No Closure on Foreclosures for Taxpayers

If you thought the housing mess was damping economic recovery, be warned that foreclosures will soon crater the real estate market. That may sound too alarmist for your tastes, but the facts suggest the coming tide of foreclosures will fuel another economic crisis likely to overshadow anything the country has witnessed.

Worst of all, the billions of taxpayer dollars spent by the Obama Administration to address the foreclosure problem have made only a tiny dent in the problem. By the Treasury Department's own admission, the Home Affordable Modification Program (HAMP) has not worked as foreclosures have steadily mounted, despite the massive bailout. The price tag for this failed government experiment is $50 billion.

Even that figure does not include the $148 billion the Treasury has invested in the government's version of Dumb and Dumber: Fannie Mae and Freddie Mac. Taxpayers have footed the bill for the mismanagement of these government-owned mortgage giants for more than two years. Although their losses have narrowed, taxpayers may have to come up with as much as $259 billion to stave off bankruptcy, according to the Federal Housing Finance Agency.

But the news only gets worse. Fannie Dumb and Freddie Dumber now own more than 240,000 foreclosed homes, as of September 30. That's more than twice as many foreclosed homes as they owned a year ago. In addition to the bailout money that's propping up the two lenders, the terrible twins have doled out more than $2 billion of your hard earned dollars to maintain more than $24 billion in foreclosed properties they own. The longer they own the properties, the higher the final bill for cleaning, maintenance, insurance, taxes and legal fees.

Those properties are likely to take many months if not years to sell. Freddie Dumber admitted recently that the sales of these foreclosed home could be prolonged by something no one in government or the media want to talk about.

The attorneys general of all 50 states have ganged up to challenge foreclosure filings by some of the country's biggest lenders, including government-owned GMAC Mortgage, Wells Fargo, J.P Morgan and a host of others. The states claim there have been defects in the documents submitted by the lenders to force foreclosure. While that issue is being litigated, the foreclosure legal machine has ground to a halt.

What that means is a glut of foreclosures are sitting in limbo. Some estimate the number is likely 200,000 or more foreclosures. Those on both sides of the issue are disputing the paper work involved in the foreclosure process. Hardly anyone is suggesting that most homeowners will not end up losing their property, even after the document faux pas is rectified.

Once those fifty attorneys general get their pound of flesh from the lenders, what do you think will happen to all those foreclosed homes the banks and mortgage firms are holding? No doubt, the property will be dumped on the market, further depressing real estate prices and adding to the already bloated inventory.

But don't take my word for it. The CEO of RealtyTrac, the leading online marketer of foreclosure properties, recently offered a somber warning. James Saccacio said if the foreclosure documentation issues are not resolved quickly, it would have a "chilling effect on the overall housing market."

Saccacio's cautionary caveat was part of the firm's U.S. Foreclosure Market Report for the third quarter. According to the report, there were 372,445 properties auctioned in the country during the quarter, the highest in the history of the firm's tracking. Bank repossessions also set a record in the third quarter, totalling 288,345 properties.

Think you've heard the worst of this sorry story? No way. Even before this embargo on foreclosures, banks and mortgage firms were already hoarding notices, waiting for the glut of foreclosures to dissipate before dumping more houses on the market. There are no available estimates on how many foreclosures are primed to be pumped into the pipeline, but it could be hundreds of thousands more. The results could be catastrophic for the real estate market.

Foreclosures are the economic beast no one in government wants to tame. However, the taxpayers are about to have their pockets picked again by Washington if nothing is done to manage the looming foreclosure nightmare. As each day passes without any action, the opportunity to avoid the crisis becomes more remote.