The tidal wave of foreclosures seems to be unstoppable.  According to CNBC this morning: [Thanks L!]

Foreclosures—a multi-stage process that begins with a homeowner falling behind in their mortgage payments and can end with them losing their home—soared 71 percent in the third quarter, to an average of more than 8,500 homes a day.

There’s been a lot of press about government programs to encourage workouts, but there’s a couple of problems.  One- it’s more difficult for the banks than many people think and two- workouts don’t seem to be working:

Why is this happening—especially when the last thing most lenders want to do is repossess a house?

For one thing, banks are overwhelmed with the sheer number of troubled mortgages. That’s made it more difficult for them to work out loan modifications—essentially reducing the interest rates and even the principal to help people keep their homes.

Many mortgages also have second liens attached to them, requiring negotiations with third parties.

But the main problem is that so many mortgages have been grouped together into securities and sold off to investors worldwide. These mortgage-backed securities typically carry terms that severely limit the homeowner’s ability to renegotiate a mortgage.

So the banks that typically service the mortgage—collecting payments from homeowners and passing them on to the investors—risk being sued if they deviate from these terms. And those servicing the loans often make more money in foreclosures than in renegotiating a loan, giving them even less incentive to help out homeowners.

 “It basically floods the market with distressed inventory which makes it that much more difficult for prices to hold, and sort of feeds into this cycle, and as prices fall, you put more people in danger of foreclosure,” explains Sharga.

For that reason, there is growing talk in Washington of having the government step in to help stem the rise in foreclosures.

But what has been the result so far?

Under pressure from Washington, the mortgage industry has stepped up efforts to avoid foreclosures and the industry’s voluntary effort, HOPE NOW claims to have helped avoid 2.3 million foreclosures. But critics say this significantly overstates actual on-the-ground help.

“These efforts are in no way keeping up with foreclosures,” says Julia Gordon, policy counsel at the Center for Responsible Lending, a non-partisan research institute based in North Carolina. She says foreclosures are outpacing averted actions by four to one.

There are also some who argue that renegotiated mortages don’t always solve the problem.

RealtyTrac’s Sharga says more than a third of work-outs end up back in default within three months, reducing these efforts to just “delaying the inevitable.”

Clearly the fact that these are only "delaying the inevitable" won’t stop government efforts to continue with programs that are showing little results.  "Delaying" for politicians is often good enough.

Related Posts

1. Bank Repos Up 184%, Foreclosures Up 55% (August 14, 2008)
   Tagged Housing Bubble
   
2. Newly Delinquent Borrowers Outnumbering Those Catching Up Two-To-One (May 30, 2008)
   Tagged Housing Bubble, Mortgage Banking
   
3. Foreclosure "bargains" – What will you do with it when you buy it? (January 17, 2008)
   Tagged Housing Bubble
   
4. Cities Think They Can "Flip This House" (August 26, 2008)
   Tagged Housing Bubble
   
5. Foreclosures Nationally More Than Doubled (July 25, 2008)
   Tagged Housing Bubble