While Hawaii’s housing market collapsed at a more drastic rate than other states, so did the handling of mortgage foreclosures. Hawaii Attorney General Mark Bennett has joined his colleagues in all other 49 states and the District of Columbia to conduct a sorely-needed joint investigation of the finance system, but a nationwide moratorium on foreclosures would only worsen the mess.
The improper procedures and paperwork by lenders in response to the delinquency of mortgage holders during the recession is appalling and inexcusable. JPMorgan Chase, Bank of America and GMAC Mortgage have decided to halt foreclosures in many states while they review the debacle, but immediate changes should be made while the rest of the industry handles foreclosures properly, although belatedly.
One of every 371 households in Hawaii was foreclosed last month, the ninth-highest rate in the country, according to real estate research firm RealtyTrac. Up to then, the foreclosure process had started for 14,408 houses in the islands, and more than 2,000 of them had been sold since the first quarter of 2008, the Center for Responsible Lending reports.
How many of those foreclosures were proper is anybody’s guess at this point. About 11.5 percent of borrowers nationwide are now in default, twice as many as two years ago. Banks were ill-equipped to handle the paperwork so hired inexperienced people to process and sign foreclosure documents, called robo-signing.
Sloppy handling of those documents was made to assure the loaners’ revenue. A mortgage generates an annual fee of about $500 on a typical $200,000 mortgage, while the cost of handling a foreclosure can exceed $2,500, eating up the profits generated from handling healthy loans.
The cost-saving improprieties typically included walk-in hires who barely knew what a mortgage was — derided by a JPMorgan executive as "Burger King kids" — signing flawed or fraudulent documents with or without personal knowledge of the facts, or simply getting rid of documents in the trash.
In 23 states, such documents, which must be signed in the presence of a notary, are required in court to go forward with foreclosures, confirming that the borrower is in default. In Hawaii, the documents are required before the lender advertises the house for sale without going through the courts. Bennett says it appears that some documents "were signed by persons who did not have personal knowledge of the facts asserted in the documents" or "were signed outside the presence of a notary public."
A major upshot of this whole scandal is that many struggling homeowners did not have a fair shot before losing their homes. A remedy for them, alas, is highly elusive. But the 50-state enjoined investigation rightfully aims to strengthen safeguards for the future, including an independent monitor to ensure lenders follow state foreclosure laws; subjecting banks to financial penalties; some restitution for mishandled foreclosures; or forcing lenders to help homeowners avoid foreclosure by reducing loan payments.
The problem with a nationwide foreclosure moratorium — in spite of its instinctive, feel-good boost — is that it’ll freeze the market. Foreclosures put homes on the market that are affordable and that has sparked a rebound in buying; the sudden unavailability of supply, however, would halt that churn.
Proper reaction to the scandal will undoubtedly slow down the process of handling the backlog of delinquent housing loans. Closing the door to all foreclosures while the investigations by the attorneys general and the Justice Department proceed, as some have suggested, would devastate the attempt to recover from the housing slump.