A number of big banks have halted foreclosures. Ally Financial (previously known as GMAC) and JPMorgan were a few of the first big names to state that there may be documentation issues with some defaulted mortgages they own or service. Since then, other banks and servicers have taken their lead and temporarily ceased foreclosing on properties as they investigate their processes and documentation. At this point, it's unclear precisely the effect this will have on the housing market, but here are three possibilities.
Further Harm to the Housing Market
Housing market sentiment is already quite low. Demand on the part of Americans to buy homes has been very anemic since the expiration of the buyer credit. But it's possible that this foreclosure delay could make matters even worse.
First, banks might feel forced to revamp their entire process for mortgage origination. If that happens, then it might create a time during which banks and servicers go through a transition period and new mortgages slow. That would make it even harder for Americans interested in buying a home to secure mortgages.
Some reports indicate that judges are ruling in favor of struggling homeowners in the sorts of situations that triggered the foreclosure delay. As a result, they're either providing them the home free and clear if the bank cannot prove ownership or forcing banks to modify the mortgages. If judges become increasingly more activist with these cases, then even larger losses on these mortgages for banks could result. That would likely force them to restrain lending further.