'Robo-Signing' Threatens Homebuyer Tax Credits

October is the month of ghosts and goblins, but banks have awakened a monster of a different sort - a delay, or possible cancellation, of the homebuyer tax credit on the purchase of certain foreclosed homes. Those homes have one thing in common: They’ve fallen victim to “robo-signing” – a malady that could not only change the face of foreclosures, but also tax credits for homebuyers facing a big deadline from Uncle Sam.

In a word, robo-signers are lending company analysts who sign off on the paperwork that enables banks and mortgage lenders to repossess a foreclosed property. But some analysts sign thousands of documents a day, giving them little time to properly review (or even actively look at) the foreclosure documentation, though this does not stop them from signing off on the actions anyway.

Consequently, the hits are coming hot and heavy in the aftermath of the scandal. An Arizona Congressman is pushing hard for a 90-day moratorium on home foreclosures. Bank of America (Stock Quote: BAC), Ally Bank, and J.P. Morgan Chase (Stock Quote: JPM) have all suspended mortgage foreclosure activity in selected states until the verification of proper foreclosure documentation can be completed. And the U.S. Office of the Comptroller of the Currency has instructed all major U.S. lenders to re-examine their foreclosure practices.

But it may be the impact that robo-signing has on the sale of foreclosed homes – particularly those purchased with a homebuyer tax credit attached – that has the most immediate impact on the housing market. The homebuyer’s tax credit provided an $8,000 credit for new homebuyers, and a $6,500 credit for existing homebuyers.

By suspending foreclosures in 23 U.S. states, lenders like Ally Bank, JP Morgan and Bank of America have also delayed the sales of foreclosed homes in those states. By U.S. law, the homebuyer tax credit formally closed out on September 30, 2010. There was enough time for a rush of last-minute homebuyers seeking to take advantage of the credit to fall victim to the late September decisions by lenders to halt all foreclosure-related activity – including sales.

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