New round of foreclosures delivers blow to recovery

In fact, some loan servicers are now in the process of implementing the new rules, says Marietta Rodriguez, director of national home ownership programs at NeighborWorks America in Washington. But during that implementation period, she says, a lot of conflicting things are happening to homeowners.

“If there is a counselor in St. Louis who is negotiating with a lender to help save a home, the banks say for legal reasons they have to file a notice to preserve their rights,” she says. “So there could be a parallel filing of a foreclosure notice, but the homeowners are still in their home. Even though loss mitigation is being pursued, this presents very conflicting and stressful messages to the homeowner.”

Foreclosures spreading to high-end neighborhoods?

Housing analysts are also watching to see if the recession drives the foreclosure surge to higher-income neighborhoods. DataQuick has observed, for example, an increase in foreclosures in coastal California. Many borrowers in those areas used “creative financing” such as interest-only loans or some form of adjustable rate mortgage.

“A lot of high-end coastal Zip Codes are starting to see their default notices rise,” says LePage. “We’re not talking $5 million homes, just where the merely wealthy live.”

Many of those borrowers took mortgages without having to show a traditional W2 form. These mortgages, known as Alt A mortgages, depended on what the individual stated as income.

“With the rising unemployment rates, those Alt A mortgages are coming home to roost,” says Mr. Taylor. “Some predict they could be higher losses than the subprime [mortgages made to people with less than stellar credit]."

Why 'underwater' homeowners may just walk away

For some borrowers, there may be a motivation to simply walk away from their homes because they now owe much more than their properties ares worth. Some 20 percent of mortgages in the US are now underwater – that is, the homes are worth less than the loans, says Mr. Zandi.

In cases when a mortgage is deeply underwater, homeowners are mailing their keys to the mortgage servicers.

“It’s hard to know what percentage of homeowners want to hang on,” says LePage.

The rising unemployment rate could be particularly harmful to the housing market in Florida, says Jack McCabe, CEO of McCabe Research & Consulting in Deerfield Beach.

“We have an 8.5 percent unemployment rate, and in some places it’s over 10 percent,” says Mr. McCabe. “In St. Lucie County [Port St. Lucie] and Lee County [Cape Coral-Fort Myers] it’s over 12 percent.”

Home prices in Florida have dropped so quickly, McCabe says, that almost no property bought with a loan since 2004 is eligible to be refinanced by the US Housing Finance Agency. For example, in the Cape Coral-Fort Myers area, the median home price has dropped from $323,000 in 2005 to $87,500 today, he says.

Florida braces for more

The problems in the Sunshine State are showing up in foreclosures, surging after a moratorium ended in February. According to RealtyTrac, Florida has the second highest level of foreclosures in the nation.

McCabe suspects that the unemployment rate, combined with a large number of interest-rate resets coming up, will result in yet another foreclosure wave in the state.

“The biggest wave has yet to come,” he says. “For every three houses that have been foreclosed, there are seven waiting to happen.”

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