The accidental Main Street bailout?

October 5, 2010, 8:46 PM UTC

Finally, foreclosures are freezing, but it’s too bad it took questionable banking practices to make it happen.

Not a happy sight

For months, the U.S. government has tried to stabilize the fragile real estate market through hugely expensive housing programs. The Feds have helped the unemployed and underemployed pay their mortgages, they’ve helped certain homeowners refinance home loans, and they’ve promoted tax credits to encourage home sales.

And it appears even more help for debt-ridden homeowners is coming, but this time it’s independent of any direct government program: Some of the nation’s largest lenders have recently admitted to glitches in foreclosure procedures, which in turn, could buy homeowners more time in their houses as lenders and attorneys work things out.

In at least six states including Florida, Massachusetts and Illinois, attorneys general are investigating improper foreclosure practices, The New York Times reported earlier this week. GMAC Mortgage, JPMorgan Chase (JPM) and Bank of America (BAC) have recently begun looking into missteps – a development that could prompt other lenders and loan services to halt foreclosure proceedings and even reconsider past evictions.

Welcome to your accidental Main Street bailout. It could add some stability in the housing market’s feared “shadow inventory” — the glut of foreclosed and mortgage delinquent homes predicted to seep into an already depressed housing market and further drive down home prices.

But whatever boost this gives the housing market will be temporary, in much the same way the government programs have impacted the market only in the short-term. It might stall hundreds of thousand of foreclosures for a few months and help stabilize overall prices somewhat, but the long-term effects to the housing market will probably be negligible.

Richard Sharga, RealtyTrac vice president, says all sort of scenarios could play out — including successful class-action lawsuits or a boom in modification of existing mortgages — but the vast majority of cases pending review will likely eventually end up in foreclosures.

This isn’t necessarily a bad thing, as a longer foreclosure process could prolong a full recovery of the housing market.

Sharga says delays will probably span only 60 to 90 days, which means the market should see foreclosures actually accelerate during the first three months of next year. However, this doesn’t impact much of Sharga’s original forecast about the shadow inventory, which he says will largely be absorbed in the span of 3.5 years.

Foreclosures accounted for 24% of all residential sales in the second quarter of 2010, according to RealtyTrac. The average sales price of properties that sold while in some stage of foreclosure was more than 26% below the average sales price of properties not in the foreclosure process.

Economists expect home prices will probably fall 6% to 8% over the next 12 months due to weak demand, the housing glut and foreclosures.

A foreclosure slowdown might sound like some relief for Main Street, if only temporarily. But it also might just be a longer wait for the inevitable.

See also:

A Housing rebound? Yes, it’s possible

Housing quagmire. Is it time to remove relief?

McMansion welfare. Why does government subsidize homeownership?