The U.S. foreclosure scandal is fast creating bedlam as home sales dry up in some areas, investors dump bank stocks, and analysts peg the potential fallout at tens of billions of dollars.
"It certainly has the potential to create difficulties in the U.S. housing market and the economy," said Sal Guatieri senior economist at BMO Nesbitt Burns. "People underestimated the subprime mortgage crisis suggesting it would be contained. We saw where that led us to. That's why this deserves very close monitoring over several weeks."
Mr. Guatieri said later in a report that that the troubles threaten to "paralyze housing markets, choking off demand and undermining prices."
Troubles have been building for weeks amid concerns that U.S. financial institutions processed millions of foreclosures without verifying the underlying documentation. Some employees of lenders allegedly signed 10,000 foreclosure documents a month without checking the accuracy of the information.
Investigations are now under way by federal regulators and officials in all 50 states. Several lenders are also reviewing or suspending foreclosures, including Bank of America Corp., Ally Financial and JPMorgan Chase & Co. Investors have driven down bank stocks, with Bank of America falling more than 9 per cent this week.
The issue is critical because sales of foreclosed homes represent as much as one-third of all residential sales in some U.S. markets. There are roughly nine million mortgages in some form of foreclosure that could now be challenged. Even sales of houses not in foreclosure could be affected if the property has been in foreclosure before. Home insurance companies have also become more cautious as the investigations widen.
The lenders, while reviewing the process, say their procedures were correct.
Estimating the financial fallout is tricky and many analysts are scrambling to figure out the impact. Paul Miller, an analyst at FBR Capital Markets in Arlington, said in a report this week that the crisis could cost banks $10-billion in litigation and delays tied to the various probes. Mr. Miller had put the figure at $6-billion a few days earlier.
Other analysts say the costs could be higher if banks have to take back mortgage-backed securities. Those securities are typically bundles of home mortgages packaged together and sold to investors by financial institutions. If any of the mortgages involve questionable foreclosures, banks could be forced to repurchase the securities. That could cost between $29-billion and $44-billion, according to analysts at Goldman Sachs Group Inc. But others say it is difficult to estimate the cost and the figure could be far higher.
Several banks and other analysts have played down the trouble, saying the estimates are wrong and the foreclosure problems are largely technical. Barbara Desoer, president of Bank of America's home lending and insurance unit, called the estimates "grossly distorted" and said the bank's practices were proper.
The issue is already slowing home sales. In Phoenix, where foreclosed homes account for as much as 40 per cent of all sales, only 54 foreclosed properties were auctioned by lenders on Friday, about 200 less than normal.
The crisis "is definitely creating a backlog," said Jarrett Zielinski, vice president of property acquisitions at CBI Group, a Calgary-based investment fund that is trying to buy up to 400 homes in Phoenix. The company has bought about 100 already. Mr. Zielinski said the fund's acquisitions have slowed but he believes the foreclosure issues will be resolved soon. He added the value of the homes the fund has already bought could rise in the short term if the supply of houses tightens because of the problem.
Diane Olson, a former Winnipegger who sells houses in Phoenix to Canadian customers, said the issue has confused buyers and sellers. Foreclosures represent about 60 per cent of Ms. Olson's sales and her staff were still arranging sales on Thursday.
"We have to let our clients know that we don't know what could happen [to these properties]" she said Friday. "We just don't know."
Canadians make up a good portion of buyers of distressed housing in places such as Nevada and Arizona, added Mark Dziedzic, of Cross Border Realty, a Canadian company that specializes in U.S. properties.
Mr. Dziedzic said the crisis hasn't dampened Canadian's interest in the U.S. market. "We just had 600 people at a seminar in Vancouver," he said. "It hasn't slowed down."
Paul Waldie