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A real estate agent stands in front of a foreclosed home in Kissimmee, Fla. (Phelan M. Ebenhack/AP)
A real estate agent stands in front of a foreclosed home in Kissimmee, Fla. (Phelan M. Ebenhack/AP)

Foreclosure freeze adds to U.S. woes Add to ...

Just as it seemed the U.S. housing crisis couldn't get any worse, the largest bank in the United States is halting all sales of foreclosed houses as of this weekend, amid growing allegations that lenders have improperly seized hundreds of thousands of American homes.

The decision by Bank of America on Friday could grind a significant portion of the real estate market to a halt in the next few months. It comes after legal questions were raised about the automated processes bankers in the United States have used to handle the unprecedented number of foreclosures taking place.

Lawyers representing foreclosed homeowners argue that so-called "robo-signers," people employed by the banks to process piles of paperwork, can't possibly verify all the information contained in the documents, given the speed at which the foreclosures are being filed. Further, since so many of the mortgages offered in the U.S. are securitized and not held by the original lender, some of the cases lack sufficient proof of which bank actually owns the rights to the home. They allege this has led to improper seizures.

Those legal technicalities have the potential to reverse some foreclosures if the documents are proven to be incomplete or inaccurate. But the implications of this latest storm are much broader.

The freeze now threatens to chill parts of the U.S. real estate market as buyers and sellers of distressed homes wait for the banks to sort out the paperwork problem and verify documents, leaving all sides in limbo. Real estate agents in several states began pulling foreclosed homes off the market Friday, according to reports from across the U.S.

In the past two weeks, Bank of America had already frozen sales of foreclosed homes in 23 states, where court approvals are needed to process seizures. But in a short statement Friday that sent ripples through the U.S. housing and banking sectors, Bank of America said it is extending the review of documents to all 50 states starting today, pending a review.

"We will stop foreclosure sales until our assessment has been satisfactorily completed," the bank said in a statement, adding: "Our ongoing assessment shows the basis for our past foreclosure decisions is accurate. We continue to serve the interests of our customers, investors and communities."

Other major banks could follow suit with a nationwide halt. PNC Financial, JPMorgan Chase & Co. and Ally Financial Inc. have also introduced a freeze in 23 states, to verify the accuracy of documents, but have yet to make it national. No allegations have been proven.

"They've got these robo-signers who are signing things without reading them - not just any documents, but official court affidavits that are under oath and say I have read this and I vouch for everything that's in here," said Tom Ice, a foreclosure defence lawyer in Florida.

Mr. Ice's Palm Beach law firm Ice Legal P.A. is a key player in the drama, having secured pivotal depositions from bank officials who admitted under oath that they could not verify all of the foreclosure documents being filed. Mr. Ice alleges that about 71 per cent of his cases involve discrepancies in the paperwork over who owns the loan, and therefore raises questions about who holds the right to foreclose.

Mr. Ice has about 400 active cases involving suspected improper foreclosures in Florida, including a small number involving Canadian owners who own properties in the state. A record 1.2 million homes were expected to be seized by U.S. banks this year, up from one million a year go. In South Florida alone, including Miami and Palm Beach, there have been an average of 150 foreclosure filings a day since the summer.

"There are tens of thousands if not hundreds of thousands of these," Mr. Ice said, predicting the banks face a lengthy review. "... It took years when they weren't looking at the numbers. It's impossible to do in a few weeks."

The banks aren't necessarily conceding that their paperwork isn't valid, just that it needs to be rechecked. The mortgage group of Citibank is not freezing its foreclosure sales, and said it is confident all paperwork is within the law and does not contain mistakes. For its part, Bank of America isn't halting all foreclosure operations. It is still issuing notices to delinquent borrowers who miss payments, and making efforts to renegotiate terms.

The crux of the matter is not whether home seizures are being executed on people who have paid their bills - though there have been some mistaken cases of that - but at what point a legal foreclosure can take place.

In the rush to process the mountains of paperwork, some banks are allegedly moving to seize homes too quickly, argues St. Petersburg foreclosure lawyer Matt Weidner. One of his cases involves a bank that sent foreclosure agents to a woman's home to change her locks, even though she was only a few months in arrears. She called 911 when they entered her home.

Mr. Weidner argues that with proper diligence by the bank, the woman probably wouldn't have been foreclosed upon so quickly, since the bank would have likely made out better by renegotiating her mortgage. But the sheer workload at the financial institutions - processing 8,000 a month in some instances - is creating such situations.

"It's the wild west down here, and it's getting worse," Mr. Weidner said. "These documents are being used to take people's houses." He added that there may not be buyers for the homes. "Let's say they granted every one of those foreclosures tomorrow. Who would move into those houses?"

After the housing crisis began more than two years ago - fuelled by subprime lending that gave mortgages to lenders who ultimately proved incapable of paying the money back, particularly as house values fell - financial institutions are trying to recover as much asset value as possible. From Arizona to Michigan, foreclosed homes have been liquidated at a fraction of the original price.

The widespread foreclosures have created other problems. Renters booking holiday properties now face a buyer-beware market too. A couple from Kingston, Ont. who rented a Punta Gorda, Fla., home for a March vacation came home from the beach to find the house had been seized, and their belongings were missing.

The couple, who asked that their names not be used, are still seeking to recover items such as a laptop computer. Mr. Weidner's firm is representing the owner, who was delinquent. But the Canadian couple believes the ordeal is a lesson to other renters, since they were not warned about the problems before they rented.

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