Foreclosure chaos for homebuyers, sellers

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Recently, several major lenders suspended foreclosures as they review irregularities in legal paperwork. These suspensions could have a significant impact on today’s homebuyers and sellers.

The extent of disruption will depend largely on how long banks hold up foreclosures in states that require a judicial foreclosure process. During these suspensions, banks will review affidavits that have been challenged.

If the problems are resolved quickly, the impact may be minor, according to Rick Sharga, senior vice president at RealtyTrac, a national foreclosure-tracking service in Irvine, Calif.

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“We should see a slowdown in new foreclosures and foreclosure processing over the next two to three months, followed by an accelerated rate of foreclosure activity in the first quarter of 2011, and then we’ll be more or less back to normal,” he says.

The risk, however, is that foreclosure delays could drag into next year or be expanded to more states — as already has begun to happen.

“The concern is the potential implications for the overall housing market and economy,” Sharga says. “If you freeze the sale of homes that have been repossessed and are in foreclosure, you will wipe out 30 percent of all home sales. That’s like finding a patient who’s in intensive care and unplugging some of the tubes.”

Outlook for sellers

The foreclosure delays may impact sellers in several ways.

Homeowners in foreclosure who hope to sell may get a “temporary break” before the process moves forward, according to Nick Libert, broker/owner of Exit Strategy Realty in Chicago. That would allow them to live in their home awhile longer and potentially close a short sale. Or, they could negotiate a loan modification to avoid foreclosure.

Home sellers who aren’t in foreclosure also may benefit as banks take foreclosed homes off the market. The diminished supply could put upward pressure on prices.

“As long as buyers stay in the market and the inventory gets reduced, we’ll see prices stop any slides and potentially go up a bit,” Libert says.

Sellers may need to act quickly if they want to take advantage of that window, says Lydia Player, a real estate agent at Virginia Cook, Realtors, in Dallas.

“It’s positive short-term news for sellers because they won’t be competing against the inventory of distressed properties,” she says. “But (their home) could be listed for one, two or three months, and at that point, the market could be flooded.”

Outlook for buyers

Potential homebuyers who previously considered shopping for foreclosures may be scared off by the recent negative news reports. But Libert says there’s no reason for buyers to delay their plans as long as they can get a clear title to the property and title insurance.

However, some buyers remain worried. Player says buyers in Texas are concerned about recent developments, even though the state doesn’t require foreclosures to go through a judicial process. Texas Attorney General Greg Abbott has demanded certain lenders forestall all foreclosures in the state, though it’s unclear how many will cooperate.

Buyers are looking for foreclosure properties, Player says, because they perceive these homes to be “a good deal.” But now, she fears, the prospect of fewer bank-owned homes being for sale could prompt them to delay their homebuying plans. “Buyers have been sitting on the sidelines for several months, waiting to see what’s going (to) happen, and this only gives them more of a reason to sit on the sidelines,” she says.

The bottom line is that affected housing markets are now in a state of heightened uncertainty that presents both risks and opportunities.

“The fear is that we could see some contagion and this could turn into a real mess,” Sharga says.

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