The latest fiscal mess confronting us is the new foreclosure fiasco. As you likely already know, news that many of the nation’s biggest lenders had made some major errors of oversight in processing foreclosure documents has thrown a big monkey wrench in the entire banking machine.

Mistakes -- if I may be so kind as to call them -- such as false affidavits, improper shortcuts, and so-called “robosigners,” i.e., bank officials who signed off on so many foreclosures that they couldn’t possibly have reviewed all the details, have caused the nation’s biggest lenders to suspend all foreclosures temporarily. This isn’t just some localized mortgage broker issue. This issue materially affects the likes of Bank of America, J.P. Morgan and Wells Fargo.

This whole paperwork mess is really telling, and what it represents to me is the flipside of all of those “ninja” loans -- no income, no job -- that got approved a few years ago when lenders were willing to give sizeable loans to anyone who had a warm body and a legible signature. Back then, there was virtually no due diligence on the part of mortgage brokers and banks about the lending wherewithal amongst homebuyers. This, as we found out with the banking crisis, was because there was no one truly accountable in the end. The banks knew that they could bundle up the loans and sell them to Fannie Mae and Freddie Mac, so why bother worrying about it?

Well, now that same mindset seems to have taken hold when it comes to foreclosures. There have been numerous examples of people erroneously being foreclosed on, and a couple of cases where people already had paid off their home loans in full -- and still someone came out to change the locks on their homes! I don’t know about you, but if this happened to me, I’d be inclined to take some physical steps to prevent that lock from going on my door.

Now, the real issue here, as I see it, is the damage that this whole foreclosure mess is going to do to the value of financial stocks. So far, the banking sector has not participated in the wider market rally. As you can see by the chart here of the Financials Select SPDR (XLF), this sector actually trades below its long-term, 200-day moving average.

The sector has been a decided laggard, and it’s actually holding back the gains on the S&P 500 Index due to the fact that the broad-based market measure is comprised of about 16% financial stocks. If we really are going to see a sustained move higher in the markets, we will have to see financial stocks such as Bank of America, J.P. Morgan and Wells Fargo resolve their foreclosure fiascos.

Another, perhaps even more widespread, negative consequence here is that the temporary pausing of foreclosures will mean yet another delay in the return to health of our housing market. Right now, more than one million properties in the United States are undergoing foreclosure, according to tracking firm RealtyTrac. Ratings agency Moody’s estimates that the number of foreclosures currently under review for possible bank shenanigans is approximately 250,000.

This number of delayed foreclosures would reduce the total supply of homes for sale, and likely depress sales by about 8%, according to Moody’s. The reduced supply of homes might cause home prices to rise, but everyone would be fully aware that it only would be a temporary blip. This likely would mean more pain for an already ailing housing market -- pain that our economy definitely doesn’t need.