5 Things You Should Know About the Foreclosure Moratorium

Some big banks are suspending foreclosures pending investigation, but others are holding their ground and moving forward.

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JPMorgan Chase has suspended foreclosures in 23 states while the company looks at 115,000 mortgage foreclosure files to find potential errors in its documentation. Ally Financial and Bank of America are looking for errors in files for all 50 states and suspending foreclosures. Goldman Sachs' Litton Loan Servicing, PNC Financial, and OneWest Bank began are checking their files, but Wells Fargo and Citigroup are holding their ground, stating that their affidavits are valid and sound. Here are some things you should know about the foreclosure moratorium:

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What's This All About?

Foreclosure moratorium. It almost sounds like 2007 again, with talk of a moratorium on foreclosures, but this buzz isn't coming from the federal government. This time the states are banding together to stop foreclosures based on illegal affidavits submitted by mortgage companies in foreclosure proceedings.

It all started back in June when Maine homeowner and attorney, Thomas Cox, deposed a GMAC employee about affidavit practices as part of foreclosure proceedings. The answers revealed that the signer had little to no knowledge about what was contained in the affidavit. He just signed.

The Maine attorney's foreclosure case was dismissed, and GMAC was very unhappy about the deposition being shared on the Web. This minor blemish might have been swept under the rug but someone in GMAC leaked an internal memo in late September, exposing that the company was quietly directing brokers in 23 states to suspend foreclosure proceedings until the company could, "take corrective action in connection with some foreclosures."

Judicial Foreclosure

The reason GMAC chose 23 states is because those jurisdictions have "judicial foreclosure" laws requiring foreclosures go through court. The affidavits involved in these proceedings require that the signer have "personal knowledge" that the information contained in the affidavit is true and correct. Instead, signers were depending upon the work of other employees, sometimes even failing to have the affidavits notarized.

Then it came out of Florida that the same shenanigans were playing out at JPMorgan Chase. Under oath, en employee admitted that eight managers signed about 18,000 foreclosure affidavits in a month, trusting that their underlings did their jobs correctly. The managers did not read the case files and only reviewed them if an employee brought up a question. This transgression could amount to 18,000 cases of perjury against those eight managers.

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September Foreclosure Numbers

When the September numbers hit the newsstands, eyebrows started to rise even higher. That month, RealtyTrac reported that lenders took possession of 102,134 properties.

The States Take Action

Since then, a storm has arisen with attorney generals from several states demanding that banks halt foreclosures until an investigation can be completed. Michigan, Florida, South Dakota, and others are all jumping on board. While these delays might keep homeowners in their houses a little longer, in the long run it will have only negative consequences.

If prior foreclosures are deemed illegal, title insurers will be fraught with claims. Some have already balked at the idea of paying claims in the face of such outright fraud by the lenders. And the few lucky homeowners who get another month or two in their homes face continued uncertainty at already difficult times.

Off Again, On Again

ABC News reports that one Belfast, Maine, resident, Michael Holmes received word that his foreclosure was to be halted. "I felt, you know, maybe God is looking down from heaven a little bit and helping me get through this," said Mr. Holmes. But two days later, the foreclosure was back on, leaving Holmes distressed and confused. He described the situation as "disconcerting."

And for those who have been fortunate enough to keep their jobs and continue paying the bills, there's even more trouble. These folks are now anchored to homes that will likely depreciate if a flood of homes comes back on the market after a moratorium. Any plans dependent on leveraging equity or even just relocating will need to be put on hold indefinitely.

Chad Fisher spends his time building and promoting websites for people to learn more about low-income housing and has developed a free site for consumers to access car insurance quotes from providers in their state.