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Foreclosure Crisis: The Worst-Case Scenario

"A lot of the banks have really screwed up with this," says Eli Lehrer, national director of the Center on Finance, Insurance and Real Estate at The Heartland Institute, a conservative think-tank based in Chicago.

Meanwhile, the foreclosure freeze has begun to create a chilling effect on the entire housing market.

New buyers have stepped back from the market for distressed property, which now accounts for more than 30% of new transactions, according to RealtyTrac. New owners are worried they don't have a legal right to their homes. Title insurers are worried about their exposure to faulty documents and unwilling to stand behind new purchases. Since title insurance is required for most mortgages, the market is essentially at a standstill.

"Additional uncertainty has been brought to a very fragile market," says Brungardt, of RoundPoint, an origination and servicing shop. "I think the impact should not be underestimated."

So far, the only government lawsuit has been that of Ohio Attorney General Richard Cordray against GMAC. He is seeking up to $25,000 for each affidavit that is found to be fraudulent, along with undefined restitution for affected consumers. Attorneys general in 49 states, including Ohio, have also joined forces to investigate and potentially prosecute other banks as well.

Cordray has said the investigations aren't focused on "mere technicalities," but industry insiders and political observers suspect that government inquiries can be resolved relatively quickly.

"The evidence so far indicates that these were more process screw-ups that should be reasonably easy to correct," says Lehrer, of The Heartland Institute. "So as long as attorneys general don't find actual evidence of criminal wrongdoing and try to make it up for political gain, there's a lot of incentive for everybody involved to bring this to a close very quickly."

James Gomes, onetime adviser to onetime presidential contender Sen. John Kerry (D., Mass.), says foreclosures have taken center stage ahead of the elections. But he doesn't expect the issue to gain much traction on Capitol Hill, even if Republicans get more seats in Congress, as expected.

""There is no mention of mortgage foreclosures in the Republicans' 'Pledge to America,'" says Gomes, who is now director of the Mosakowski Institute for Public Enterprise at Clark University.

The outcome of private court battles - in which interested parties have very different incentives - seems far less predictable.

Lynyak notes that there are several financial parties to most securitized mortgages - servicers, subservicers, special servicers, title insurers and owners - all of whom share the income and costs of mortgage lending.

"The political issue is easy - 'This is horrible, what are these people doing, etc.'," says Lynyak. "But getting into the bushes on the legal rights and obligations of the parties, I think, is going to take time."

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