Government Measures No Match for Second Wave of Foreclosures

When the Obama administration in March instituted programs to help homeowners modify mortgage payments or refinance for lower interest rates, the idea was to curb the foreclosure crisis that has gripped the United States for the past two years.

But roughly seven months later, it looks like the federal programs have merely delayed the inevitable, and a substantial second wave of foreclosures is becoming more likely.

"The sheer scale of the problem is preventing the loan modification programs from having the kind of impact we'd all like" said Rick Sharga, senior vice president for marketing at research firm RealtyTrac Inc. told The Associated Press.

Foreclosures – which include default and auction notices or bank repossessions – rose to 937,840 in the third quarter, up 5% from the previous quarter and 23% from the same period last year, RealtyTrac said. But a key factor in the rise of foreclosures was the rise of bank repossessions, or REOs to a record 237,052 – a 21% jump from the previous three months.

At the heart of the U.S. government’s efforts are two programs: The Home Affordable Modification Program (HAMP), designed to lower monthly mortgage payments for those who can’t afford them, and the Home Affordable Refinance Program (HARP), which enables homeowners current on their payments but can’t refinance their interest rates due to lower home values.

Banks held off on repossessing homes while they evaluated whether borrowers qualified for the federal programs, but when it became clear that many wouldn’t, lenders moved in and took back the properties.

“REO activity increased from the previous quarter in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties,” said James Saccacio, RealtyTrac’s chief executive officer.

And it’s likely to get worse: A “shadow inventory” of 7 million properties are in the foreclosure process or likely to be seized, up from 1.27 million in 2005, according to Amherst Securities Group LP. This will likely wipe out any gains home prices have made this year.

Last week, the Obama administration touted a milestone in its mortgage relief efforts by noting that 500,000 homeowners received help since the programs began earlier this year – ahead of its self-imposed deadline to get to that number by Nov. 1.

But the Congressional Oversight Panel for the government’s Troubled Asset Relief Program (TARP) was critical of the mortgage mitigation efforts, saying that the administration’s programs were not designed to respond to a foreclosure driver such as the rising unemployment rate.
“Rising unemployment, generally flat or even falling home prices, and impending mortgage rate resets threaten to cast millions more out of their homes,” a report released last week by the panel said. “The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures, and consider whether new programs or program enhancements could be adopted.”

The unemployment rate rose to 9.8% in September and could go as high as 10.5% in mid-2010. Even when it does stabilize, the unemployed may not go back to work right away amid a jobless recovery.

"Foreclosures should remain really high as long as unemployment is rising, and that is through next spring," economist Mark Zandi of Moody's Economy.com told USA Today. "They should be very high into spring."

Zandi’s forecast is optimistic compared to RealtyTrac’s Sharga.

"We'd hoped this year would be the peak as far as foreclosures, but we've since concluded it will not be," said Sharga. "We should see a peak in foreclosures at the end of 2010."

RealtyTrac’s estimate may actually understate the depth of the crisis, due to the banks playing “wait-and-see” with the government’s programs. This in turn could result in certain foreclosures not being counted on the firm’s report that was released yesterday (Thursday).

"The fastest growing area is in the 180 days late-plus category, the most seriously delinquent borrowers," Sharga told CNNMoney. "It's going to be a lingering problem."

Falling home prices will be the mechanism that keeps the crisis going, even after the foreclosures subside. Banks will likely take their time in relisting REOs as they wait for prices to recover.

"It's hard to envision [the banks] putting millions on properties up for sale and cratering prices," Sharga said. "Recovery will be slow and gradual. I don't see home prices getting much better until 2013."

The third quarter wasn’t any kinder to the states already hit hard. Nevada saw its year-over-year foreclosure rate grow 59%, Arizona’s gained 25%, California’s increased 19% and Florida’s 24%.

News and Related Story Links:

• The Associated Press:
  Foreclosures Rise 5 Percent From Summer to Fall
• Bloomberg News:
  U.S. Foreclosure Filings Jump 23% to Record in Third Quarter
• Money Morning:
  U.S. Housing Prices Rise as Market Shows Signs of Stability
• Congressional Oversight Panel:
  October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six Months
• Money Morning:
  Unemployment Figures Increase Odds of Jobless Recovery
• Money Morning:
  Can Democrats Anchor Unemployment Without Doing More Damage to the Deficit?
• Money Morning:
  Jobless Recovery Category
• USA Today:
  Foreclosures in 3rd Quarter Up Nearly 23% from 2008
• CNNMoney:
  Foreclosures: “Worst Three Months of All Time”
• RealtyTrac:
  U.S. Foreclosure Activity Increases 5% in Q3