For all that I said that the legal issues involved in the foreclosure mess are surpassingly difficult for a non-lawyer to understand, the Levitin piece I linked is still worth reading. One paragraph in particular should strike a chill into peoples' hearts:
In theory, these loans should be put-back to the seller. Will that happen? I'm skeptical. If not, that means that investors will be eating the loss. This case also means that foreclosures in MA (and probably elsewhere) will be harder, which means more delay, which again hurts investors because there will be more servicing advances to be repaid off the top. The servicer and the trustee aren't necessarily getting off scot free, though. They might get hit with Fair Debt Collection Practices Act and Fair Credit Reporting Act suits from the homeowners (plus anything else a creative lawyer can scrape together). And mortgage insurers might start using this case as an excuse for denying coverage. REO purchasers and title insurers should be feeling a little nervous now, although I doubt that anyone who bought REO before Ibanez will get tossed out of their house if they are living in it. Going forward, though, I don't think there's a such thing as a good faith purchaser of REO in MA.
These issues will almost certainly spread outside of Massachusetts. And while it might be good for some delinquent homeowners, since it lessens the bank's incentive to foreclose, it will be terrible for people who want to buy a home, since it will dramatically shrink the number of homes available on the market. And if the current inventory of REO homes can't be sold, they are all too likely to sit empty, dragging down the neighborhood around them.
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