As foreclosures mount, D.C. debates answer

John W. Schoen Senior producer • Profile • E-mail

The nation's mortgage crisis worsened last month as thousands of homeowners across the country failed to keep up with their monthly payments and faced the possibility of losing their homes.

Foreclosures rose 9 percent in July compared with June and were up 93 percent from a year ago, according to the latest monthly figures released Tuesday by RealtyTrac, a Web site that tracks foreclosed properties.

Nearly 180,000 fillings — including default notices, auction sale notices and bank repossessions — were reported during the month. That means that one in every 693 U.S. households was hit with foreclosure in July.

The new foreclosure data, along with ongoing turmoil in the financial markets, renewed debate in Washington over whether the government has responded adequately to the meltdown of the mortgage market. Caught in the middle are borrowers who may qualify for better terms but remain at risk of losing their homes because they can't refinance their existing mortgages.

Lawmakers on Capitol Hill are considering various measures to restore a mortgage market that has fallen into disarray. Some are suggesting that lenders and borrowers involved in the risky loans that are now going bad should simply suffer the consequences. But supporters of more aggressive measures argue that the government may need to step in before the current mortgage mayhem threatens the wider economy. 

Senate Banking Committee Chairman Chris Dodd, D-Conn., urged the administration Tuesday to raise limits on the portfolios of mortgages held by Freddie Mac and Fannie Mae, federally chartered companies that play a huge role in the housing market.

"The power exists today with regulators to lift those caps," Dodd told a news conference following the meeting following a meeting with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. "That does not require statutory language or new laws."

But Dodd, a Democratic presidential candidate, said Paulson indicated the Treasury was "not likely to move in that direction."

"I'm still concerned Treasury does not appreciate the importance of this issue," said Dodd.

Earlier, Paulson told CNBC that the Treasury is "talking to a wide variety of participants in that market, including Fannie Mae and Freddie Mac, and we're thinking through options to reduce the strain in the mortgage market."

Paulson said the turmoil in the credit markets would take time to settle, but stressed that the underlying U.S. economy remains in good shape.

"This will play out over time, and liquidity will return to normal when the market has a better understanding, when investors have a better understanding, of the risk return trade-off," Paulson said.

But while investors cope with the turmoil in the financial markets, millions of homeowners remain at risk of losing their homes. Like everything else involving real estate, the impact of the mortgage mess and the ongoing wave of foreclosures have been felt unevenly across the country. Much of the damage has occurred in the states like California and Florida where the housing boom — combined with rampant speculation and easy-money lending — grew the fastest.

Other hard hit states such as Michigan were already battered by weak economic conditions before the recent credit storm hit. Detroit posted a 70 percent month-over-month increase in foreclosures in July, pushing the city’s foreclosure rate to one filing for every 97 households — more than seven times the national average.

Though 43 states have seen higher year-over-year foreclosure rates, more than half of the total has been concentrated in just five states — California, Florida, Michigan, Ohio and Georgia.

Nevada topped the list with with one filing for every 199 households — more than three times the national average. Georgia, with one foreclosure for every 299 households, ranked second. Michigan’s foreclosure rate of one filing for every 320 households ranked third. Other states with foreclosure rates in the top 10 included Colorado, Ohio, Arizona, Massachusetts and Indiana.

As foreclosures have risen, the flow of new money into the mortgage market has slowed sharply. Hardest hit have been buyers applying for so-called “jumbo” loans (more than $417,000 for a single-family home) which have become much harder to come by — and more expensive when available — in just the past few weeks. Some borrowers with good credit looking for so-called “conforming” loans below that limit are also having a hard time getting mortgages approved.

The worry is that a slowdown in the availability of new mortgages could deal yet another blow to a housing industry already suffering its worst downturn in more than a decade.

“The reduction in credit availability to the broader mortgage market in recent days represents a new and potentially more damaging phase to the housing correction,” Credit Suisse's chief economist Neal Soss wrote in a research note Friday. “We have sharply lowered our residential investment forecast accordingly.”

MORE FROM MORTGAGE MESS

Mortgage Mess Section Front

Mortgage demand climbs from 7-month low   FBI cites 'rampant' mortgage fraud Foreclosure help available to more homeowners Mortgage applications decline Reclaiming blighted neighborhoods Obama pushes for less risky home loans Foreclosures up 18 percent over last year Can't refinance? Call your congressman Broker charged in subprime fraud on the lam Tony Las Vegas development struggles Mortgage Mess Section Front   Add Mortgage Mess headlines to your news reader: