Back in January, financial data firm, Bloomberg detailed that roughly three million U.S. homes had been repossessed by lenders since the housing market peaked in 2006. That figure hasn't slowed much as 2010 saw the repossession of one million homes. Bloomberg's Businessweek publication also estimated that 800,000 homes are currently owned by the U.S. government through repossessions from the likes of Fannie Mae and Freddie Mac.

The majority of these foreclosures stemmed from supposed investors that were out to speculate on housing prices rising further. The reversal of years of appreciation left them with homes they could not afford nor cared to live in as a primary residence. It's difficult to feel sorry for these individuals, but in other cases legitimate homeowners have been caught in the crosshairs of the historic housing bust.

TUTORIAL: Mortgage Basics

A Military Horror Story
In one of the more highly publicized cases, earlier this year JPMorgan Chase realized it had overcharged and improperly foreclosed on the homes of a number of active members of the military and veterans. The Service members Civil Relief Act limits the fees and interest rates that active-duty military individuals can be charged, and they cannot have their homes foreclosed on while overseas.

JPMorgan reportedly returned the foreclosed homes of 10 families that were protected by the act and had foreclosed on close to 20 families overall. In other instances, it contacted families repeatedly for payment of mortgages and fees that were not allowed under the act.

JPMorgan admitted to making these mistakes, such as charging members more than the 6% interest rate limit on mortgage interest rates. It apologized for the errors and paid an estimated $54 million settlement to make up for its mistakes. It also agreed not to foreclose on any active-duty military members, lowered interest rates and worked to modify mortgages that those members may be struggling to pay. (Exotic mortgages allow you to decide how much to pay. For more, see Choose Your Monthly Mortgage Payments.)

Loan Modification Eligibility Pulled
There are numerous other examples of homeowners receiving improper foreclosure notifications or delinquent payment notices due to administrative errors at banks.

A Wall Street Journal article cited an unemployed homeowner who originally qualified for the Home Affordable Modification Program (HAMP) and was notified she owed nearly $4,100 after paying a similar amount over the previous six months. She was told to ignore the letter, but then told she should have never qualified for the program in the first place. She was then asked to pay $5,000 to return her original loan, which included late fees.

Other homeowners have qualified for loan modification programs, only to be deemed ineligible when a payment was missed or lost. Once eligibility is lost, the lender unfairly demanded additional funds, which unemployed individuals, or others struggling to make payments in the first place, are unable to afford. (For more, see Avoid Foreclosure: How To Handle An Underwater Mortgage.)

Overly Restrictive Practices
In more current cases, after years of easy credit and the ability to make minimal down payments toward a mortgage, obtaining a loan has become extremely difficult. Realtors have cited cases where homebuyers have high credit scores above 700 and are able to make a 20% down payment, but end up being turned down because of what used to be considered a minor restriction from a lender.

Others are concerned that down payment requirements have become too restrictive when it is clear a potential homeowner has more than enough income to pay monthly mortgage expenses.

The housing appraisal process has also grown too restrictive in the current real estate market. During the upturn, the appraisal process was criticized as too lax because excessive home appreciation levels were supported through higher subsequent appraisals.

The current environment is seeing a much higher percentage of appraisals subject to a downward bias. An appraisal too below an agreed upon purchase price between the buyer and seller can cause a deal to fall through. One example cited a house in New York where a $500,000 sale price was agreed upon. Surrounding foreclosures and falling prices resulted in an appraisal of only $415,000 and caused the deal to fall apart.

The Bottom Line
A certain number of errors is certainly understandable given the historic volumes of foreclosures and home repossessions that lenders are having to carry out since the housing bubble burst. These horror stories keep sentiment firmly negative, which only reinforces the fact that housing sales remain depressed. The problems will eventually be overcome, but could take more than a decade to occur. (For related reading on housing bubbles, see Why Housing Market Bubbles Pop.)

Disclosure: At the time of writing Ryan C. Fuhrmann did not own shares of any company mentioned in this article.

Related Articles
  1. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  2. Credit & Loans

    HARP Loan Program: Help for Underwater Mortgages

    If you are underwater on your mortgage, this program may be just what you need to help build up equity in your home.
  3. Insurance

    6 Reasons To Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  4. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  5. Home & Auto

    9 Things You Need To Know About Homeowners' Associations

    Restrictive rules and high fees are just some of the things to watch out for before joining an HOA.
  6. Home & Auto

    Should You Buy A House At Auction?

    In theory, many of the best properties are auctioned. But auctioned properties aren’t always hidden gems.
  7. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  8. Taxes

    Before You Visit Your Tax Preparer: Do This

    The earlier you start preparing your tax records and documents, the more likely you are to have a smooth tax return experience – and all the tax benefits you're due.
  9. Economics

    What to Expect From Mortgage Rates in 2016

    Understand the factors that influence the direction of mortgage rates, and use this information to project what will happen with rates in 2016.
  10. Professionals

    Becoming a Real Estate Agent Or Mortgage Broker

    Considering a career as either a real estate agent or a mortgage broker? Here are some factors that might help you choose between them.
  1. Do FHA loans have prepayment penalties?

    Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not ... Read Full Answer >>
  2. Can FHA loans be refinanced?

    Federal Housing Administration (FHA) loans can be refinanced in several ways. According to the U.S. Department of Housing ... Read Full Answer >>
  3. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  4. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  5. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>
  6. Are FHA loans assumable?

    Loans insured by the Federal Housing Administration (FHA) on or after Dec. 15, 1989, are assumable by qualifying borrowers. ... Read Full Answer >>
Trading Center