Scope of foreclosure crisis daunts government

updated 7:04 p.m. ET Oct. 26, 2008

WASHINGTON - Each day from July through September, more than 2,700 Americans lost their homes in foreclosure.

That number, up from 1,200 a day a year ago, is a sign that the mortgage industry and government programs have done little to help troubled homeowners.

The mortgage market's troubles have proved to be far more serious and intractable than most in government or the private sector had predicted a year ago.

"We are behind the curve. We are falling behind," Sheila Bair, head of the Federal Deposit Insurance Corp. told a Senate hearing Thursday. "There has been some progress, but it's not been enough, and we need to act. And we need to act quickly, and we need to act dramatically to have more wide-scale, systematic (loan) modifications...."

More than 4 million homeowners with a mortgage were at least one month behind on their payments at the end of June, according to the latest data from the Mortgage Bankers Association, and a record 500,000 had entered the foreclosure process.

So why is the foreclosure crisis so hard to fix?

There are five main reasons:

Crashing home prices
A massive speculative bubble in housing prices caused millions of Americans to think of their homes as an investment, rather than a place to live.

Now prices are plummeting, especially in once-sizzling markets like California, Florida and Nevada. And the bleeding might not stop until the end of next year.

The median home price in the U.S. dropped 9 percent in September from a year ago to $191,600, and is down 17 percent from the peak in July 2006, the National Association of Realtors said Friday.

Already, 23 percent of homeowners with a mortgage owe more on their loans than their homes are worth, and that figure is expected to rise to 28 percent by this time next year, according to Moody's Economy.com.

While the majority of homeowners will continue to make their payments and wait for values to recover, some will mail their keys to their lender and walk away, leaving the lender with no choice but to foreclose.

Sophie Lapointe, a mortgage broker and owner of Five Star Mortgage in Las Vegas, has found there's little that can be done to help people who owe more than their homes are worth. "The biggest problem is negative equity," she said.

When homeowners in that position ask her about refinancing, Lapointe tells them to contact their current lender and ask about a loan modification because she already knows no new lender will give them a loan.

Loan modifications vary depending on many conditions, but can include deferring payments, allowing partial payments, lowering the interest rate and lowering the principal balance.

Investor speculation
Plunging prices have had even more impact on investors than on homeowners because investors have less emotional attachment to a house. They're even more likely to walk away, especially if they've put little money into a property.

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Investors purchased one of every five homes last year, and almost one of every three when the market peaked in 2005, according to the Realtors trade group.

They flocked to hot markets like California, Florida, Nevada and Arizona, as television shows such as A&E's popular reality series "Flip This House" touted the easy money that could be made buying and selling homes.

They took advantage of risky loan products that didn't require down payments or proof of income. Other loans allowed the borrower to pay only the interest on the loan, or even less, and none of the principal for a certain time.

Now, more than 30 percent of properties in the foreclosure process are owned by someone with a different address, indicating the home is likely owned by an investor, according to foreclosure listing service RealtyTrac Inc.

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