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updated 10/14/2010 10:36:28 AM ET 2010-10-14T14:36:28

Lenders seized more U.S. homes this summer than in any three-month stretch since the housing market began to bust in 2006. But many of the foreclosures may be challenged in court later because of allegations that banks evicted people without reading the documents.

A total of 288,345 properties were lost to foreclosure in the July-September quarter, according to data released Thursday by RealtyTrac Inc., a foreclosure listing service. That's up from nearly 270,000 in the second quarter, the previous high point in the firm's records dating back to 2005.

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Banks have seized more than 816,000 homes through the first nine months of the year and had been on pace to seize 1.2 million by the end of 2010. But fewer are expected now that several major lenders have suspended foreclosures and sales of repossessed homes until they can sort out the foreclosure-documents mess.

On Wednesday, officials in 50 states and the District of Columbia launched a joint investigation into the matter.

And on Thursday, The Wall Street Journal reported that government-owned mortgage giants Fannie Mae and Freddie Mac are examining the work of a Florida law firm they recommended to process foreclosures. The Journal said that last Friday Freddie told mortgage servicers to cease forwarding cases to the Law Offices of David J. Stern, of Plantation, Fla. Fannie did the same on Monday.

The Journal said Jeffrey Tew, a lawyer representing the Stern firm, declined to comment about the move by Fannie and Freddie. The Florida attorney general's office recently released a deposition of a former Stern employee who alleged the firm routinely forged notarized documents, the Journal reported. Tew told the Journal that the firm believes the employee's allegations "are incorrect and not true."  

Rick Sharga, a senior vice president at RealtyTrac, noted that legal challenges to foreclosures are likely. But he doubts many will be successful in overturning foreclosures. He said he expects foreclosures to resume and predicts about 1 million homes will be taken back this year.

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"The bottom line is not that those properties won't be repossessed," Sharga said. "They simply won't be repossessed as quickly. We're simply delaying the inevitable."

Experts say if lenders resume foreclosures in a couple of months or so, the delay will amount to a temporary lull followed by a spike in home repossessions early next year.

But if the crisis drags on for months and more lenders stop seizing homes, the foreclosure delays could last well into next year. That could have a severe effect on home sales and prices.

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A freeze in foreclosure sales between now and December by a majority of lenders could amount to removing 30 percent of all home sales for that period, Sharga suggests.

"You would virtually guarantee that tens of thousands of properties would miss going to market in time for the spring, which is the peak buying season for real estate," Sharga said.

Nearly 600,000 bank-owned homes are not yet on the market, according to RealtyTrac.

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The states most affected by the foreclosure freeze accounted for 40 percent of all foreclosure activity in the third quarter and 36 percent of homes taken back by lenders, the firm estimates. Sales of homes by lenders made up 18 percent of all U.S. home sales in September, the firm said.

Other experts say delays from the foreclosure documents problem won't end up having a huge impact on home sales or housing values.

Foreclosed homes that would have been sold by lenders now will be sold seven or eight months from now, and prices will start going declining about 3 percent to 4 percent nationally, on average, when those sales take place, said Andres Carbacho-Burgos, an economist at Moody's

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That's good news if you're a homeowner looking to sell in the near term, because there won't be as much competition from deeply discounted foreclosed properties, Carbacho-Burgos said.

"But if you were looking to sell further down the line, that's not so good news," he said.

Economic woes, such as unemployment or reduced income, continue to be the main catalysts for foreclosures this year.

While bank repossessions rose in the third quarter, new defaults continued to decline.

Some 269,647 properties received default notices, the first step in the foreclosure process, down 1 percent from the second quarter and down 21 percent from the same period last year, according to RealtyTrac, which tracks notices for defaults, scheduled home auctions and home repossessions.

In all, 930,437 homeowners received a foreclosure-related warning between July and September, up nearly 4 percent from the second quarter but down 1 percent from the same period last year, RealtyTrac said. The latest tally translates to one in 139 U.S. homes.

The Associated Press contributed the bulk of the reporting for this article.

Video: What’s the impact of foreclosure freeze?

  1. Closed captioning of: What’s the impact of foreclosure freeze?

    >>> ms. morning on "today"'s real estate , a massive probe of the mortgage industry and they launched a joint investigation wednesday that they used flawed paperwork to justify foreclosures, just days after one of the nation's biggest banks announced a nationwide freeze on one of the biggest sales. what does that mean to you? barbara and sharon, good morning to both of you. the president has rejected calls for nationwide moratorium on nationwide foreclosure. you said it doesn't matter what he said.

    >> it's governed by state laws and the fact that the attorney generals are looking into it and the largest lenders have already called for a moratorium, this will create basically a nationwide freeze on foreclosures anyway.

    >> let's talk about dollars and cents, impact on lenders.

    >> we're talking $6 billion approximately. if you look at the fact it will cost lenders $2 billion per month, this could linger three months or more, that will create this situation.

    >> you move to the housing market in particular, the effect it will have on the price of homes.

    >> i personally believe it will have a good effect in the short run on the price of homes. they should either stabilize or go up. the reason being, if you remove 40% of all the product from the shelves, usually, the remaining houses are worth more. that's exactly the percentage being re moved from the marketplace.

    >> what if you're somebody in the midst of foreclosure right now?

    >> ironically, like being able to stay rent free, almost like being in line for the electric chair and the governor says, sit tidy for a while.

    >> maybe they can come up with plan and call a non-profit counselor and credit counselor. you're already delinquent on your mortgage, we know this. that won't change and you need to figure out how to better your financial situation.

    >> once you're on her to side and have a great deal on a foreclosed home, what will happen to you?

    >> you won't be able to close. many people are stuck in between, nowhere to go. thought they were moving in next monday, they're not, the banks of frozen everything.

    >> you're really stuck. for me, i'm not interested in buying and selling and not in foreclosure.

    >> thank god.

    >> it could have an impact on the housing industry overall. these houses will not be sold and that will create problems for real estate agents , they will not be able to be working. painters and carpenters working on these homes are not doing anything and will create an economic problem for the industry and credit problem. now the lenders know perhaps they will not get any money back if a homeowner defaults on their mortgage so will we see tighter credit? that will have an economic impact as well.

    >> which is probably why the president is rejecting this moratorium?

    >> it would be a hardship for the economy overall. when you look at the housing industry, that this is key for coming out of the economic problems we have and if we continue to have this moratorium, that could create a lot of problems and what lenders are saying and why they're saying, we can't have this nationwide moratorium. but a lot of folks are still in this situation.

    >> consumer confidence is at an all time low. you have that as well thmt this won't help it.

    >> we have more information coming out tomorrow and this won't help consumers who say, what if i am paying on time, what is this doing for me? a lot of borrowers say, if this mess is going on with the lenders, what's stopping me from walking away from my home?

    >> exactly.

    >> there could be one piece of good news. to date, the banks have been sitting on their backside. i almost said the wrong word, sitting on their backside, taking their time working out all these modifications. maybe with the attorney generals on their back, they will wake up to the fact they have to move just as fast to clear up the problems on the foreclosures. really a shame.

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