From Bad to Worse? A Foreclosure Crisis Primer

(Oct. 15) -- The American housing mess just keeps getting messier.

Even as federal and state governments ratchet up investigations into the way banks and the mortgage-servicing industry move to seize the homes of owners who failed to make payments, the pace of foreclosures is picking up.

And just over two years after a meltdown in the subprime mortgage market cascaded into a full-blown global financial crisis, a wave of bad news on the real estate front is adding to an already bleak outlook for an economic recovery that has been faltering and an American housing market that never got back on its feet.

To help understand the trouble, which affects millions of Americans, here are four key questions and the answers as far as they are known.

How bad is the foreclosure problem?

It's bad.

RealtyTrac, the online foreclosure listing service, reported Thursday that during the three summer months, the number of default notices, scheduled auctions of foreclosed homes and bank repossessions climbed to 930,437, up by nearly 4 percent from the previous quarter. During the period, one in every 139 houses in the U.S. received a foreclosure filing.

Now, that's actually a level 1 percent lower than the total number of foreclosure filings in the third quarter of 2009. But just as the apparent recovery of the jobs market earlier this year slowed down over the summer, the foreclosure problem seemed to be picking up. In September alone, there were 347,420 foreclosure filings, up 3 percent from August and 1 percent from September 2009, and a record total of 102,134 bank repossessions were reported for the month. It was the first time, according to RealtyTrac, that monthly bank repossessions have passed 100,000.

Meanwhile, residential real estate sales have shown little signs of growth. According to the Commerce Department, sales of single-family houses in August were about the same as in July and were nearly 30 percent below sales in August 2009. The government is scheduled to announce September sales numbers on Oct. 27.

The news from RealtyTrac prompted investors to sell off banking stocks, and to sell off the mortgage-backed securities used to channel investment cash into the home market -- a source of anxiety for officials hoping to get housing and the broader economy into healthier territory.

Why has a lot of foreclosure activity been suspended?

Several of the largest U.S. lenders, including Bank of America, JPMorgan Chase and the Ally Financial arm of GMAC, have recently suspended foreclosures in all or many parts of the country as they examine flaws in their foreclosure processes that included the use of so-called robo-signers -- processors who didn't read what they were signing -- for foreclosure notices, faulty record keeping and possibly fraudulent activity.

The Wall Street Journal reported that even Fannie Mae and Freddie Mac, the giant, government-sponsored entities that buy mortgages and package them into bonds to freshen the pool of loans for homebuyers, are going back over the work of a Florida law firm they recommended to process foreclosures.

And on Wednesday, attorneys general or other authorities in all 50 states said they were investigating the industry.

Meanwhile, White House spokesman Robert Gibbs said Thursday that the Federal Housing Administration has expanded its review of how mortgage servicers foreclose and that the Justice Department is looking into possible wrongdoing by the industry.

Some members of Congress have called for a moratorium on foreclosures until the issue is settled, but that seems unlikely to happen because the government and the banks have based their hope of reviving the housing market and the related financial mess on saving the homes that can be saved while cleansing lost mortgages from the market. The government has already fallen far short of its goals to help modify troubled mortgage loans that might be salvageable.

The Obama administration this month essentially vetoed a bill that would have helped banks accelerate the foreclosure process, but officials fear a moratorium would prevent valid foreclosures from going forward.

What does that mean for the housing market?

James Saccacio, chief executive of RealtyTrac, said the onslaught of foreclosures last month and during the third quarter took "a bite out of the backlog of distressed properties where the foreclosure process was delayed by foreclosure prevention efforts over the past 20 months."

But he expects the pace of foreclosures to fall in the current quarter as major lenders stop seizing homes while they review the irregularities that have come to light.

"If the lenders can resolve the documentation issue quickly, then we would expect the temporary lull in foreclosure activity to be followed by a parallel spike in activity as many of the delayed foreclosures move forward in the foreclosure process," he said. "However, if the documentation issue cannot be quickly resolved and expands to more lenders, we could see a chilling effect on the overall housing market as sales of pre-foreclosure and foreclosed properties, which account for nearly one-third of all sales, dry up and the shadow inventory of distressed properties grows -- causing more uncertainty about home prices."

The inventory of unsold homes has already been growing.

In August, there was an estimated 8.6 months of supply of new homes on the market, according to the Commerce Department. That's up from a supply of 7.8 months a year earlier, and the trend has been worsening since the supply hit a low of 6.3 months in April.

What does this mean for the economy?

The skein of bad housing news -- reaching the level of crisis for many headline writers -- hits the country at a time when the Federal Reserve and the Obama administration are already struggling with how to reignite the post-recession recovery. Their focus has been on jobs and a weak employment environment that has undercut consumer spending, which in turn has made companies skittish about hiring.

But now real estate, a persistent concern even when the economy seemed to be convalescing earlier this year, is becoming a big worry again, and one that affects millions of Americans who base their spending decisions on how secure they feel about their living conditions.

The roots of the financial crisis lay in shoddy care given by banks to the mortgages they were facilitating and the even shoddier attention Wall Street and banks around the world paid when they invested in those mortgages as if the whole thing was a safe bet.

If the current foreclosure problems block the government and industry from getting the many real estate sectors back in shape -- and even worse, if they provoke a new crisis of confidence -- all bets on the wider economic recovery are off.