From the useless HAMP program to the lack of criminal accountability among the people who created this mess, this situation is basically the result of the misplaced idea that "helping" banks instead of helping people was the way to fix the economy. It's a typical modern American half-assed response that comes of this ridiculous fetish for "markets" and privatization and a corresponding belief that the the government can't directly do anything. When the problem is the market and the private sector, the fallacy of this myopic view becomes obvious.
Millions of people have already lost their houses to lenders who didn’t have the proper paperwork, and it’s unlikely they will ever get any redress. For people who haven’t yet been foreclosed upon, however, it could now be a very long time before they lose their house.
The big-picture consequences here are by their nature unpredictable, as no one has a clue how this might all play out. But I can think of a few themes:
- Bond investors, who have seen the value of their mortgage-backed debt rise impressively over the past 18 months, could find themselves unable to find any kind of bid at all. The paper will still be cashflowing, but those cashflows will be surrounded by enormous uncertainty, and no one’s going to want to buy them except at extremely deep discounts until the mess is cleared up.
- Mortgage servicers will go from being assets to being liabilities, and banks which own mortgage servicers could find themselves on the hook for substantial losses.
- The time from default to foreclosure will become indefinite, and as a result there will be a significant uptick in strategic defaults, especially in states with judicial foreclosures.
- The “shadow inventory” of houses which aren’t on the market but will eventually be sold once the bank gets around to foreclosing will grow substantially from its already-enormous level.
All of this is going to be very costly and very unpleasant for all concerned; the only winners I see here are the lawyers. Add in possible securities-fraud charges against investment banks which underwrote a lot of these bonds, and the end result is a level of legal chaos I can barely imagine, in both the civil and criminal courts. And I see no easy way out at all.