Moreover, because of fraudulent procedures, bank of America and other companies have halted all foreclosures. See 40 State Attorneys General to Investigate Mortgage Fraud; Bank of America Halts Evictions Nationwide; Senator Reid Calls for More Suspensions, A nationwide halt in foreclosures for details.

Halting of foreclosures cut home sales of distressed as well as add to already enormous shadow inventory of homes. In an ironic twist, median home prices may temporarily rise because of decreased sales of distressed properties.

Potential Distressed Sale Buyers Will Stay On Sidelines

Bloomberg reports Foreclosure Freeze May Sideline U.S. Homebuyers on Legal Concern

Revelations of mistakes in foreclosure proceedings are causing buyers to have misgivings about property titles, the right of home possession, said Richard DeKaser, chief economist at Woodley Park Research in Washington. Confidence in the legality of repossessions will cut foreclosure sales more than a reduction of available properties because the market already is flooded with repossessed homes, he said.

“The legal problems we’re seeing will hit sales as people worry about the legitimacy of the process,” DeKaser said. “The implications are that there’s been shoddy work.”

Bank of America Corp., the largest U.S. lender, extended a freeze on foreclosures to all 50 states Oct. 8 as concern spread among federal and state officials that homes are being seized based on faulty data. JPMorgan Chase & Co. and Ally Financial Inc.’s GMAC Mortgage unit stopped repossession cases in 23 states where courts supervise home seizures, amid allegations that employees submitted documents with unverified or false information to speed the process.

Foreclosure sales accounted for 24 percent of all home transactions during the second quarter, according to a Sept. 30 report by RealtyTrac Inc., an Irvine, California-based data seller. They made up a greater share in the states hardest-hit by the housing crisis, accounting for 56 percent of purchases in Nevada, 47 percent in Arizona and 43 percent in California.

In Florida, Massachusetts, Michigan and Rhode Island, the share was about a third.

“The broader concern is that if banks took shortcuts here, what else did they do?” [Rick Sharga, senior vice president of RealtyTrac] said. “Five years into this crisis, there’s no excuse for not having a process in place.”

Ownership questions may not arise until a home is under contract and the potential purchaser applies for title insurance, or even decades later as one deed researcher catches errors overlooked by another. A so-called defective title means the person who paid for and moved into a house may not be the legal owner.

In cases of lost or mishandled paperwork, attorneys in many cases are allowed to refile documents to correct omissions and establish a claim, said Kathleen Engel, a financial-services law professor at Suffolk University in Boston.

Most of the homes affected by the foreclosure freeze will eventually come on to the market because the dispute is about court documents, not about whether borrowers defaulted, said Lawler, the housing economist.

“Most of the delays will just be delays,” Lawler said. “All this is doing is creating severe uncertainty for people who were thinking of buying a distressed property.”

Old Republic National Title Insurance, among the nation's largest title insurance companies, will no longer write new policies for homes foreclosed upon by J.P. Morgan Chase and Ally Financial's GMAC Mortgage unit –– a sign that concerns about faulty foreclosure paperwork could now endanger new sales of foreclosed homes.

Old Republic issued a bulletin to some agents stating that "the company will not insure title to any property which has been foreclosed by Ally Financial, Ally Bank or GMAC until further notice," according to a Sept. 29 copy of the memo. The concern is that other title companies will also refuse to issue policies for major lenders, which could have major ramifications for the housing industry.

And Maryln Weiner, a title agent and real estate lawyer in Boca Raton, Fla., said she received a bulletin saying that Old Republic would also not insure title policy to a purchaser who has bought a property from Chase when the bank has foreclosed on the home and are now selling it to third parties.

"They won't insure it after completion after the foreclosure," Weiner says. "This is going to set us back years. It's really going to be a mess. I think you're going to see actions to reopen foreclosures that already took place. This will have tremendous consequences and all title companies will do the same thing. We've never seen anything like this before."

Mark Stopa, a lawyer in Florida who represents homeowners, says the implications are huge. Buyers will not purchase homes that have been foreclosed upon if they don't have insurance that it's a clear title, he says.

"Would you buy the house? If there's questions about the title, you can't sell it, so who's going to buy it?" Stopa says.

And distressed homes, which include foreclosed properties and that now make up a significant number of housing sales, rose to 34% of sales in August from 32% in July; they were 31% in August 2009, according to the National Association of Realtors.

More Likely Than Not, Taxpayers Will Pay

Lawler says he does not have the answers to those questions, and right now I don't either. However, the attempt by the Senate to ramrod through that legislation shows the senate's intent to minimize the damage to the guilty parties.

Voters are extremely angry right now, and the next Congress is likely to be far more conservative than this one, but after the election the slate will be clear for another two years.

I hope I am wrong about this, but I smell another taxpayer sponsored bailout, possibly via some backdoor concocted scheme involving Fannie Mae. This trick will be to pass a bailout that does not look like one.

If that can be done, rest assured it will be done

Free Market Failure? Hardly!

Someone is sure to blame this mess on the "free market". Nothing could possibly be further from the truth. The Fed's loose monetary policies were the great enabler in this scheme. The mere existence of the Fed, Fannie Mae, Freddie Mac, and the FHA run counter to free market philosophies.

Note too, that the big three rating agencies (Moodys, Fitch, S&P) were sponsored by the SEC. Please see Time To Break Up The Credit Rating Cartel for details.

Regulators in Bed with Industries they are Supposed to Regulate

Finally, and as I have pointed out on many occasions, the one legitimate function of government is to protect civil rights and property rights, with everyone treated equally under the law. Regulation designed to prevent fraud, does just that.

However, and as is typically the case, regulators get into bed with those they are supposed to regulate.

How does this happen? Look no further than the appointment process itself. How many key players in the Bush and Obama administrations have ties to Goldman Sachs and JPMorgan? How many have other ties to Wall Street and other large banks?

Playing Field Purposely Dishonest

Cries for more regulators will not do a damn thing when people like Elizabeth Warren Tossed a Bone and Appointed Geithner's Lapdog

We do not have a level playing field for the simple reason Wall Street and the big banks do not want an honest playing field. Unfortunately, the corrupt way corporations buy politicians all but ensures the status quo, even as screams for more regulation reverberates from the mountain tops.