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Here's What Foreclosure-Gate Will Really Do to House Prices

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Thanks to revelations that they have been fabricating the documentation necessary to foreclose on some houses, the country's big banks have suspended foreclosures.

This gives us all an excuse to scream about the outrageousness of the bailed-out banks again. It also means that some folks will be able to spend a few more weeks or months in their houses.

But what does it mean for the housing market? And the banks?

For those who are praying for higher (or at least stable) house prices in the near-term, foreclosure-gate is good news: By stopping the flood of foreclosures onto the market, foreclosure-gate will reduce inventory-for-sale, which will likely act as a temporary positive for house prices. So homeowners may get one more temporary gift at the expense of house buyers.

Of course, when the foreclosure-gate moratorium ends, which it inevitably will, a sudden flood of foreclosures will hit the market, as the banks try to make up for lost time. And when that happens, prices will likely temporarily plunge. So sell while you can.

And what about the banks? What will happen to them now that they've stopped foreclosures?

Well, the banks will spend another few weeks or months eating the non-interest payments of folks they might otherwise have foreclosed on. Over time, if the foreclosure blockage remains in place, the number of non-payers will increase. Eventually, moreover, when the foreclosure block ends, the banks will likely suddenly have to play catch-up here, too, which will mean big write-offs and loan losses.

Overall, as bank analyst Chris Whalen recently observed, banks are quietly moving into the "non-operating REIT business"--owning a lot more real estate than they ever intended to. As anyone who has been stuck with an underwater investment property can attest, the carrying costs of holding distressed real-estate are significant. And Whalen believes that this will soon begin to eat into banks' profit margins. It will also continue to represent a huge "shadow inventory" that will keep the pressure on housing prices for years.

Now check out Chris Whalen's terrifying presentation on what this will do to banks