A second wave of home foreclosures is sweeping the nation, but this time the blame lies with the recession and "liar's loans" to people who had no proof of income and not with the infamous subprime mortgages that first triggered a full-scale housing crisis.
In fact, it's hard to pinpoint any single reason for the second wave. Just name a recent economic development – credit-card company crackdowns, the challenge of paying off large student loans, rising joblessness – and it's another contributor to a foreclosure, say some housing analysts. Moreover, foreclosure moratoria, which some states enacted late last year, have been lifted, sending a fresh gush of foreclosure proceedings into the pipeline.
“The sky is falling,” says John Taylor, president and CEO of the National Community Reinvestment Coalition, a Washington-based group that has tried to make housing affordable. “We all wanted things to get better, but it looks like foreclosures are going to worsen.”
A 'serious weight' on the economy
The new rise in foreclosures is likely to have some large-scale implications. As banks take over properties, they will probably put them on the market, adding to the downward pressure on home prices and further destabilizing the industry. Banks themselves could see another period of losses if foreclosures continue at these rates. And any further problems at the banks could spill over to the economy at large.
The latest evidence that foreclosures are becoming a larger problem came Wednesday when RealtyTrac, which compiles foreclosure data, reported that last month 342,000 households received at least one foreclosure-related notice. That’s up 32 percent compared with notices issued last April and marks the second consecutive month when at least 300,000 households got a foreclosure filing.
With moratorim ended, filings resumed in spades
In California's case, some of the surge is related to a foreclosure moratorium the state enacted last September but ended earlier this year.
“In many instances it was required that lenders meet certain borrower notification [criteria] before they could file,” says Andrew LePage, a spokesman for DataQuick, real estate information company in LaJolla, Calif.
And file they did. Lenders filed 135,431 default notices, a record number, in the first quarter, according to DataQuick. That was up 80 percent from the fourth quarter of 2008 and 19 percent higher than a year ago.
A confusing time for homeowners in default
Some lenders may have also wanted to wait to see how President Obama’s $75 billion mortgage help program, called Making Home Affordable, works. “Some of them may have been holding off to see what the government was going to do,” says Mr. LePage. On Thursday, Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan planned to hold a briefing on what they termed "the swift implementation" of the program.
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.
“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.”