Housing market's woes could get even worse

More troubling are recent signs that even some homeowners who succeed in convincing their lender to rework their loans eventually lose their homes anyway. In some parts of the country as many as half of those homeowners who rework their loans eventually “redefault” on their loans.

“When you see the data and you see the total amount of redefaults going up each month by whatever measure we use, it's clear that something is not working right,” said John Dugan, the comptroller of the currency, whose office regulates federally chartered commercial banks. "I don't think we've seen the worst yet, because we're going into a worse economy.”

For now, the government’s primary strategy for boosting the housing market has been a massive effort by the Federal Reserve to lower interest rates. At its latest meeting, policymakers said they had let a key short-term rate fall to zero and would try to force down rates on mortgages and other long-term loans.

The Fed's announcement of its policy shift helped push mortgage rates to their lowest level in 37 years. That has sparked a refinancing rush by existing homebuyers looking to lower their monthly payments. But many homeowners with unaffordable loans can’t refinance because they are stuck with hefty “prepayment” penalties on their old loans or because they don’t qualify under now-stricter lending standards.

Some analysts doubt that low mortgage rates alone will be enough to get housing sales moving again among new buyers.

Lenders are looking for substantially bigger down payments, especially in areas of the country where home prices are higher than the limits for FHA-backed loans, which allow low down payments. The historical requirement that a borrower put down 20 percent of the purchase price — widely abandoned during the housing bubble — is returning. That’s forcing many would-be first-time buyers to the sidelines until they can save up that down payment.

To help spur sales, the battered home building industry is pressing Congress to provide relief in the Obama administration's promised economic stimulus package. The industry proposal, called Fix Housing First, would include a move to offer mortgages at 3 percent interest and provide a $22,000 tax credit to help buyers come up with a down payment.

The latest call for the proposal came from Ara Hovnanian, CEO of Hovnanian Enterprises, one of the nation’s largest homebuilders. Last week, the company reported a 48 percent drop in revenues from a year ago for the latest quarter, due to falling home prices and lower sales. More than 40 percent of buyers who signed contracts during the quarter walked away from the deal amid growing concerns over the economy and rising unemployment, the company said. Hovnanian has cut its work force by 65 percent since the peak in 2006, and said more reductions could be ahead if home sales continue to decline.

"Declining home prices are what caused much of the financial and economic turmoil that we are faced with today," Hovnanian told Wall Street analysts on a conference call to discuss the company's latest financial results. "If the government wants to enact a stimulus policy that will get to the root cause of the problem, they need to fix housing first."

Also in msnbc.com business Frustrated shoppers put credit cards away, pay cash MoorHead: New Audi R8 is a refined land rocket Open House: Homes for sale in a winter wonderland ConsumerMan: It's a ruby ... but it's not the real thing   Video: Christmas music sales are booming this holiday

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

Economy gets tidings of hope for holidays One year later, Madoff case is far from over NYT: U.S. forecasts smaller loss from bank bailout Battle lines forming over TARP extension Obama talks of jobs plan in weekly address Productivity rises by largest amount in 6 years Bleak job scene poses challenge for Obama 'Problem' banks at highest level in 16 years RV industry no longer running on empty Long-term unemployed face dwindling options  Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: