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Foreclosure Fraud Settlement Predictably Leading to More Foreclosure Actions

I wrote when the foreclosure fraud settlement was announced that a potential consequence would be a spike in foreclosure actions. The fact that robo-signing and servicer abuse appear to be ongoing issues only adds to that analysis. The relief of the burden of lawsuits from state or federal regulators would certainly lead the banks to ramp up the foreclosure machine again, at least in most states where there are no procedural obstacles. Even if they still have liability to using faulty documents, the settlement shows that they can pay their way out of that pretty nominally.

And sure enough, the first set of statistics, for February, show an increase in foreclosure actions in 21 states, mostly judicial foreclosure states, according to Realty Trac.

“February’s numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed,” said Brandon Moore, CEO of RealtyTrac. “Although national foreclosure activity was pushed lower by decreases in a handful of larger states, 21 states posted annual increases in foreclosure activity, the most states with annual increases since November 2010.

“The foreclosure and mortgage settlement filed in court earlier this week will help pave the way to a properly functioning foreclosure process by providing a clear roadmap for necessary foreclosures,” Moore continued. “That should result in more states posting annual increases in the coming months. Not surprisingly, many of the biggest annual increases in February were in states with the more bureaucratic judicial foreclosure process, which resulted in a larger backlog of foreclosures built up over the last 18 months in those states.”

The caveat, we’re told by Suzy Khimm, is that foreclosures are edging down nationally, a by-product of an improving economy. However, if you want to break that cycle, you would put more foreclosures on the market, reducing housing prices and increasing negative equity. Laurie Goodman at Amherst Securities and other analysts have described how negative equity leaves borrowers completely vulnerable to any financial shock, and how it portends millions more foreclosures in the future. And reducing prices through a surge of foreclosure actions will only add to that negative equity. In short, if you want to end the trend of what has been described as an “abating foreclosure crisis,” you would reinstitute the rocket dockets and let banks foreclose on homes with impunity.

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David Dayen

David Dayen