Wednesday, October 13, 2010

Citigroup (sort of) Answers the Question: "Are We Headed for Housing Armageddon?"

From the Wall Street Journal's Developments blog:

So the mortgage market is in disarray. Bank of America and three other servicers have halted some foreclosures in response to allegations that they submitted fraudulent documents in thousands of foreclosure proceedings nationwide. A coalition of as many as 40 state attorneys general is expected Wednesday to announce an investigation into the mortgage-servicing industry.

How long will the chaos last? How will this shake out in the housing market? Should we brace for an even-longer housing bust?

Josh Levin, a Citi home-builder analyst, seems to be wondering the same thing. On Monday, he held a conference call featuring Adam Levitin, associate professor of law at Georgetown University. Tuesday, Mr. Levin distributed a research note that takes a stab at these questions....

During the call, Mr. Levitin gives three potential outcomes for what is being dubbed “Foreclosures gone wild.”
  • In the best case scenario, the issues are simply technical, the situation is resolved and the foreclosure process continues. Many believe housing won’t recover until the glut of foreclosed homes clears the market.
  • In the medium-case scenario, litigation ensues and the matter takes years to sort out. That will inflict more pain onto the already troubled housing market.
In the worst case, the issues become a “systemic problem” that grinds the mortgage market to a halt and title insurers refuse to insure mortgages involving existing homes. In other words, housing Armageddon.  “It would be devastating for the resale market if this robo-signer issue spiraled out of control,” Mr. Watson says.