NOTE: This post will be continually updated, below, as more foreclosure freeze news breaks.

I double-dog dare you to watch a TV news show or spend more than 5 minutes on the web without hearing about the massive "robo-signing" foreclosure scandal that is rapidly encompassing the biggest banks in the country.  Here are 4 things home buyers need to know about this breaking real estate news, and how it impacts them.

(Hint: I threw in a couple of bonus items at the end!)

1.  What is robo-signing is, and what all the fuss is about?  The phrase robo-signing refers to what we’re now realizing has been a very common practice in the banks’ foreclosure document processing divisions, where one person was essentially given the job of signing as many 10,000 foreclosure documents per month, by hand.  These individuals were supposed to be reviewing the files, making sure grounds for foreclosure actually existed, signing the docs in front of notaries. But because of the volume of documents, what they actually did was just sign thousands of documents at a time, without even reading them, and ship them off somewhere else to be notarized.

If you do the math on an 8 hour workday, you'll see that that only gives the staffer 1.5 minute to review each file and documents to make sure the foreclosure is warranted.  That's not humanly possible, which is how these staffers got the nickname “robo-signers”
   
Government regulators are very concerned that the banks may have been taking people's homes without following the proper legal procedures.  As a result, 40 states' attorneys general are teaming up to launch a multi-state investigation, and the federal Comptroller of the Currency and federal attorney general may also get involved in investigating this issue.

2.  Will the freeze will make the banks cancel buyer contracts on REO properties? Currently, the freeze impacts bank-owned properties that are owned and/or serviced by Ally Financial/GMAC Mortgage, JP Morgan Chase, and some properties that were owned by Bank of America. Generally, contracts to buy these homes are being put on hold and extended for 30 days.  As well, the banks are often reaching out directly to buyers and offering them the option to cancel their contracts and recoup their deposit money.

3.  Is it safe to buy a foreclosed home? There's lots of talk right now about the "clouds" that this scandal will create on the titles to homes that were foreclosed by the banks' foreclosure mills. And that makes sense: if the home wasn't properly foreclosed on in the first place, then the legitimacy of the bank's resale can be called into question.  Normally, I'd say: Don't worry about it, buyer - that's why you'll get title insurance!  But last week, 3 of America's largest title company insurers declared that they will not offer title insurance on a number of the homes that may have been involved in this scandal.

In the vast majority of cases – when the foreclosure was justified and a bona fide purchaser, someone who was not involved in the bank’s wrongdoing, has purchased the home, courts will not reverse these foreclosures or their sale to buyers.  But if you’re in the market for a foreclosure, get clear on which bank owns the place as soon as you can, and run the property past your title insurer before you get too far into the transaction to make sure they can write a policy of title insurance on the property before you spend too much money on inspections and appraisals.  (And see my Bonus Buyer Advice at the end of this blog post!)

4.  How the foreclosure freeze will impact American home values, say after you buy.  In the short term, these freezes might cause prices to stabilize, as we expect to see the supply of foreclosures for sale start to shrink.  However, if these freezes stretch out for a long period of time, they could simply be delaying many inevitable foreclosures, which could delay the recovery of the housing market and home prices, over time.  I wouldn't expect to see the freezes cause prices to drop much beyond where they are now, but if they stretch out, they could keep appreciation flat for a longer period of time.

P.S. - Bonus Buyer Advice from Tara: Don’t underestimate the deals you can get on non-foreclosed properties. You can often get just as good of a price on a better property with more flexibility on the seller’s part in terms of repairs and other negotiation points if you buy a home from an individual seller, as opposed to a bank-owned property. 

P.P.S. - Click here for more tips on how to negotiate the best possible deal when you buy a home.

P.P.P.S. - You should follow Trulia and Tara on Facebook, too!


Update 10.12.2010 - Litton Loan Servicing and PNC Financial have also implemented foreclosure moratoria. Details to come.
 
Update 10.18.2010 - Many have written to ask me whether any Fannie Mae-owned properties are affected. Bank of America, in particular, services many Fannie Mae-owned homes. The short answer is that yes - many Fannie Mae REO sales ARE frozen, for the time being.

Fannie Mae says: "Fannie Mae has halted foreclosures, evictions, and REO sale closings when necessary for a servicer to perform required remediation. Our actions are intended to protect the rights of borrowers facing foreclosure, enable a fair and equitable legal process for all impacted parties and allow new homebuyers to close on their transactions in a timely manner."

Update 10.19.2010 - Bank of America says it will "effectively" lift the foreclosure freeze in the 23 judicial foreclosure states, beginning next week - click here for more details.

Update 10.29.2010 - Wells Fargo has announced that it will re-file foreclosure documents in 55,000 foreclosure cases - the first indication the bank has ever given that there might have been "issues" with its foreclosure document processes.  click here for more details