How the Foreclosure Fiasco Threatens the Economy

The Rosy scenario 

The price drops could cause a mini-bust inside the bigger bust, as skeptical buyers once again head for the sidelines, waiting for prices to bottom out. Falling home values would push more homeowners underwater, making it harder for them to sell and possibly causing even more foreclosures. Banks could pass on the higher costs of foreclosure processing to borrowers, making loans more expensive. Moody's predicts that home values will finally bottom out in the second half of 2011, but it could take longer if the foreclosure freeze drags on for more than a couple of months.

The worse scenario

It's a complicated problem (nicely explained by blogger Mike Konczal in a series of detailed posts) that can go unnoticed in foreclosures unless they're challenged in court--which people on the verge of losing their homes usually can't afford to do. But growing awareness of the problem could bring many more challenges, and if this turns out to be a widespread flaw in the foreclosure process, lawsuits and a dizzying array of legal conundrums--like who actually has legal rights to a house if the occupants can't pay their mortgage--could tie the housing market in knots for who knows how long.

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