NEW YORK — Karl Case, the co-creator of a widely watched housing market index, was upbeat three weeks ago. Mulling the economy while at a meeting at a resort near the Berkshires, Case thought the makings of a recovery were finally falling into place.
"I'm a 60-40 optimist," he said at the time.
Today, Case's mood is far more subdued. In scarcely two weeks, he and other housing analysts have watched as the once-staid world of back-office bank procedures has spawned a scandal that threatens to further unhinge the housing market.
Allegations of possible mortgage fraud against financial giants GMAC, JPMorgan Chase and Bank of America read like a corporate thriller: forged documents, faked Social Security numbers, phantom titles, disappearing paper trails, "robo-signers" and mortgages sliced and diced so many times that nobody really knows who owns them.
Now the specter of a national foreclosure moratorium is closing in.
The banks will have to review the paperwork for hundreds of thousands of mortgages. On top of that, class-action lawyers and state attorneys general have filed lawsuits and called for foreclosure moratoriums.
In the near term, foreclosure freezes could actually benefit both homeowners and the housing market. Homeowners would have time to live rent-free and chip away at their debt. Prices might stabilize because so many homes are penned up.
But the long-term implications are grave. Only a month ago, housing watcher Mark Zandi, chief economist at Moody's Analytics, predicted that a housing recovery would be under way by the third quarter of next year. Now he believes the foreclosure scandal could prolong the housing depression for a few more years.
The alleged document fraud could open up the entire chain of foreclosure proceedings to legal challenge. Some foreclosures could be overturned, others deemed outright fraudulent.
Before a housing recovery can occur, all those foreclosed properties have to be rescrutinized by the banks and then sold. With any foreclosure-related deal open to legal challenge, that inventory could be taken off the market while the legal challenges make their way through the courts.
That's not to mention the questions being raised about missing paper trails on mortgages owned by people who have never missed a payment.
Since housing is the engine that in the past seven recessions has pulled the economy out of recession, any further damage couldn't come at a worse time.
"As far as I'm concerned, anything that slows the foreclosure process is a bad thing," Case said.
"Right now, everyone in the industry is trying to understand the scope and breadth of the problem, and is looking to lenders to get their paperwork in order so that sales can resume," said Kurt Pfotenhauer, chief executive of the trade group American Land Title Association.
Meanwhile, real estate agents who specialize in selling bank-owned properties say the market is locking up. Dorothy Buse, a Coldwell Banker agent in the Orlando area, said that out of the 200 foreclosures she has listed for sale, 40 are now in the foreclosure freeze. Of the 40, 12 that were already under contract are now on hold.
"There's nothing within my power — or my staff's power — that we can do, except try to reassure them that we're working on this," Buse said.