It's likely to become the biggest business story, if not the biggest story period, of 2011. What will happen as a result of the massive mess created by the sloppy process by which banks foreclosed on properties? Already three banks have made foreclosure moatoriums in about half the states. More are likely to come. A handful of state AG's are considering charges and more will come.
The first impact is economic. Such a freeze on foreclosures will remove properties that need to be sold from the market.This will create a disequilibrium between supply and demand. There are few buyers and so prices will need to come down but with these properties being held out of the market prices will stay up artificially.
Second, the one area of real estate that's moving will freeze. About the only people making money in real estate were those that focused on foreclosures. Whether they were realtors, mortgage bankers, buyers, or attorneys, there has been plenty of money if you captured the foreclosure market. That will be no longer. Without that moving, nothing is moving.
The most potentially devastating is the potential moral hazard. The biggest problem with a successful loan modification process would have been that it encouraged more people to fall behind on their mortgage. After all, you only get a loan modification if you are behind. That never materialized. Now, we are facing a similar dynamic. Mass freezes on foreclosures mean that people have little to fear about falling behind on their mortgage. There is now little incentive to pay your mortgage. Banks have proven that when push comes to shove, they almost never can prove they have a right to take your home. So, why pay? There is no punishment.
Finally, no one will talk about the main problem, too much paper work. Too much paperwork was partially responsible for causing the crisis. Now, it's largely responsible for causing this crisis. Yet, we passed a massive financial reform bill that will expand paperwork exponentially.
Please check out my new books, "Prosecutors Gone Wild: The Inside Story of the Trial of Chuck Panici, John Gliottoni, and Louise Marshall" and also, "The Definitive Dossier of PTSD in Whistleblowers"