So far the recent halting of foreclosures, coming as a response to findings that questioned whether these lenders have followed correct foreclosure procedures in the 23 states affected, is just a voluntary action by these lenders and has not yet been mandated by either the states or the federal government. These findings have revealed that there may have been fraudulent paperwork filed, or media dubbed “robo-signed” documents, during the foreclosure process by banks in states that require a judicial foreclosure process, our court affirmation prior to the foreclosure.

In reaction, Federal agencies, including the Office of the Comptroller of the Currency, the Federal Housing Administration, and the conservator of Fannie Mae and Freddie Mac, have asked lenders and servicers to review their foreclosure processes in all states. This apparently this has been enough to cause JP Morgan Chase, GMAC and Bank of America to temporarily suspend their foreclosures while they internally audit their files and ensure that there has not been any illegal paperwork completed during the foreclosure process. Other banks such as PNC Mortgage and Wells Fargo have yet to stop any of their foreclosure activity, but they are internally reviewing their foreclosure process.

While banks claim that problems with their foreclosure documents are merely technical and that homeowners in default will still be foreclosed upon, teams of lawyers representing homeowners are trying to claim that the filing of any flawed foreclosure documents with the court is fraud. This has been enough reason for attorney-general’s offices in all 50 states to launch a nationwide investigation in whether the corner-cutting banks had broken the law as they pushed delinquent borrowers from their homes. And, if it is ultimately determine that some of these foreclosures were wrongful due to the inaccuracy of any filed documents, then some previous buyers of foreclosed homes could face title claims by the previous owners who may have been wrongfully evicted.

Unlike the states affected by this fiasco, the foreclosure process in CA is dominated by non-judicial procedures, also known as Trustee’s Sales, which are not currently being questioned by authorities. Nonetheless, banks are still reviewing their files in all 50 states and so far the only lender to stop foreclosures in CA has been Bank of America.

REALTORS in CA have already begun to report the immediate impact of this moratorium on transactions that involve properties that have been foreclosed by Bank of America. Delays in escrow and the removal of listed foreclosures have been temporary results.

But luckily there isn’t any indication that other lenders will follow suit, and for the moment it seems safe to assume that this bank is merely reacting in a knee-jerk manner, meaning all other CA homeowners will probably not see any direct affect from this “foreclosure freeze” other than it creating an additional speed bump in an already prolonged recovery. Assuming that Bank of America’s moratorium will be lifted in the next month, the flow of REOs to the market should resume, but the uncertainty created by their moratorium may cause hesitation on the part of homebuyers.

So, although a light has been shed on some possibly “sneaky” behavior on behalf of banks, the outcome will not stop foreclosures and is sure to only postpone the real estate market from arriving at two things necessary for a recovery: a bottoming out of prices, and a sense of certainty that the market is functioning properly. If Buyers are not sure about purchasing foreclosures then a large amount of the inventory will continue to pile up, and if banks can’t unload these inventories then it will be more difficult for them to continue financing new purchases.