Bank of America's Big Freeze Chills Housing Recovery

It was bound to happen, and it did.

Bank of America extended its foreclosure freeze to all 50 states as it continues internal "assessments" of its foreclosure practices. "Our ongoing assessment shows the basis for our past foreclosure decisions is accurate," reads their statement.

Bank owned home
Bank owned home

Bank of America is one of the highest volume loan liquidators. This means we're going to see a huge slowdown in sales of bank owned properties in the coming months, which have been running at roughly one third of all home sales. It also says something about what happens next.

"It’s really only a matter of time before there is effectively a national foreclosure moratorium," notes Guy Cecala of Inside Mortgage Finance. "We already have moved way beyond having foreclosure concerns in just certain circumstances in certain states. There are concerns/challenges being raised about all foreclosures."

I put in the call to JP Morgan Chaseto see if they will follow. "No comment at this point," answered spokesman Thomas Kelly.

While some see today's announcement as something of an admission:

"The national moratorium is what would be expected if they are truly concerned about the legality of their internal policy, procedures and processes. This is because in non-judicial states it is even easier to commit fraud, or act irresponsibly with respect to the quality of legal documents, than in the 23 judicial states in question because there is no judge involved," says mortgage consultant Mark Hanson.

"This scandal has the potential to make the Subprime crisis look like a minor market correction and at the end of the day, the nation's largest banks will feel the most pain." -Mortgage Consultant, Mark Hanson

Others say it's just common sense:

"I see it as a recognition that it would be absurd to suggest any systematic problems they may identify would be isolated to 23 states," says Graham-Fisher's Josh Rosner.

Whatever it is, it surely opens the door to more litigation and more trouble for all the big banks.

It will also mean a huge wrench in the system of clearing out foreclosed properties and selling them out in the market.

The only way for housing to recover is for that to happen. Title companies, while largely tight-lipped, are raising big red flags.

Fannie Mae, which owns a huge number of the loans Bank of America services, is obviously faced with a new conundrum now that the freeze has gone national. They have been giving REO (bank owned) property buyers the option to get out of deals where the foreclosure might be in question or to stay in while the servicer guaranteed all was fine. "All transactions on potentially affected properties are currently on hold until the servicer can verify the issue has been rectified," spokesperson Amy Bonitatibus tells me. Fannie Mae has a special program called Home Path which offers REO buyers incentives, as the mortgage giant tries to unload its vast supply of foreclosed properties.

But selling houses is just one piece of the picture.

The domino effect cannot be underestimated.

"It will have an immediate negative impact on house sales volume, house prices, private label MBS investors, bank earnings, mortgage servicing values, and much more. It opens up all the servicers to a rush of litigation at an extent never experienced before from homeowners and investors alike. This scandal has the potential to make the Subprime crisis look like a minor market correction and at the end of the day, the nation's largest banks will feel the most pain," adds Hanson.

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