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.”
Soss figures that home sales “could register huge declines over the next several months” which could, in turn, set off a new round of construction cutbacks. Credit Suisse now forecasts a 33 percent drop in residential real estate investment from the last year’s peak. That would be bigger than the 24 percent decline in the late '80s and early '90s, but not as big as the 45 percent drop in the early '80s, according to Soss.
Both of those housing pullbacks sent the U.S. economy into recession. But Soss, among others, believe that the current strength in the U.S. job market, strong consumer spending and a rapidly expanding global economy could limit the impact of the current mortgage mayhem on the broader economy.
“Whether or not the current financial episode devolves into a more significant storm for the business expansion remains to be seen, but history suggests that financial crises on Wall Street are often treated as a spectator sport by Main Street, with little impact on the real economy,” he wrote.
Despite last week’s efforts by the Federal Reserve to put out the fire, some lawmakers on Capitol Hill are working on broader measures to try to stem the ongoing wave of foreclosures and calm the mortgage markets.
“We've got a serious problem, with a lot of potential foreclosures out there. How can we keep people in their homes?” Dodd told CNBC Monday. “That's an ongoing problem here in addition to trying to change the regulatory environment that allowed this to happen in the first place.”
A key issue under discussion in Congress is whether Fannie Mae and Freddie Mac should be given more leeway to expand their reach in the mortgage market.
As the housing market boomed earlier in the decade and subprime lending took off, these quasi-governmental agencies lost market share to more lenient lenders with easier terms like no money down or little or no documentation. (Along the way, they also lost friends in Congress following disclosure of accounting problems and other issues.)
Now, backers of the two agencies are pushing a series of reforms to help them regain mortgage market share. Because these loans carry the implicit backing of the federal government, they typically charge lower interest rates because the risk to investors who buy them is lower. The hope is that homeowners now at risk of foreclosure — because of pricier terms offered by subprime lenders — could avoid default by converting to cheaper loans that conform to lending standards required by these government-chartered agencies.
“(Fannie Mae) checked on subprime mortgage issuance out there, and they say roughly up to half of the holders of subprime mortgages would qualify on a credit basis for a Fannie Mae conventional conforming loan,” said Sam Lieber, president of the Alpine Mutual Fund Group.
In April, Sen. Charles Schumer, D-N.Y., proposed spending hundreds of millions of dollars of government funds to help troubled borrowers avoid losing their homes. In May, the House passed a bill that would raise current limits on the size of mortgages that can be insured by the Federal Housing Administration.
But the bill would also allow FHA to insure loans with no money down and charge higher premiums to riskier borrowers. Critics of those moves, including Sen. Richard Shelby, R-Ala., and other Senate Republicans, say the changes that eased lending standards could expose the FHA — and taxpayers — to the kinds of risks that got subprime borrowers and lenders into trouble to begin with.
“We have to be very careful going down this road,” said Michael Darda, chief economist at MKM Partners. “Longer term, we're going to have a problem with risks being mispriced. That is how we got into this situation in the first place. So I think we need to be very wary about federal government actions.”
Though the details of any reform package have yet to be worked out, the turmoil in the mortgage markets has provided momentum to legislation that has been stalled for months. Last week, President Bush indicated general support for giving federal housing agencies enough "flexibility" to help try to avert more foreclosures.
It remains to be seen how far Congress and the White House will go to use taxpayer dollars to help bail out homeowners facing foreclosure. But some see a significant shift in the political wind in the past few weeks.
"I do smell a federal bailout," said Darda. "We have a Democratically controlled Congress and a Republican president with a disastrous international situation and a plummeting approval rating. So this could be irresistible."