Click here for an update to this post written on October 8.
In a letter dated October 4th, Texas Attorney General Greg Abbott has requested that 30 mortgage servicers operating in Texas stop all foreclosure activity in the state by the affected firms. This means that these lenders would not foreclose on properties, would not sell properties they have previously foreclosed upon, nor would they evict people living in previously foreclosed upon properties. At the time of this writing, I do not know what percentage of foreclosures in Texas are handled by these 30 companies. According to the Houston Chronicle, Wells Fargo has already stated that they do not intend to stop their foreclosures.
Recently, many lenders suspended their foreclosure activity in 23 states that have judicial foreclosures (the foreclosures must be approved by the courts). This occurred because the lenders realized that some of their activities in the foreclosure process were not following the letter of the law. Specifically, some employees known as “robosigners” were executing so many documents in a week that they were physically not able to perform the duties required of them to properly execute the documents. Although we don’t use the courts in Texas, many of the procedures the lenders must follow are similar. Therefore, Attorney General Abbott concluded that these same lenders were likely violating Texas law with their robosigners. He has asked for the voluntary foreclosure moratorium until he is satisfied that each mortgage servicer has adjusted their procedures. He has given them until October 15 to respond to his inquiry. Read the letter he sent to Bank of America: http://www.oag.state.tx.us/newspubs/releases/2010/100510_sample_bank.pdf.
So what does it mean? First, the Texas Attorney General has not legally stopped the foreclosure activity – he has simply requested that these 30 companies voluntarily do so. If a lender chooses to ignore the request, it will be business as usual for them. However, the AG could choose to seek a court injunction stopping any of these companies from foreclosure activity if he is not happy with their response.
If the lenders comply, it means exactly what it says – no foreclosure activities at all for these 30 companies (see the list at http://www.oag.state.tx.us/newspubs/releases/2010/100510_recipient_banks.pdf). Once they lenders have responded to the inquiry, it will clearly take time for the AG’s office to review the response and determine who can resume foreclosure activity. Given that the deadline to file for the November foreclosure auction is October 12, it is clear that these companies would not be able to auction homes in November. And, since December is traditionally an extremely low month at the foreclosure auction (no one wants to seem heartless at Christmas), it is pretty safe to conclude that there could be few foreclosures in Texas until 2011. In terms of selling their properties already foreclosed upon and either on the market currently or under contract awaiting closing, the lenders would likely not sign any new contracts and would delay the closings on the ones under contract. To me, this is the bigger issue in that it disrupts the market when it is unlikely that any of these foreclosures will be reversed. Now all of a sudden, short sales might become more popular (in fact, I have a great one for sale right now – a great investment property that is cash flow positive even with a 15 year mortgage. Check it out here).
In the end, I suspect that while the robosigners may not have done everything they were supposed to do, the lenders will prove that the documents were all in order. They’ll have to hire more staff to actually read the documents in the futuer, but things will return to normal before too long. For those facing foreclosure, it will buy more time, but in the end the foreclosure will occur.
If you are interested in learning about investing in real estate, you should attend my series of workshops on Investing in Real Estate. The first workshop, Investing in Foreclosure Properties, will be offered twice – October 14 and October 19. Click here for more information.
To search for foreclosure properties, click here. Keep in mind that some of these may not be available for purchase if the lenders follow the Attorney General’s requests.