The Obama administration took control of the news cycle yesterday with the announcement that a settlement had been reached in the lawsuits between lenders and the Attorney's General of 50 states over faulty and fraudulent loans. What they didn't tell you though was that home seizures now have a clear path.
The $25 billion settlement with banks over foreclosure abuses may result in a wave of home seizures, inflicting short-term pain on delinquent U.S. borrowers while making a long-term housing recovery more likely.
Lenders slowed the pace of foreclosures as they negotiated with attorneys general in all 50 states for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. With yesterday’s agreement, banks are likely to resume property seizures.
A surge of home seizures may drive down values, at least for a while, in a fragile market.
Home prices have dropped 33 percent from their July 2006 peak, according to the S&P/Case-Shiller index of values in 20 U.S. metropolitan areas. About 11 million U.S. homeowners have negative equity, or owe more on their mortgages than their homes are worth, according to CoreLogic Inc. (CLGX), a real estate data provider.
The total value of the agreement with lenders including Citigroup Inc. (C), Bank of America Corp. and Wells Fargo & Co. may grow to $40 billion if the next nine largest mortgage servicers sign on to the agreement,
Separately, Fannie Mae, the mortgage company under U.S. conservatorship, invited investors to apply for a new program to buy foreclosed homes in bulk to be managed as rental properties, under another program announced by the Federal Housing Finance Agency. [Bloomberg]
There remains a danger that “a wave of foreclosures” may destabilize the housing market, said Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School.