Mortgage lenders being held back from foreclosing because of missing paperwork.

Much hubbub this month in the Mortgage/Foreclosure world about banks having to halt foreclosures in many states because they do not have all of the legally required paperwork. This Foreclosure Freeze has hundreds of thousands of homeowners hopeful. In most states, to bring about foreclosure the lender must furnish the signed note. During the peak of the run and gun mortgage backed securities days the loans were getting transferred many times and some of the notes were lost. It has long been a foreclosure prevention tactic for distressed borrowers to make their lenders show the note. If the lender cannot, some judges around the country are postponing foreclosure until they can. This impressive loophole has caught on like wildfire across our default-laden country. While I am certainly all for homeowners avoiding foreclosure, I can see that this is not a good thing for the market at large.

Yes, foreclosures are a bad thing, but delaying them is even worse. I have two points to justify that statement. The first is the money tied up in the house that can't be recovered or re-lent to anyone else. Those servicing companies who have put a moratorium on foreclosing on the property often times still owe the ultimate investor the scheduled monthly interest, based on their contract. And if the loan is possibly subject to a buyback situation, the originator of the loan (whoever sold it to Chase, for example) is certainly going to argue that it is not "on the hook" for interest charges that Chase voluntarily stopped making and thus owed. No one will pay and the note will be in limbo awaiting some legal verdict from a judge who is also dealing with thousands of other distressed mortgage cases. The legal system will draw out these cases and whatever money is left from these mortgages will take longer to recirculate into the lending pool. In a word, there will be less liquidity. The current foreclosure issues increase uncertainty - and markets don't like uncertainty. Bank stocks are down, and they continue to hold on to trillions of "lendable" money because of nervousness about the future. Chase announced that it would now be reviewing 115,000 foreclosure cases in 41 states. PHH's president and CEO stated, "PHH Mortgage is actively cooperating with its regulators, is responding to such inquiries and has completed a comprehensive review of its foreclosure procedures. Based on this review, PHH Mortgage has not halted foreclosures in any states and has no plans to initiate a foreclosure moratorium." When push comes to shove, the courts will tie up the process between lenders and homeowners and only the lawyers will win.

The second problem with delaying foreclosures is that it will create unnatural demand for the properties on the market because there will be less supply. Prices will be driven up in the short term, as with all bubbles but then once the bottleneck eases and the huge numbers of bank-owned foreclosures hits the market, the opposite will be true. At that point you could see a rash of new foreclosures from recent buyers who are now underwater because of price softening due to the "normal" amount of foreclosures being on the market. In Los Angeles the competition is fierce to buy properties right now. This is causing overbidding and tremendous buyer frustration when buyers have to write 25 offers to get one accepted. Stopping foreclosures is an indirect manipulation of the real estate market and will ultimately slow a true recovery by causing peaks and valleys. A natural and balanced market can only exist if all of the foreclosures are purged from the system and all the bad debt is finally settled so the banks know how much money they have.