Foreclosures top 1.5 million with no end in sight

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U.S. foreclosure filings continue to rise, proving that job losses and falling property prices are overpowering any attempt by the government to modify loans and keep people in their homes. For the fourth straight month, foreclosures topped 300,000 as more than 336,000 homes reported foreclosure filings in June, up 33 percent over last June.

More than 1.5 million homeowners faced the possibility of foreclosure in the first six months of 2009. That total includes properties that received a default or auction notice or were seized by the banks, according to RealtyTrac. Banks repossessed 386,800 properties during this time period.
California and Florida continue to lead the nation in foreclosure, but Clark County, Nevada, where Las Vegas is located, had the highest foreclosure rate with one in 13 households receiving a filing. Twenty of the 50 U.S. counties with the highest foreclosure rates were in California and 12 were in Florida.

"I don't see any turn of the tide," Donald Haurin, an economics professor at Ohio State, told Bloomberg. "The effect of more foreclosures will be continued downward pressure on house prices, and lead to difficulty making mortgage payments."

Rick Sharga of RealtyTrac is most worried about payment-option adjustable rate mortgages that are just starting to reset. People who borrowed using this type of mortgage could decide to pay even less than the interest owed, with the unpaid interest added to the principal of the loan. As home prices dropped, these homes fell quickly underwater with borrowers owing more than the house is worth. About three quarters of these loans reset in 2010 and in 2011, with the peak coming in August 2011 when 54,000 loans rest, according to data from First American CoreLogic.

More than 8.3 million U.S. mortgage holders owed more than their homes were worth and an additional 2.2 million borrowers will be underwater if prices decline another 5 percent, according to First American. "Stemming the tide of foreclosures is a critical component to stabilizing the housing market, so it is imperative that the lending industry and the government work in tandem to find new approaches to address this issue." James Saccacio, RealtyTrac CEO, said in a statement released with the data. Yet the Obama mortgage rescue programs are failing.

Allen Jones, a default-management policy executive for Bank of America, will testify before Congress today that the Obama administration stokes "confusion and delay" among mortgage lenders when it announces anti-foreclosure plans before drafting the rules. He believes the administration could improve the effectiveness of the programs if they would give loan servicers advance notice of new rules and time to review program changes before making announcements.

Jones is right. Obama announced the mortgage modification program weeks before the rules were in place. In fact, borrowers are still waiting for details about a plan announced in April that would let homeowners rework home-equity debt. By the time the rules are set people are angry, which makes mortgage modification even more difficult.

A research report released by the Federal Reserve of Boston also gives some clues as to why banks are not rushing to modify loans. The Fed found:

  • Some homeowners "self-cure" and start paying again. The Fed found that 30 percent of all borrowers who miss two payments start repaying on their own. If lenders modified these loans they would have agreed to losses they didn't have to take.
  • Fifty percent of modified loans re-default. Then the bank must bear the expenses of two defaults. A foreclosure filing after the first default is cheaper.
  • If they delay foreclosure by agreeing to a modification and the borrower defaults a year later they may get the home worth 10 percent, 20 percent or even 50 percent less. The continuing fall of housing prices creates an urgency to foreclose.

Yet that last reason seems to be a self-fulfilling prophecy since as more distressed properties are placed on the market, the lower home prices will go. Clearly, the Obama home modification programs are not working and it's time for the banks and the administration to come up with a plan that will work. House prices will not stop dropping until the foreclosures stop and the backlog of homes on the market are sold.

Lita Epstein has written 25 books including The 250 Questions You Should Ask About Buying Foreclosures.
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