What began as scattered accusations of shoddy paperwork and fudged documents is mushrooming into a full-blown crisis threatening to derail the foreclosure process across the country.
Bank of America on Friday became the first big bank to temporarily halt foreclosures in all 50 states while it reviews hundreds of thousands of cases for potential paperwork errors.
For Florida, which has been slower than many states in attacking its foreclosure backlog, any delay threatens to not only clog courts further but also makes it harder for the overall market to reach any sort of price stability. Wary buyers will remain on the sidelines until they know the value of what they intend to purchase won't collapse.
The Bank of America announcement also created further jitters among title insurance companies, several of which are already scared away from offering "clear title" guarantees on foreclosed homes. Without those guarantees, most would-be buyers simply won't, or can't, go ahead with the purchase.
All of this comes as home sales are already slumping this summer, despite the lowest mortgage rates in decades.
"It's impossible at this point to state the magnitude of this, but the consequences are profound," said St. Petersburg lawyer Matt Weiden, a vocal critic of Florida's foreclosure system. "I believe there will be a shutdown of the entire mortgage foreclosure industry as this continues to spiral out of control."
Bank of America said Friday that only pending judgments and sales are affected. In other words, Bank of America customers won't be booted from their homes during the moratorium, but more could be served with the initial foreclosure paperwork.
Of the 14 million loans Bank of America services, more than 14 percent are past due or already in foreclosure. The bank wouldn't give details about its volume of Florida cases.
"Foreclosure sales will be held up until the ongoing assessment of documents is completed, which we anticipate will be within a few weeks," said bank spokesman Rick Simon.
Lenders and their law firms have been under fire for months, accused not only of shoddy work but using "robo-signers" to either sign affidavits that haven't been researched or forge documents outright.
The affidavits are used to verify whether loan documents and other records are correct. Judges rely on them to make sure lenders are on firm ground in kicking someone out of their home.
On Sept. 20, Ally Financial, previously known as GMAC, was the first lender to pause foreclosures in Florida and 22 other states where evictions need court approval. Bank of America followed with a temporary halt in the 23 states last week. JPMorgan Chase halted proceedings for about 56,000 homeowners. PNC Financial announced Friday that it, too, would postpone at least some foreclosures.
St. Petersburg lawyer Barry Wilkinson would not address Bank of America specifically but said he has seen many instances of paperwork errors and missing documents during the foreclosure process. Among them: affidavits that have the wrong name or wrong address and one certifying that a delinquent homeowner was served a court notice at a non-existent address.
Nick Bogos, a tax lawyer who is handling a foreclosure suit filed on his late brother's house in Tampa, was not surprised to hear of Bank of America's pullback.
During his involvement in the foreclosure process, he said, there was not only miscommunication on whether a deed in lieu of foreclosure could proceed but also conflicting paperwork about who even had title to the house: Bank of America or Fannie Mae.
Backlog could worsen
The impact of even a partial foreclosure hiatus has already hit the courts.
One senior judge in St. Petersburg found 50 percent of the foreclosure cases on the docket canceled on Tuesday, according to Pinellas-Pasco Chief Circuit Judge J. Thomas McGrady. And on Friday, another 18 cases were canceled.
Most of them were final hearing cases in which the judge would typically grant the foreclosure.
As of July 1, the Pinellas/Pasco district had 33,000 open mortgage cases. And every month, another 1,000 new cases are filed.
With federal stimulus money paying for more judges and case managers, McGrady said the circuit is trying to address 800 cases a week in four different courthouses. A foreclosure suspension will make it difficult to meet a goal of reducing the foreclosure case load by 62 percent by July.
McGrady said that since July, judges have sent back about 300 cases because of problems with the paperwork necessary to complete the foreclosure. Either they didn't attach the original note or they didn't complete the proper form of final judgment.
"It would appear from what we're seeing that some of them are trying to take some shortcuts," McGrady said.
As accusations of errors and fraud grow, some attorneys anticipate that banks may be forced to reopen past cases, creating havoc for lenders and title companies.
The issue goes far beyond sloppy affidavits to the core issue of improperly conveyed title to property, said Weiden, the foreclosure lawyer.
"Even a small percentage of title claims will be crippling not just to the title agency but the entire real estate industry," he said. "What these (foreclosure moratoriums) are, I believe, are the lenders taking a deep breath."
As cases of canceled foreclosures continue to swell, Realtors are worrying about the ripple affects.
Fred Bullard III, broker and owner of Bullard Realty, said he expects to receive lots of calls from homeowners on the brink of a short sale who may be wondering if they should hold off.
"A lot of them will be dissuaded and will say, 'let's see what happens' rather than going ahead and getting started," he said.
Bullard worries that Congress might force a moratorium on all foreclosures. Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, announced Friday that he will hold a hearing to investigate allegations of improper mortgage servicing and foreclosure processing on Nov. 16, the day after the Senate returns from recess.
"That would be bad for the market," Bullard said. "Any time the natural forces of the market are interfered with, this creates instability."
Jon B. Coats, a real estate lawyer in Pinellas Park, said a foreclosure moratorium could stabilize or even slightly increase real estate prices initially since banks would stop flooding the market with low-priced homes. But once foreclosures began in earnest again, the reverse would happen.
"You would see thousands of homes flood the market, and you would see another decline in housing prices," he said.
Times staff writer Greg Hamilton contributed to this report, which also used information from Times wires.
What's the fallout from the foreclosure moratoriums?