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Will halting foreclosures help the LI housing market?

Long Island foreclosure notices slowed in January. (Undated)

Long Island foreclosure notices slowed in January. (Undated) Credit: Bloomberg News

Troubled homeowners trapped in the paperwork nightmare of fighting foreclosure proceedings may get a breather. Three of the nation's biggest lenders of home loans have suspended foreclosures to review documents, and House Speaker Nancy Pelosi has called for a federal probe into questionable foreclosure procedures. 

Bank of America, Ally Financial Inc., and JP Morgan Chase all announced a freeze on foreclosure proceedings after accusations that many mortgage servicers have employed so-called “robo-signers” who spend the day signing foreclosure documents they haven’t read.

In addition to buying some time for individual homeowners at risk of losing their homes, in the short term this may reduce the volume of home sales on Long Island: Foreclosure-related sales made up 11 percent of home closings in Nassau and 17 percent in Suffolk in the second quarter, according to data released by Realty Trac. This could temporarily help prices, says analyst Jonathan Miller, who tracks Long Island real estate.

“If your mix is made up less foreclosures than normal, and less inventory coming on the market to absorb, in the short term you do see prices remain stable, or even rise in the short term,” says Miller.

However, the stopgap measure may hurt the market in the long run, he says. One problem is that financing will become harder to come by, he says. “The lenders become bloated with properties that they need to dispose of. The probability of them easing lending guidelines is greatly diminished. This doesn’t solve much of anything.”

And once the freeze is lifted, those properties will still have to be absorbed, he says.

Miller compares it to what happens after a moratorium: “All the properties that should have gone into the market organically, in a natural progression, all of a sudden on the day they’re able, they flood the market. The rate at which these properties are introduced to the market once this catastrophe is resolved means much more trouble down the road. It’s almost a false positive,” Miller says.

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