What has been the negative impact on banks?
The sole realistic collateral for mortgage loans is the underlying property, because, by the time of foreclosure, borrowers rarely have other significant assets. A bank can’t sue and realize a money judgment; the assets aren’t there. The house backs up the loan, and if there is a significant delay in the bank’s ability to foreclose on the property and liquidate it, that slows down the process. Not only could that temporarily impair capital while banks try to foreclose and liquidate, it could also affect future lending decisions. Every time you throw an obstacle in the way for a lender to be able to realize on collateral, that calculates into its decision to make loans. In theory, you could see banks further raising their lending standards because this is one more potential obstacle. The biggest impact though is likely to be on the housing market and economy generally. Anything that delays foreclosure delays the ability of the market to clear and prolongs the housing crisis, which has already lasted for three years.
What other institutions are being impacted?
An increase in challenges to foreclosure also burdens the judicial system, which was designed for a very different economic reality. Banks have more flexibility to adjust in that they can hire people or acquire new technology. But the court system, being dependent upon the political process, isn’t as nimble. For the system to suddenly change from a model where it might have 5,000 foreclosures a month to where it now has 100,000 hugely stresses a court system that already has a very large backup.
How does this issue impact third-party purchasers of foreclosed property?
It creates uncertainty. For example, say the bank foreclosed on Joe and Mary Smith a year ago, and the property was sold to Susan Jones. But the affidavit submitted in connection with the foreclosure wasn’t properly verified, so the chain of title is being challenged. If the original borrower complains that the foreclosure was wrongful because the affidavit was fraudulent, suddenly you have a third-party title issue.
That presents potential concerns for those who buy property out of foreclosure, as well as for title insurance companies that verify the title is good. If that adversely impacts the willingness of purchasers to buy property out of foreclosure, it’s another factor that may slow the clearing of the market and prolong the housing crisis. That inability to sell will further damage banks and lenders by impairing their ability to realize capital on that collateral as a result of either being unable to sell or having to sell at a significant discount that reflects that there’s a title uncertainty.
William A. “Mac” McBride is an attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. Reach him at (404) 221-6537 or [email protected].