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The Associated Press November 1, 2010, 6:02PM ET

Fitch: Foreclosure delays to prolong housing slide

Foreclosure delays stemming from allegations that some lenders made mistakes in paperwork will drag out the time it takes for the U.S. housing market to recover, Fitch Ratings said in a report Monday.

Allegations surfaced in September that banks evicted people without fully reading foreclosure documents. Major lenders, including Bank of America and Ally Financial Inc.'s GMAC Mortgage temporarily suspended some foreclosures while they reviewed foreclosure paperwork for possible errors.

And attorneys general in all 50 states and the District of Columbia launched a joint investigation into whether paperwork and legal procedures were handled properly in hundreds of thousands of cases.

The investigations, lender reviews and lawsuits from consumer advocacy lawyers will combine to lengthen the time it takes for distressed homes to be foreclosed, adding to the size of the so-called shadow inventory of empty homes that have yet to be sold, Fitch said.

The firm estimates that the shadow inventory of properties in some stage of foreclosure or that were taken over by lenders hit 7 million in September. That pool of unsold, distressed properties could push home prices lower once they hit the market.

"The foreclosure and liquidation extensions will slow the resolution of defaulted loans and delay home prices from finding a floor," said Grant Bailey, senior director at Fitch Ratings.

Longer foreclosure delays will also weigh on U.S. residential mortgage-backed securities, causing higher carrying costs for lenders, Bailey noted.

Fitch predicts that it would take more than three years to sell the properties backed by loans that are currently seriously delinquent, in foreclosure or have been taken over by servicers. In states such as Florida where the courts are involved in foreclosures, it could take longer than in states where courts don't play a role, the ratings firm said.

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