News

October 27, 2008

Foreclosure crisis: No end in sight

Five factors keep government from gaining the upper hand on problem for now.

ALAN ZIBEL AP Business Writer

WASHINGTON — Each day from July through September, more than 2,700 Americans lost their homes in foreclosure.

That number, up from 1,200 a day a year ago, is a sign that the mortgage industry and government programs have done little to help troubled homeowners.

Fed policymakers are widely expected to lower the central bank’s key interest rate this week, either by half a percentage point to 1 percent or by a quarter-point to 1.25 percent.

But the mortgage market’s troubles have proved to be far more serious and intractable than most in government or the private sector had predicted a year ago.

“We are behind the curve. We are falling behind,” Sheila Bair, head of the Federal Deposit Insurance Corp. told a Senate hearing Thursday.

More than 4 million homeowners with a mortgage were at least one month behind on their payments at the end of June, according to the latest data from the Mortgage Bankers Association, and a record 500,000 had entered the foreclosure process.

So why is the foreclosure crisis so hard to fix?

There are five main reasons:

• Crashing home prices:

A massive speculative bubble in housing prices caused millions of Americans to think of their homes as an investment, rather than a place to live.

Now prices are plummeting, especially in once-sizzling markets such as California, Florida and Nevada. And the bleeding might not stop until the end of next year.

Sophie Lapointe, a mortgage broker and owner of Five Star Mortgage in Las Vegas, has found there’s little that can be done to help people who owe more than their homes are worth. “The biggest problem is negative equity,” she said.

• Investor speculation:

Plunging prices have had even more impact on investors than on homeowners because investors have less emotional attachment to a house. They’re even more likely to walk away, especially if they’ve put little money into a property.

Investors purchased one of every five homes last year, and almost one of every three when the market peaked in 2005, according to the Realtors trade group.

• Complex investments:

Traditionally, lenders evaluated borrowers carefully because they held onto the mortgages for the life of the loan. That process started to change in the late 1980s, as Wall Street found new ways to package the loans into securities to sell to investors.

Investors were attracted to these new mortgage-backed securities because they paid better returns than government bonds.

At the beginning of this decade, the Federal Reserve started cutting interest rates to historic lows. So investors poured money into the U.S. mortgage market, particularly into securities made up of high-interest mortgages made to borrowers with poor credit records.

When mortgages are packaged into securities, borrowers’ monthly payments are divided up and sent to thousands of investors around the world. With so many owners, helping troubled borrowers is tougher. Many of these investors have been reluctant to agree to drastic loan modifications, such as reducing the principal balance, because they don’t want to take a big loss.

• Job losses:

The No. 1 reason people fall behind on their mortgage is loss of a job, or some source of income, perhaps from a divorce or death of a spouse. If a borrower is unemployed, lenders don’t have many options but foreclosure.

• Falling behind again:

It’s hard to fix something that keeps breaking. Roughly one-third of all subprime loans modified in the third quarter of last year were delinquent again within 10 months, according to a Credit Suisse report released this month.

• So what has and should be done?

The Bush administration announced a new mortgage industry coalition — dubbed the Hope Now alliance that had an “aggressive plan to reach more homeowners and help them find a way to stay in their homes,” Treasury Secretary Henry Paulson said at the time.The industry has modified 765,000 loans since last July, and put 1.5 million borrowers on temporary repayment plans.

Faith Schwartz, executive director of the Hope Alliance coalition, said the effort was never meant to be the only solution. And in Washington, the FDIC’s Bair has proposed a plan in which the government would provide guarantees for mortgages that have been reworked by banks, lowering payments to more affordable levels.

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