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Originally published October 13, 2010 at 12:14 PM | Page modified October 20, 2010 at 2:02 PM

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Foreclosure mess just latest scandal for housing debacle

Massive fraud involving mortgage paperwork is the latest snake encountered while trying to slog out of the nation's economic swamp.

Special to The Seattle Times

China is investing $100 billion this year alone to build high-speed rail. It's working hard to corner sustainable-energy industries, too.

America is still dealing with the collapse of the housing bubble.

The latest snake encountered while trying to slog out of this swamp should have been entirely predictable: the emergence of massive fraud involving mortgage paperwork.

Bank of America has halted foreclosures nationwide, and other big banks are following. JPMorgan Chase said Wednesday it would expand its review of mortgages to 41 states. Also, Washington Attorney General Rob McKenna said he will investigate foreclosure practices.

Yet this is no clear victory for the working man and woman. Some homeowners might be able to remain in foreclosable houses for years, even stop paying because of flawed paperwork.

But others still will lose their houses — Washington is among 27 states where a judge is not required to review a foreclosure. The borrower must sue.

Worse, the freeze is the latest blood clot in the housing economy, which because of the bubble was America's most important sector. It was not going to come back as before, but the freeze ensures that even a weak recovery may be strangled.

Foreclosed houses affected by the freeze are being pulled from the market. Real-estate agents are facing another lean year. Investors are retreating. And the shadow inventory of houses just keeps growing, an avalanche waiting to be dumped the first time prices seem to be headed higher.

Another problem: Even with incentives for some buyers, the inventory of unsold, foreclosed houses keeps rising on many banks' books.

Why? Banks are now applying actual standards — tough ones — to lending. Also, lack of jobs for millions, and poor wages and shrunken wealth for millions more, dampen the demand.

Banks are lucky if they can rent these houses; many are unoccupied. In any case, banks don't want to be in the property business.

According to the website ForeclosureRadar.com, in September most foreclosed properties in the state went back to the bank, up 69 percent from the prior year.

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Of 3,593 foreclosures last month, only 147 were sold to a third party. (An additional 1,586 were canceled because of a short-sale, loan modification or legal issue).

Behind the numbers is the ugly reality: America has far to go to work off this historic bender of debt, fraud, unsustainability and greed.

With a push from government policy backed by both parties, the "financial services" sector and too many homebuyers and speculators went on a gaudy spree that will be with us for years.

The foreclosure paperwork scandal won't be the last ugly surprise.

You may reach Jon Talton at jtalton@seattletimes.com

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