Obama’s sweeping loan modification initiative has been in place for five months. Incentives are being offered to lenders who agree to loan modification proposals. It appears that different projects, proposals, and processes are in place that would have technically resulted in fewer foreclosures by now. Instead, foreclosure filings were reported on more than 1.5 million properties in the first six months of the year, a 15% increase over the same period last year. So why are foreclosures still rising?
Here are six factors that may account for why foreclosures are still growing:
1. Unemployment
Recently, the unemployment rate hit 9.5%. According to Celia Chen, an economist at Moody’s Economy.com, the key factor of the growing unemployment rate is the rise of home foreclosures. “Employers continue to shed jobs, and that makes it difficult for even people with good credit who were doing fine to keep up with their mortgage payment,” Chen says. For example, a recent report issued by federal bank regulators found that home loans to borrowers with solid credit histories were going bad at a rapid clip. “Prime loans, which represented two thirds of all mortgages in the portfolio, experienced the highest percentage increase in serious delinquencies, climbing by more than 20% from the prior quarter to 2.9% of prime mortgages,” the report stated.
2. Plunging home values
Almost three years since the real estate bubble burst, home prices continue the painful decline. Although the pace of decline leveled out slightly compared to the previous month, home prices in 20 major metro areas dropped 18.1% in April from a year earlier. Falling home values have dragged more than 20% of American homeowners “underwater”—meaning they owe more on their mortgages than the property is worth—as of the first quarter. By sucking equity out of homes, the price declines have also evaporated much of a homeowner’s financial incentive for paying their mortgage bill, Chen says. “When somebody doesn’t have equity in their house and they are struggling to pay their mortgage, the likelihood of a foreclosure is much higher,” she says. In addition, home owners with less equity in their homes will have a more difficult time refinancing their mortgage.
3. End of foreclosure moratoriums
The end of certain foreclosure moratoriums—including those of Fannie Mae and Freddie Mac, which were lifted in late March—also contributed to the rise in foreclosures during the period, Chen says.
4. Is Obama’s plan working?
A key factor of Obama’s housing rescue plan is an effort to restructure—or modify—as many as 4 million troubled loans. So far, about 325,000 modification offers have been made through the program, according to Bloomberg news. Chen says the program is having an impact for certain individual borrowers, but the efforts—at least so far—have not put much of a dent into the national foreclosure epidemic. “The program is making progress. It’s just that there are a large number of distressed borrowers out there,” she says. “It’s so hard to process all of those loans, and then second of all, not all of those borrowers will qualify for the program.” Borrowers have complained of long delays and bureaucratic hurdles in their efforts to modify their mortgages.
Though the administration’s effort includes incentive payments to convince servicers to modify the loans, Newport says some may find it less costly to foreclose on the property. “My understanding is that there is going to be some pressure from the administration to get banks to start renegotiating more loans,” he says. “But if [modification is] not in [the servicer's] self-interest, I don’t think that they are going to do much.”
5. Mounting political pressure
Mortgage services appear to be facing mounting pressure from Washington to redouble their efforts. “We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share,” Treasury Secretary Tim Geithner and HUD chief Shaun Donovan said in a recent letter to 25 mortgage servicing firms. In a hearing today, Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, expressed his frustration more directly. “Why am I still reading about lost files, understaffed and undertrained servicers, and hours spent on hold on the phone?” Dodd said in a prepared opening statement. “Why are servicers and lenders refusing to accept principal reduction so that homeowners can start building equity and get the housing market moving again?”
6. Foreclosure outlook
Despite this pressure, Newport expects foreclosure rates to rise into next year. “It’s going to keep on getting worse until the unemployment rate peaks, which we think will happen in about the middle of next year,” he says. For her part, Chen argues that a successful mortgage rescue program could expedite a housing recovery. “The hope is that we will be able to push through enough mortgage modifications to prevent home prices from falling too much more,” she said.
