But the fallout from the crisis is beginning to be felt in real-estate markets across the country, particularly in places dominated by vacation homes and investment properties. Some of the worst-hit areas could be Western ski towns, because fall is the busiest time of the year for sales.
Real-estate salespeople in some of those places are worried. "September and October are usually the height of the selling-season for us," says Rich Armstrong, who owns the brokerage Rare Properties in Jackson Hole, Wyo. "Now we are seeing a number of what we call 'fence sitters,' people who would have leapt in even a month ago, but now are waiting on the sidelines."
The "foreclosure crisis" is a result of the frenzied real-estate boom and bust of the past decade. Banks made foolish loans, and borrowers signed up for them—only to default later, as the economy slumped. Banks rushed to reclaim properties, launching a record number of foreclosure proceedings.
In the past several weeks flaws have emerged in that complex process. Because of the high volume of foreclosures, the documentation supporting legal actions was prepared hastily, and some homes were seized improperly.
Yet the far bigger worry is what happens next. A frenzy of lawsuits and banks' examinations of their own practices could throw more of the millions of foreclosures of the past few years into legal jeopardy. Attorneys general in all 50 states are investigating, and plaintiffs' lawyers are working hard to perfect their legal strategies for suits on behalf of people who have been foreclosed on.
The suits might well fail. But just the threat that past foreclosure rulings might be overturned could result in collateral damage. In some places, banks are rushing foreclosed properties to market. In others, buyers are stepping back, refusing to buy foreclosed properties or "short sales"—homes sold by owners for less than the mortgage balance. In markets already beset with large inventories of foreclosed properties, the result could be a slower recovery.
Coastal markets and ski areas are feeling the most anxiety. Some already are littered with foreclosures—in part because they're dominated by second-home and investment properties. Those owners are more willing to walk away from a house that isn't their primary residence.
Foreclosure tracker RealtyTrac estimates that, nationwide, 30% to 35% of properties in foreclosure are owned by investors or were second homes. In Aspen, Colo., the figure is about 60%, says Kim McKinley, owner of McKinley Sales Real Estate in Basalt and Aspen, Colo. If foreclosure proceedings slow from here, inventory could jump, leading to price weakness later.
"We're concerned that the phantom inventory buildup will cause a more rapid and drastic drop in prices in Aspen, which is just getting started in terms of foreclosures coming to the market," says Ms. McKinley.
The timing of the foreclosure mess is especially inconvenient for ski towns, given the fall selling season.
Property owners are growing nervous. In Park City, Utah, lenders are quickly unloading foreclosed homes ahead of what could be a long, stalled foreclosure process, says Joe Trabaccone, a real-estate agent there.
On Oct. 11, for example, J.P. Morgan Chase put up for sale an 8,000-square-foot home adjacent to a private gated golf course. Mr. Trabaccone initially recommended the property be listed for $1.6 million, but Chase opted for $1.26 million. "They are offering these homes far too low just to hurry up and sell them," Mr. Trabaccone says.
Even so, it hasn't worked. A buyer made an offer and signed a contract, but then backed out.
In South Lake Tahoe, Calif., on Thursday, Freddie Mac, the big government-sponsored guarantor of mortgages, put a foreclosed home that had just been listed for sale on hold, freezing the property until paperwork could be straightened out. The foreclosure mess "seems to be filtering down and it could be an impact," says Doug Rosner, the broker who had listed the home. Three other properties in town were also frozen, another real-estate agent says.
The "sand states" of Arizona, California, Florida and Nevada are being hit as well. These areas, too, have a lot of vacation and investment properties—and a lot of foreclosures.
Robin Speronis, a real-estate broker in Cape Coral, Fla., says business had been picking up recently, with several inquiries a day—until the latest foreclosure scandal broke. Since then, she says, inquiries have shriveled to just one in the past week.
Susan Weeks, 55 years old, and her husband, Eddie, aren't optimistic. The couple had expected to retire and downsize when they bought a condo in Clermont, Fla., near Orlando, in 2007 for $192,000. Their plan was to sell their primary residence 10 minutes away and live in the condo. The trouble: They can't sell their first home.
The Weeks paid $269,000 for their three-bedroom home in 2004. The house next door, a bit larger, is listed at $185,000, Ms. Weeks says.
The couple has decided to move back to their primary home and take a renter for the condo. But while that brings in $850 a month, the Weeks take a $450-a-month hit on the condo —on top of the $2,400 a month they pay every month on their primary home.
"We're just going to wait it out," she says.
The possible foreclosure wars to come loom so largely over Florida markets that Ms. Speronis is urging condo sellers to consider any offer they get, even if it is far below asking price or what is owed on the mortgage.
Dianne Cloutier, a records supervisor in Chelmsford, Mass., had been looking for a retirement property in Cape Coral, but decided to wait because of the foreclosure mess. "It's left us on hold until we are sure the banks have legitimately foreclosed on people and that nobody can come back on us to get their property back," she says.
Foreclosures aren't the only problem. Short sales are getting more difficult to pull off, too.
In Bend, Ore., agents say buyers are avoiding short sales or even backing out of contracts because they don't want to deal with paperwork hassles or the chance of a court challenge later.
"I have some people saying 'I don't want to mess with bank-owned properties or short sales,'" says Dianne Willis, principal broker with RE/MAX Sunset Realty in Sunriver, Ore. "They're reluctant because it can be a frustrating process, especially for those who are looking to make a big move."
The short sales "can be very frustrating," adds Becky Ozrelic, of with Steve Scott Realtors in Bend. "You just have buyers waiting and waiting."
For sellers, lining up a short sale was tough even before the latest foreclosure crisis. Banks and mortgage "servicers," the outfits that process payments, already had been scrambling to handle surging workloads.
Mike and Kim Schwarz of San Jose, Calif., are coming up on the one-year mark on their short-sale saga.
The couple had acquired several investment properties over the past few years, including one in Thousand Oaks, Calif., for $751,000. After the tenants stopped paying rent, the Schwarzes couldn't cover the payments and decided to sell, Mr. Schwarz says.
They lined up a buyer in November 2009, and started working with their loan servicer on the short sale. For lenders, short sales are ugly because they guarantee a loss, but they often are preferable to a foreclosure, in which the lender is saddled with a tough-to-sell house.
The servicer, Residential Credit Solutions, took six months to process the paperwork, the Schwarzes say. Faxes and emails were sent, but nothing happened, Mr. Schwarz says.
"We typically don't hear from borrowers about long delays," says Dennis Stowe, president of Residential Credit.
The buyer walked away from the deal in June. The couple found another buyer in August, and resubmitted the short-sale paperwork. Mr. Schwarz says he has sent paperwork to Residential Credit four times since.
On Friday, Mr. Schwarz says, Residential called to tell him the short-sale paperwork looked good and the sale should close in mid-November.
Says Mr. Schwarz: "They didn't make it easy."
The foreclosure mess could hurt homeowners in another way: The costs of buying a home and paying off the mortgage are likely to go up, say housing experts.
The rising costs will come both during the closing and throughout the life of the loan.
At the closing, the cost of title insurance, which protects a property buyer from claims of ownership made by other people, is likely to rise, industry officials say. Title insurance is one of those annoying costs that can sneak up on a buyer during a close; premiums average around $2,000 across states, says Tim Dwyer, CEO of insurer Entitle Direct Group.
The foreclosure mess has sent insurers scrambling. One of the largest, Old Republic Title Insurance, told its agents on Oct. 1 not to issue policies on homes that have been foreclosed by GMAC Mortgage or J.P. Morgan Chase. And on Wednesday, the nation's largest title insurer, Fidelity National Financial, said lenders must vouch for the accuracy of their paperwork before it will insure properties.
Just like homeowners-insurance rates rise after a hurricane, the rates for title insurance are expected to rise, to compensate for the added risk.
The turmoil will likely lead to pricey premiums for new homeowners, says McLean, Va.-based housing economist Tom Lawler. Adds Cameron Finlay, chief economist at mortgage lender Lending-Tree.com: "Any time there is uncertainty in the market or risk implied, it follows that costs go up."
Other costs could be felt during the life of the loan. Until the current mess, servicing loans was a low-margin, high-volume business. Servicers collect mortgage payments from borrowers and send them off to mortgage holders, and if the loan gets into trouble, they manage the foreclosure. Few doubt this process will get costlier now that it is under scrutiny from regulators and the courts. That higher cost likely will show up in higher interest rates for borrowers.
Both of these higher costs also would hit homeowners who refinance their loans.
How much the costs of buying a home will rise is unknown. Mortgage industry officials say it is too soon to tell. And no one believes the costs will significantly change the price of a home. But with the housing market still weak, the uncertainty is making the prospect of buying—or selling—a home that much dicier.