Prepare now for possible foreclosure moratorium

Home buyers and sellers in today's market have a whole new range of factors to consider, given growing regulatory scrutiny after recent disclosures that mortgage lenders and servicers have mishandled foreclosure paperwork.

One big lender, Bank of America, has said it will halt all foreclosures.

Other banks have said they are limiting foreclosures in states that use judicial foreclosure, which has court oversight.

Texas is a non-judicial foreclosure state for all but home equity loans, giving it a more streamlined process, but it isn't immune to disruptions, experts say.

"This moratorium on foreclosures is the worst possible news for the housing market for the whole country, including Texas," said Mark Dotzour, chief economist at Texas A&M University's Real Estate Center.

"As long as people think there is a big overhang of foreclosed properties waiting to come to market, they are going to be uncertain about prices falling. This shuts down everything. Buyers and investors are going to go to the sidelines."

"Bottom line, it will further slow an already weak market," said Mauricio Rodriguez, professor of finance and real estate at Texas Christian University. Money for mortgages could slow to a trickle if investors in mortgage-backed securities refuse to take on more risk by not being allowed to foreclose if the investment goes sour, Rodriguez said.

"That means less money for mortgage brokers to lend," he said.

On Wednesday, a coalition of attorneys general, state mortgage regulators and bank regulators formed the Mortgage Foreclosure Multistate Group, which will jointly review improper foreclosure-processing procedures. The Texas attorney general's office will serve on the group's executive committee.

Texas was No. 9 in foreclosures in the third quarter with 34,187 properties, well behind California's 191,016 foreclosures and Florida's 157,026, RealtyTrac reported.

A foreclosure-related slowdown is not happening in the current local market but could if the moratorium goes on too long, said Chad Bates, regional manager of Cendera Funding, a mortgage banking firm based in Fort Worth.

"There's no shortage in terms of funding right now," he said. "And we're at a historic low in terms of interest rates. People shouldn't shy away from the market because of this."

Oddly enough, freezing the foreclosed property market could turn out to be a temporary boon to the regular home-selling market, said Dale Erwin, a Fort Worth real estate broker with Longfellow & Lee who specializes in foreclosed properties.

"No one knows exactly what will happen," he said. "But if they do a foreclosure moratorium for three months, some of the regular sellers may be able to sell their houses" for more, since removing distress sales from the market would reduce the impact on home prices.

Distress sales made up almost a third of the residential market, according to RealtyTrac, and depress home prices by around 26 percent.

Although Texas Attorney General Greg Abbott on Oct. 6 asked 30 Texas mortgage companies for a temporary halt on foreclosures, Erwin said that on Wednesday he helped a buyer purchase a foreclosed property with no delays.

But Erwin did say that one of the lenders he works with, a Florida bank, did pull its Texas foreclosures last week to honor Abbott's request.

"Their asset manager told me they should be back on board again next month, though."

He advises home buyers to shy away from foreclosed properties at banks that are halting their foreclosures, because sales may take months to close.

"We are seeing a slowdown in closing paperwork," he said. "Lenders are dotting every 'I' and crossing every 'T' to make sure it's all being done properly."

For those homeowners who are scheduled for foreclosure, the moratorium should not be a silver bullet, said David O'Brien Jr., executive director of Fort Worth housing counselor Housing Opportunities.

"If I hadn't made a payment in 12 months and now my foreclosure has been postponed, I'm not sure how much comfort I would take in it," he said.

"People tend to hang on these sheds of hope, but it's a false hope. You're just digging yourself in deeper in what you owe."

Teresa McUsic's column

appears Fridays.