Disputes May Affect 9 Million Foreclosures, Morgan Stanley Says

10-12-2010 • Bloomberg.com

As many as 9 million U.S. mortgages in the foreclosure pipeline or already through the process may face legal challenges because of questions about the validity of documents, according to Morgan Stanley. About 2.5 million homes have been repossessed since 2005 and another 6.5 million mortgages are in foreclosure or may be soon, Morgan Stanley’s Oliver Chang, Vishwanath Tirupattur and James Egan wrote in a note today. The validity of documents used to verify ownership and payment obligations may be in question for each of those loans, Chang said. “We are talking about some pretty big numbers,” Chang, a San Francisco-based housing strategist, said in a telephone interview today. “There’s a lot of developing aspects” to determine the actual impact, he said. Lawmakers, state attorneys general and consumer groups have pressed mortgage firms to follow Bank of America Corp., which last week suspended all foreclosures to check whether faulty documents were used to confiscate homes. A worst-case scenario, in which questions of legitimacy arise beyond procedural issues and a freeze extends to all states and servicers, would lead to “a torrent” of eventual foreclosures, retroactive litigation on home seizures and a delay in the housing recovery, Morgan Stanley said. In addition to Bank of America’s halt, JPMorgan Chase & Co. and Ally Financial Inc.’s GMAC Mortgage unit froze seizures or evictions in 23 states. There are about 3.3 million mortgages in foreclosure or more than 60 days past due in those states, according to New York-based Morgan Stanley.