After suspending foreclosures in order to review cases that may be flawed by procedural errors or fraud, major mortgage companies have injected new uncertainty into the already weak housing market. While few of the homeowners under scrutiny are likely to avoid foreclosure, the freeze adds additional confusion and delays recovery of the troubled housing sector, according to Wharton faculty and real estate analysts.

The foreclosure flap is the most recent of many setbacks for the troubled industry, even as a new generation of potential buyers is rethinking the traditional dream of homeownership. "Buying a home doesn't make sense for a large proportion of the population," says Wharton real estate professor Fernando Ferreira, noting that ownership reduces the flexibility to pursue work in other regions and ties up cash in a down payment that might be used for better investments. "We forgot these lessons in the housing boom. But I think the new generation is learning them -- at least for the next five to 10 years."

After discovering that employees violated procedures while attempting to process a crush of foreclosure cases, three of the nation's leading mortgage servicers -- J.P.Morgan Chase, GMAC and Bank of America -- are holding off on further action in 23 states that require foreclosures to undergo judicial review. One GMAC "robo-signer" acknowledged signing off on as many as 10,000 cases a month, even though the law requires the signer to review all documents personally. Bank of America later extended its halt to foreclosures in all 50 states.

Wharton real estate professor Susan Wachter says the foreclosure freeze might temporarily buoy prices by keeping foreclosed properties off the market and could give some families another chance to come up with enough money to save their home. However, she expects that most of the now-stalled foreclosures will eventually move forward. "This will only delay the market clearing process."

According to Wharton real estate professor Georgette Chapman Phillips, lenders may be guilty of shoddy paperwork, although she stops short of calling it fraud. Lengthy delays or overturning foreclosures based on improper documentation, she adds, would create new levels of moral hazard that might lead even more homeowners to stop paying their mortgages. "This is a horrible mess created by the banks and the secondary market. It's sloppiness, but the borrowers are not asserting fraud in the lending of money. We can't ignore that, at the bottom of all this, the people who were foreclosed upon didn't pay their mortgages."