Double Dip In Housing Largely Caused By Failure to Prosecute Mortgage Fraud

There's a double-dip in housing prices (and see this and this).

As CNN points outs:

U.S. home prices fell 2% in the third quarter after having gained steadily since early 2009.

The S&P Case-Shiller Home Price Index has recorded gains in four of the previous five quarters, including a 4.7% jump between April and June 2010. That leaves national home prices down 1.5% year over year and off 2% compared to the second quarter, according to the Index, which was released Tuesday.

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The inventory of homes is high with nearly 3.9 million on the market in October, according to the National Association of Realtors. That means it would take 10.5 months to sell through all of the current inventory. In a normal market, there is usually a six-month supply.

Plus, there's a massive shadow inventory of homes waiting in the wings. These are homes that are deeply in the foreclosure process or even repossessed by banks but not yet put back on the market.

Much of the massive shadow inventory of homes is due to the fraud involved with mortgage documents.

CNN notes in a second article:

Big banks are having trouble restarting the foreclosure process after this fall's "robo-signing" scandal, and the once booming market for foreclosed homes has been hit hard as a result.

According to ForeclosureRadar, the number of properties coming to auction in hard-hit western states -- Arizona, California and Nevada -- has dropped more than 30%.

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Investors had been doing brisk business, buying distressed properties on the cheap, sprucing them up and flipping them. But now they are being far more cautious.

"Their concern is that homeowners will be more aggressive in fighting foreclosures even after the auction sale," said Sean O'Toole, CEO of ForeclosureRadar.

For vulture investors, speed is essential -- they do not want to tie up investments for months while attorneys argue.

They are also worried about being able to unload the property.

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Pressure on the market for distressed properties could last if delinquent borrowers are less likely to give up on their homes, according to Duane LeGate, CEO of Georgia-based House Buyer Network.

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LeGate says his business dropped more than 30% the week after news of the robo-signing scandal broke, and has stayed down since. His theory: homeowners think the bank will have a tough time kicking them out in this environment, and that they can live for free for a while. He says he's got two friends who intend to do just that.

Reuters reports:

Shadow inventory is seen as one of the chief threats to the fragile housing market that is showing new signs of weakening.

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Adding to the problems are errors in processing tens of thousands of foreclosure cases at Bank of America Corp, the largest U.S. mortgage servicer, and other financial institutions.

The massive failure to provide proper documentation in court has resulted in delays to an already lengthy processes of repossessing homes, leading to a backlog in paperwork and repossessions as the companies fix their procedures. The banks are also facing a nationwide probe by state attorneys general.

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What's more, buyers of distressed properties have become gun shy due to the foreclosure processing problems, according to a Campbell/Inside Mortgage Finance survey of real estate agents.

The poll found 14 percent of owner-occupant homebuyers and 6 percent of investors refused to view foreclosed properties in October.

And Zack's Investment Research writes:

Foreclosures have slowed recently, but that is only because of the fraudclosure scandal, where the banks have proved to be exceptionally incompetent in handling the paperwork related to securitized mortgages. Basically, they can’t really prove that they hold the mortgage, and thus don’t have the right to foreclose.

It remains to be seen just how big a problem that will prove to be. It could just be a technical glitch that will gum up the works for a few months, or it could be a HUGE problem that once again undermines the solvency of the entire banking system.

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What is clear is that what [Bank of America, Wells Fargo and other big banks] were doing was illegal and at least technically constituted fraud and misrepresentation to the courts.

There should be more than a handful of bankers who end up with long terms in prison as a result. Just because there should, however, does not mean that there will be. White-collar crime is simply not taken seriously in this country relative to blue collar or street crime, even though the amount stolen with a pen far exceeds the amount stolen with a gun.

For those who doubt that fraud is rampant in the mortgage paperwork mess, see this, this, this, this, this and this .

There are obviously other factors responsible for the softening housing market, such as the end of government stimulus programs regarding housing, and poor employment conditions. But as I've pointed out early and often, these problems are all interrelated. See Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won't Recover.