Will fear from the foreclosure fiasco push buyers to short sales?

For those who have been following the mortgage/real estate meltdown, the announcements that Bank of America, JP Morgan Chase and GMAC (Ally Financial) would be postponing foreclosures states didn’t come as huge surprise. For months now – years even – stories have circulated about lenders rubber-stamping foreclosures, without properly reviewing the paperwork to see if they are legally able to do so.

It’s been no secret that those lenders (and many others) have retained foreclosure mills – law firms that represent the lender and process massive numbers of foreclosures in a given city or region – to do the lenders dirty work for them, often it appears, fraudulently.

Even Fannie Mae, the quasi-government agency that owns or guarantees just over half of the United States mortgage market (and many of those serviced by BofA, Chase & GMAC), has been equally guilty of such practices. As noted in The Huffington Post last week, Congress has been left asking how a company propped up on taxpayer dollars could do this to the very people keeping it solvent.

Make no mistake these stories are huge. But the question they have left many people asking is: what does it all mean? The answer leads to a larger story.

On the surface, it means that many people who purchased foreclosed homes might want to keep the number of their moving company handy. If it turns out homes were foreclosed on illegally, the original owner might be able to challenge the legitimacy of the foreclosure and the person who is currently living there might be forced to move out.

However, the story of greater significance appeared on the USA Today website last weekend, when they reported that Old Republic Title Company would stop writing policies on some of these foreclosures.

Whereas this scandal to date has been limited to the lenders, their clients and those who have purchased foreclosed homes in recent years, the announcement from ORTC could eventually affect every neighborhood in the U.S – especially if other title companies follow their lead.

By many estimates, lenders are currently sitting on over 3 million foreclosed homes, with still record numbers of homes waiting to be foreclosed on. If title companies won’t issues policies on them – for fear they were foreclosed on illegally, placing the title company themselves in a murky situation – then what? Will lenders be forced to sit on these homes, care for them, pay taxes, association dues, etc., until this mess is cleaned up? What will happen to both the value and curb appeal to those homes and their communities? I think we can all assume that the odds of these homes being cared for the way someone living in them would, are low.

Sure, there is the possibility that lenders would insure the title themselves, but they’d still be looking at a lengthy road to cleaning up the paperwork, before even they’d feel comfortable selling a foreclosed home with any degree of confidence that they followed the process legally.

With foreclosed homes as the pariah of the real estate world, short sales suddenly become a far better option… for everyone.

For the buyer, a short sale is a safer bet. Sure, the process is long, but the buyer is protected. The home hasn’t been foreclosed on; therefore a title company independent of the seller’s lender will perform a title search, insuring clean title.

For the seller, this could mean better offers for their lender. If title companies stop insuring title on a large number of foreclosed homes, the available inventory will be significantly reduced, which would be a boon for anyone listing a short sale.

For the community, it will likely mean a dramatically shorter turn-around from underwater homeowner to new neighbor – and equally as important, far less of a chance that the home would fall in disrepair, squatters might move in, or any other concern a vacant home might bring to the block.

And of course, the lender might benefit most of all, since a successful short sale would mean one less potential foreclosure for them to pay/care for…