Job Losses Push Safer Mortgages to Foreclosure

There has been a lot of talk blaming the collapse of the real estate market on risky sub-prime loans that should never have been made. While there is truth to that story line, what is troubling is that now foreclosure risks are spreading to those who have lost jobs or those whose incomes have declined as small business revenues have plummeted due to the severe recession - a fact lost on those like my former wife and judges who have never practiced a day in private practice. Increasingly I am receiving calls from homeowners who never dreamed that they would ever be facing foreclosure who are desperate to find ways to get their loans restructured or work out some sort of forbearance agreement. The reality is that one cannot get blood out of a stone and more and more homeowners are finding that their homes no longer appraise at values like they once did. The New York Times has a story today that looks at this too often ignored reality. Here are some highlights:

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As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures. In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans — those extended to home buyers with troubled credit — to the far more numerous prime loans issued to those with decent financial histories.

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With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

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“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.” Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers’ introductory interest rates expired and were reset higher.

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Over all, more than four million loans worth $717 billion were in the three distressed categories in February, a jump of more than 60 percent in dollar terms compared with a year earlier. “I don’t think there’s any chance of government measures making more than a small dent,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

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Even states seemingly removed from the real estate bubble are seeing foreclosures accelerate as the recession grinds on. In Minnesota, three of every five people seeking foreclosure counseling now have a prime loan, according to the nonprofit Minnesota Home Ownership Center.

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The picture is bleak and to date, the much vaunted programs put in place by the Obama administration have done little to stop the trend. The programs are chaotic and getting anyone who can determine whether a homeowner qualifies for a plan can take virtually hours on the phone - assuming you ever do reach a decision maker.