Goldman Sachs announced today that it was resuming foreclosure proceedings against borrowers that have fallen behind on their payments after a suspension that lasted several months while its foreclosure procedures were reviewed.
The resumption of these foreclosure proceedings by Goldman Sachs and the other major banks in the country is going to have a devastating impact on the real estate market and the borrowers who risk losing their homes. Instead of having these foreclosures evenly dispersed over a five month period, they will all hit the market at once. Inventory will double. Homeowners already underwater will see values plummet even further prompting some to walk away from their homes and adding to the crisis. Inventory may triple. Short sales will die on the vine as investors wait for the market to absorb some of the inventory and for prices to stabilize. The bottom line is the worst is yet to come.
Homeowners will be forced to turn to bankruptcy to stay in their homes. The bankruptcy filing will put an automatic stay on the foreclosure proceeding and stop any sale in its tracks. By eliminating their unsecured debt (credit cards, medical bills, judgments, etc.) borrowerswill free up disposable income and be in a better position to renegotiate the terms of their loan with their lender. Many borrowers may be able to afford their current mortgage payments if all of the monthly payments associated with their unsecured debt were eliminated. Credit scores may even improve with a current mortgage and the lack of unsecured creditors, even with a recent bankruptcy on file. In addition, in a Chapter 13 filing subordinated liens on secured property may be eliminated if there is enough negative equity in the property.
The banks that originally caused this crisis have made it worse by skipping important steps in the foreclosure process in an attempt to save money. Their frugal ways will only cost them in the long run as underlying property values continue to be forced down by the sheer volume of inventory hitting the market all at once. Perhaps this was their plan. Maybe they wanted to force their borrowers into bankruptcy to free up funds for themselves.In any event, unsecured creditors will be forced to take a huge bite of this mess as losses are absorbed and passed on down the pecking order.
Bankruptcies may see record levels again in 2011 as the housing crisis and the artificial foreclosure dump ripple through the market.
