the economy will depend on what the ongoing investigations reveal. “If we find there’s a systematic inability of firms to be able to follow foreclosure procedures, it will have a big impact,” he said. “The market wouldn’t reset home prices, and it would delay the recovery of the housing market fairly significantly.”
While a glut of foreclosed homes on the market would negatively impact home values, Eric Locher, a broker with Cottingham Chalk Hayes in Charlotte and treasurer for the Charlotte Regional Realtor Association, said such a scenario could have some benefits. “It might encourage banks to negotiate on short sales rather than wait to foreclose and get people to move out and all the hassle that comes with that,” he said.
Dan Cottingham, a partner at Cottingham Chalk Hayes, said the moratorium might not be as bad as some predict, as long as the foreclosed homes on backlog are put back on the market in the right way.
“Some say it will be devastating flooding the real estate market with all these foreclosed homes,” he said. “But we’ve already done that. I still think the appetite for foreclosed homes is going to be very high. And by the time banks put the foreclosed property back on the market — and it might be three weeks, it might be three months — they’re going to be better organized, give quicker answers and be much more careful with the paperwork.”
Cottingham said that while prices of foreclosed homes will likely drop once the moratorium ends, in the meantime prices on distressed properties are likely to increase. A distressed property usually fetches a price below market value, such as in a short sale, which is often done to avoid foreclosure. Currently, about 30 percent of home sales in the Charlotte area involve distressed homes, he said. When it reaches 45 percent, prices drop, he said. When it goes to 20 percent, prices rise.
“It’s fixing to drop anywhere from 5 to 10 percent, so prices are going to climb for however long this takes,” he said. “Then when all the inventory comes back in the market, if it is done in a controlled, systematic manner, it’ll help stabilize and improve the market.”
Sam Boykin can be reached at firstname.lastname@example.org.