It’s no secret that a massive number of foreclosures have been filed as the economic climate took a dive. The real secret was the lenders could not handle the even more massive amount of paperwork entailed with all those foreclosures. But that is a secret no more.
According to the article “The Foreclosure Mess Could Last for Years” by Businessweek.com, “Lenders and loan servicers including JPMorgan Chase (JPM) and Ally Financial are facing an explosion in homeowner lawsuits and state attorney general investigations of claims of falsified mortgage documents.” The article further states that many homeowners filed claims and lawsuits, stating that the lenders falsified documents in order to foreclosed on properties which they did not hold titles on.
While this may be a shock to most people, but insiders of the real estate industry suspected such practices for sometime. In the days when mortgages were easier to obtain and even easier to sell on the secondary market, lenders were churning out loans faster than they could properly process them. Rumors of missing/omitted/destroyed documentation spread. However, no industry-wide flags went up because business was good, mortgages can be sold before the ink was dry and profits were made without immediate problems.
The turning point came when the many of those mortgages started to default. In order to foreclose on properties, proper documentation was needed, which lenders found was missing. Note that, lenders have been consolidated into fewer institutions during the economic downfall, which resulted in mountains of “Bad” mortgages per institution. From the lawsuits being filed today, we can suspect that the lenders tried to solve this problem by falsify documents, in order to push foreclosures through. As the massive number of defaulted mortgages piled up, this practice most likely snowballed into the giant mess we have today.
So where is the opportunity in this? It is most likely that the lenders will suffer fines or other financial disciplinary action for their misdoing. But the properties involved will still foreclose. The opportunity lays in negotiating lower purchase price through short sales. The foreclosing process is expensive as is. A longer foreclosure process, due to documentation irregularities, means more attorney fees, holding costs and lost interests. Therefore, an investor will be able to negotiate better terms. Even REOs (repossessed properties) should be easier to negotiate since the lender has already incurred larger than normal expenses.
Note that, your acquisition must be not only legitimate, but also particularly transparent to avoid scrutiny. Therefore, it is recommended you use a competent attorney, who is already specialized in auditing mortgage documents, to maximize your leverage and prevent exposure to risk.