A growing number of American homeowners are falling into financial limbo: They're badly behind on payments, but their banks have not yet foreclosed.
The backlog of seriously delinquent mortgages, which so far affects about 1 million borrowers, is a shadow over hopes for a rebound in the nation's housing markets. It masks the full extent of the foreclosure crisis and threatens to depress prices even further just as some parts of the country are hinting at recovery. For lenders, it could portend even more financial losses tied to the mortgage meltdown.
"It just means foreclosure rates are going to keep rising," said Patrick Newport, an economist for IHS Global Insight.
Rising mortgage delinquencies were at the root of the recession, and many economists say an economic recovery will be difficult until the housing market recovers and home prices stabilize.
And even though a delayed foreclosure can be a blessing for some troubled homeowners, for others, it simply prolongs the financial distress, leaving them on the hook for the condition of the property. Even if they move out, they cannot move on.
"I have even begged them for a foreclosure," delinquent mortgage-holder Charlotte Jensen said. When she realized she couldn't save her Glen Allen home last year, she filed for bankruptcy, packed up her family and moved out. Nearly a year later, Bank of America has yet to take back the home.
During the first quarter of this year, the share of all homeowners seriously delinquent on their mortgage but not yet facing foreclosure more than doubled to 3.04 percent, or about $227 billion in loans. There was a total of $97 billion in such loans during the same period in 2008, according to Inside Mortgage Finance. In more prosperous times, the rate is much lower — it was less than 1 percent in first quarter of 2007, according to the industry publication.
Some of the backlog reflects the inability of lenders to keep up with the swelling rolls of delinquent properties.
"Lenders are having an immensely difficult time handling the capacity. They are torn between loan modification, short sales, foreclosures, and they are finding they can't do all these things at once, and do them well, so we're seeing a lot of things falling through the cracks," said Howard Glaser, a housing industry consultant and a housing official during the Clinton administration.
But some of the backlog also reflects an intentional slowdown in the pace of foreclosures as government and industry step up efforts to help borrowers who want to save their homes. Fannie Mae and Freddie Mac, the government-run mortgage financing companies, put a temporary moratorium on foreclosures late last year and many of the country's largest lenders followed suit. That gave some lenders more time to determine which borrowers could benefit from government help.
Working through the backlog
The glut of foreclosed homes on the market has already pushed down prices across the country. Existing-home prices fell another 16.8 percent in May compared with a year ago, according to industry data released yesterday. The overhang of homes in limbo means that foreclosure rates are likely to increase dramatically during the second half of this year and into 2010 as lenders work through the backlog, said Bob Bellack, chairman of Zetabid, which auctions foreclosed properties.
"Prices will fall to the point where you have equilibrium, and it won't reach that until there is no longer this foreclosure overhang," Bellack said.
This could in turn put renewed stress on financial firms that carry mortgages or mortgage-backed securities on their books. As a general policy, many firms have been marking down the value of those assets as the loans become delinquent. But once the homes go into foreclosure and are sold, their value could decline even more, prompting another round of losses at financial companies.
For some homeowners, the foreclosure delays have provided needed breathing room to try to save their home, giving them a chance to live for free for a while or to work out a deal to save their property. "I think everyone has come to a realization that efforts to try to mediate are preferable to foreclosure right now," said David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a nonprofit group.
But housing experts say that once borrowers are seriously delinquent — defined as 90 days overdue on a mortgage — some are too far behind to help or have already given up. According to a March report from NeighborWorks America, a large housing counseling group, 27 percent of homeowners who go to a housing counselor after missing three or four monthly payments end up in foreclosure. That figure jumps to 60 percent for those who have missed more than four payments before seeking help.
In better times, lenders tended to begin the foreclosure process after three months, said Guy Cecala, publisher of Inside Mortgage Finance. Now it is not unusual for it to take nine months for the process to begin, he said.
"No one is in a rush, lender-wise, to deal with the property," he said. "If you have to sell at a loss, why rush?"
Lenders traditionally write down the value of the home six months after an owner stops making payments, but the total loss is not recorded until the property is sold in foreclosure, said Mark Zandi, chief economist of Moody's Economy.com.
"Some may feel that the property is worth more than the market can bear at this time, and they are willing to wait until" the market improves, he said. "They don't want to sell it into a completely depressed market."
Once underway, the foreclosure process is governed by a hodgepodge of state and local laws and the time it takes to get through the process varies by place. The process can also vary based on the original lender, on the current owner of the loan and on whether the borrower has filed for bankruptcy.
During the period that precedes final foreclosure, homeowners still have the legal obligations that come with ownership. Though in practice many borrowers who have stopped making mortgage payments may do little to look after a home.
"During that period, where the property is in limbo, until there has been a sale of the property, the homeowner is still the owner, technically," said John Rao of the National Consumer Law Center. "It used to be that they wanted to foreclose as quickly as possible. . . . [Now] it's like this hot potato that nobody wants."
Even seriously delinquent borrowers can restart negotiations with lenders to stay in their homes with a modified mortgage or persuade them to accept a short sale, which involves a homeowner selling the property for less than the outstanding mortgage balance and then turning the proceeds over to the lender to satisfy the loan.
Jay Brinkmann, chief economist for the Mortgage Bankers Association, said his industry is doing its best to work through the backlog while carrying out federal foreclosure prevention programs. "If a lender has a house that they know they will have to sell eventually," he said, "they almost always want to sell it as quickly as possible because of the interest cost of holding the loan on the books, in addition to costs like taxes, keeping the grass cut and other maintenance."
More than ever, foreclosure has become an unattractive outcome for lenders.
"What we're seeing more and more right now are cases of a lender threatening foreclosure and the foreclosure sale is canceled at the last minute," said Jeanne Hovenden, a Richmond bankruptcy attorney, who handled Jensen's case. "It's more like the lenders don't want to own any more real estate and are using foreclosures as a pressure tactic."
The Jensens bought their home in 1999 and were able to make their payments comfortably until refinancing. Since moving out last July, they have not received a foreclosure sale notice even after hiring an attorney to encourage Bank of America to speed up the process.
Jensen visits her home weekly to ensure it hasn't been vandalized or taken over by squatters. She pays landscapers to keep the lawn mowed. When the home caught fire in January, the police department knocked on the door of her new home, confused about whether to notify her or the bank. When neighbors complained about the mess left from the fire, Jensen returned to clean up.
A Bank of America spokeswoman, Jumana Bauwens, said the delay was caused, in part, by the fire. She said the home has since been referred to foreclosure. "The company makes every attempt to find a home retention solution for a borrower before proceeding with a foreclosure," she said.
For the Jensens, the delay has extended a painful period. "There was a sense of responsibility that until someone says we no longer own that property, we wanted to make sure it's handed off correctly," Jensen said. "We could have walked away like everyone else and said, 'We don't care.' But we loved our neighbors and our neighborhood. We hold ourselves responsible."