Millions Of Foreclosed Prior Homeowners To Get a Chance at Foreclosure Review

In what is perhaps an unprecedented move, the federal government is allowing 4.5 million current and former homeowners who lost their homes to foreclosure a chance to review their foreclosures for fraud, negligence, or impropriety.

Starting in November, the federal government will send notices to these homeowners that reveal an opportunity to review and appeal any residential foreclosures on primary residences that occurred in 2009 or 2010. Upon a successful review, the homeowner could receive restitution, although it is unclear what form that would take or how much it would cost mortgage loan servicers.

The move comes after a year-long investigation into foreclosure process procedures from some of the nation’s leading banks. Currently, Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial are embroiled in an ongoing settlement dispute with state governments over alleged unethical and illegal procedures, including rubberstamping and robo-signing foreclosures.

The plan was recommended by independent consultants in conjunction with the investigation, and would be supervised by consultants with oversight provided by federal regulators. The end result could be millions of homeowners compensated for the damage wrought by the financial industry.

This idea sounds terrific – obviously, homeowners who were wronged need some sort of appeal process and remedy, and violators of law and basic morality should be punished – but will it do anything to systemically help the real estate market as a whole? In other words, will it help reduce the number of foreclosed homes for sale, or help slow down the rate at which residential foreclosures enter the market?

Probably not – and that is the main concern about a program that sounds great, but ultimately could prove to be of little help for the overall market. One primary benefit is an indirect one; lenders who have to pay restitution will have more of an incentive to avoid similar behavior in the future. Another benefit could show that the government is committed to resolving the problem, but admittedly that could only be for the party that is viewed as being responsible for making the plan happen – reason enough for the other party to oppose it.

Until there is some way to help the 11 million homeowners who are currently underwater, and to help millions of foreclosures for sale leave the market, the real estate market as a whole will not improve permanently – no matter how good of an idea this restitution plan may be.