Major Banks have announced recently that they are halting foreclosures while they review their handling of the process. Ally Financial, the institution once known as GMAC, was the first to initiate such an order, and now other banks are following suit. Due to re-sets on adjustable rate mortgages, coupled with rising unemployment rates, the market for foreclosures has been booming in recent months. Now, the foreclosure crisis is entering a new phase.
JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) have also announced that they are halting foreclosures while they review their procedures. The number of loans effected at Bank of America and Ally are indeterminate, but Chase has said that 56,000 loans are effected within their bank. Politicians and State Attorney Generals have asked the financial institutions to widen their review, as nearly 5 million loans across the country are either seriously delinquent, or in the initial stages of foreclosure.
Brian Moynihan, CEO of Bank of America, said Friday the bank wants to “clear the air” and the review will take a few weeks. An important element to note though is that the homeowners involved have stopped paying their loans. And while there may be some serious problems with the paperwork, the foreclosures are not illegal. Although the banks may be vilified, the borrowers did apply for loans, and sign contracts promising to pay on the houses they were purchasing. Placing all the blame for foreclosures on the banks now would be displaced. There is at the minimum shared blame, with the banks for giving out risky loans, with the borrowers for asking for and agreeing to the loans, and even with Congress, whose Community Reinvestment Act required banks to lend in traditionally risky areas.
The housing market remains on shaky ground, and cannot fully heal until the troubled loans work their way through the system. As long as a large number of homes remain in the foreclosure process, it will be difficult for prices to stabilize. The new released today may initially sound like a realy to some weary homeowners, it is more likely to destabilize the market in the near term as empty houses continue to flood supply.
