Foreclosure Crisis Continues to Worsen

January 21, 2010

foreclosureBy Angie Moreschi:

The number of people dealing with foreclosures reached a record number of nearly 3 million in 2009.  Americans saw that dramatic increase despite efforts, like President Obama’s Making Home Affordable  Program, to reduce foreclosure filings. So, what’s going wrong? Why can’t our country stem the tide of foreclosures? Some state officials are taking a stab at changing the trend.

A group of state Attorneys General and banking regulators have released a proposal urging loan servicing companies to step it up. The report, by the State Foreclosure Prevention Working Group, said current efforts are failing to keep up with the number of borrowers falling behind on their loans.

It found that more than 70% of loan modifications resulted in an increase in the principal amount owed as unpaid interest, fees and other charges were rolled into the loan amount.  Only four in 10 borrowers who are at least two months behind on their payments are involved in any sort of loss-mitigation effort. The report warned that without more aggressive steps, including a focus on principal write-downs, foreclosures will continue to weigh on the economy.

“Despite efforts of servicers, homeowners and the government, the foreclosure crisis continues to worsen. These signs point to more foreclosures in 2010 than in 2009,” the report said.

The states’ report is based on data from 13 mortgage servicing firms.  It offered a stark view of the housing market. Through the end of October, there were 1.7 million mortgages at least two months behind on payments, while the number of loans in the process of foreclosure increased by 52% between October 2008 and October 2009, the report said.

Key recommendations in the report include:

Reduce loan principal: State officials say that servicers should cut the loan balances of homeowners, in addition to reducing interest rates and extending the terms of the loan. This is especially true in places where property values have plummeted. Reducing principal will make it less likely that homeowners will default on their modified loans.

Pay attention to option ARMs: More than 40% of these complex mortgages are delinquent. Even worse, over the next two years, many will adjust, driving up borrowers’ monthly payments. Servicers need to address these loans before they fall into foreclosure.

Limit required paperwork: Many homeowners are not receiving permanent modifications under the president’s plan because they haven’t submitted all their documents. Treasury Department officials should reduce the amount of paperwork borrowers are required to file and speed up the debut of a central portal where homeowners can submit the forms. The portal is currently set to launch at the end of March.

Expand counseling and mediation efforts: State should expand their housing counseling and mediation programs, which require homeowners and servicers to meet before the completion of the foreclosure process.

Suspend foreclosure proceedings: Treasury officials should amend the president’s program so that the entire foreclosure process is halted when a borrower applies for the president’s program. Currently, only the sale is stopped.

Help the unemployed: Treasury officials and servicers should do more to assist the unemployed so they do not fall into foreclosure. A growing number of borrowers with good credit backgrounds are behind in their payments because of the weak economy.