Foreclosures fall, but banks bracing for next big wave

While November sees 8 percent fall in foreclosures, loan-modification programs mask the size of the problem.

Damian Dovarganes/AP/File
In Pasadena, Calif., homeowners last month protested Indy Mac bank's refusal to modify loans, forcing many into foreclosure. Modification programs have helped forestall defaults, but banks are bracing for another foreclosure wave.

In November, for the fourth month in a row, the number of foreclosure filings in the United States declined -- an 8 percent drop from October. But foreclosure experts aren't celebrating. They're bracing for the next wave of default notices, foreclosure auctions, and bank repossessions, which could hit early next year.

"We don't believe the underlying conditions have actually improved," says Rick Sharga, senior vice president with RealtyTrac, which released its report of foreclosure trends Thursday. Instead, state and federal efforts to help homeowners work out their problem mortgages are delaying foreclosures, he adds.

Even in a normal year, a third of these attempted workouts end up in default, he says. With high unemployment, tight credit, and depressed housing prices, this period will see much higher failures of workout plans, mortgage experts say.

For the moment, the number of foreclosures continues to fall. In November, the total fell to less than 307,000, the fourth monthly decline in a row after peaking at 360,000 in July. That's the lowest monthly level since February and, on the surface, represents particularly good news for Nevada.

For the second month in a row, the number of Nevada properties receiving a foreclosure notice fell by a third. Las Vegas, which had topped the list of large cities with high foreclosure rates, fell to No. 5 in November.

The problem is that these drops are artificial, brought about because Nevada recently instituted a mandatory mediation program for problem loans, Mr. Sharga says. That's a potential boon for some owners of distressed homes. It may help those on the margin restructure loans that might otherwise default. Such programs are also helping to keep the foreclosure problem from spiraling out of control and sending home prices plunging again.

The challenge is that many of these attempt work-out loans won't work out, so foreclosure isn't averted, it's simply delayed. Of an estimated 7 million troubled home loans in this down cycle, 3.9 million will go through foreclosure, predicts William Campbell, a real estate adviser and head of RPC Group in Little Rock, Ark.

"We're going to see a long drawn-out housing recovery that will gradually dispose of these distressed properties over the next three years," says Sharga of RealtyTrac, an online marketplace for foreclosure properties based in Irvine, Calif. "Modifications will help, but they won't solve the problem. It's too big."
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