A new report by Bear Stearns indicates that by the end of 2008, foreclosure proceedings will be under way on staggering 50 percent of existing single-family home sales.
Historically, only a small percentage of foreclosures are ever challenged by borrowers. But, with banks in a frenzy over the subprime mortgage crisis and foreclosures rising fast, some homeowners are starting to hit back hard.
They are starting to challenge foreclosure proceedings in court, foiling recovery plans and further skewing the secondary market for securitized loans, experts tell MoneyNews.
"Challenging foreclosures in court is a great way for homeowners under pressure to buy some time and hopefully turn things around for themselves financially,” says Paul F. Davis, a realtor, and author, Orlando, Fla.
"They’ve got nothing to lose and everything to gain.”
Debt securitizations are being dogged as foreclosed loans from lenders, among them Ameriquest, Fremont, New Century, and WMC, are being contested in courts in hard-hit states like Florida, Nevada, and Ohio.
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Judges are turning out to be surprisingly sympathetic.
Consider a precedent-setting new case in Massachusetts. A judge there has case stopped all foreclosures from loans originated by lender and servicer Fremont, as his honor sought to determine whether the loans were made on terms that violated state lending laws.
In a sense, judges are regulating the industry from the bench, seeking to reform mortgage lending mores and standards.
It’s not really a shock, says Davis, "considering the corrupt lending practices of mortgage companies under scrutiny nationally.”
Borrowers are using a number of tactics in court to challenge the foreclosures.
For example, many say that loan agreements, and the law, require forbearance, meaning extra time for the borrower to get back on his or her feet and pay the loans on time again.
Others are raising due process arguments, saying they were not properly served with papers from the lender, even arguing that the lender has no standing in court.
The court proceedings are also impacting the plans of property speculators, who want to purchase distressed projects from lenders at dramatically reduced rates.
Normally, such vulture investors could be counted on to quickly clean up distressed properties and get markets moving toward realistic price levels, prompting a recovery.
Legal action threatens to slow that process to a crawl.
"Much of the activity right now is from value investors who are purchasing a lot of property from banks at a discount,” says Jeremy Brandt, a spokesman for value investor 1-800-CashOffer.
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