The Foreclosure Lock Up Begins In The United States

When I make a sad prediction, I hate to be right. Why? It is because people suffer greatly when sad predictions come true.

I told you a couple of months ago that it would take 14 months for the foreclosure machine to lock up. Sadly it is only taking two months.

Those of you sitting in homes facing foreclosure are breathing a sigh of relief now. You have lived rent free for months or for years. Now you might get free rent for the rest of your life.

Society is going to pay a dear price for your free rent.
When I made my prediction I saw a lock-up where banks could not foreclose. Eventually they would be forced to write down or write off many loans. The weaker banks would face insolvency. The FDIC and Comptroller of Currency would have to step in. The banks would be sold to stronger banks in the US and foreign countries. I stand by my prediction that J.P. Morgan Chase will survive and grow stronger. Bank of America and Wells Fargo/Wachovia, GMAC and other banks most probably will not survive this disaster in their current form. I see losses in the range of trillions of US dollars coming.

These “too big to fail” banks are both servicers of this massive number of defective loans and they have a financial stake in these bad loans. They will not sit idly by and let themselves be liquidated They will mount a massive lobbying campaign in both the US Congress and Senate as well as the 50 state legislatures to change the mortgage laws to allow them to continue to foreclose with their defective documents and fraud. Hundreds of millions of dollars will change hands. Any legislation they push through would have a hard time surviving court challenges.
These big banks will also mount all sorts of legal challenges in the court system.

The poor investors who put money into all of these defective loans will also file lawsuits to protect their investments. Adding to the massive load of litigation will be all of the lawsuits from homeowners seeking to recover homes unlawfully foreclosed and those seeking to get a clear title to their house after their mortgages are proven to be faulty. It will not take long for the 50 state and the Federal court systems to buckle under the weight of this surge in litigation.

Title companies will stop issuing title insurance policies on foreclosed homes or homes bought out of foreclosure. This will make it impossible to resell any foreclosed home. The huge “shadow inventory” we have sitting out there will sit in limbo, will be unsellable. Any home that was foreclosed on will have a defective title and likewise be unsellable.

Those honest and responsible homeowners still paying their monthly payments will begin to ask themselves why they should continue to pay when so many others are getting free rent. A portion of these more responsible people will default. This will cause even bigger losses for the banks.

In desperation these big banks will turn to the US government begging for a multi-trillion dollar new bailout to help them cover these losses. Both Democrats and Republicans will turn a deaf ear to them. Shareholders of the big banks will mount massive legal challenges to force them to properly acknowledge and write down their loan losses. When the day of reckoning comes and they are forced to admit their true loses, insolvency will follow for many banks. Shareholders and bond holders will suffer large losses.

Counties and states will see their property tax revenues fall as lenders and homeowners no longer pay their property taxes on the “shadow inventory” and homes in default that they cannot foreclose. Some states already facing huge deficits such as California and Illinois could easily be pushed into default. No US government bailout will come to these states. Their bond holders will take huge losses.

Homeowner’s associations will also be pushed into insolvency as lenders no longer pay the dues on the “shadow inventory” and on foreclosed homes.
Those seeking a mortgage to buy a new home or apartment will find very little money available. A government guarantee will be required for each new mortgage underwritten.

The property market will be a beneficiary. With no more distressed housing inventory coming on the market, home prices will not fall further. New home builders may benefit as they will not have to compete against “the shadow inventory.”

Sadly at the end of the day, all of we tax payers will be left “holding the bag” for the irresponsible conduct of the big banks.