Foreclosures take toll on US homeowners
By Suzanne Kapner and James Politi

It does not take long for Dan Claggett, head of the foreclosure project at Legal Services of Eastern Missouri, to come up with an example of the suffering the US housing crisis is still causing for many Americans.

"It's devastating," says Mr Claggett. "We helped an 85-year-old woman who couldn't get a loan modification. She lost the home that she lived in for 35 years".

His organisation, a non-profit group based in St Louis, takes calls from people seeking legal help on impending foreclosures. Business has increased by 30 per cent over the past year - evidence that even as the US economy recovers from the recession, the housing sector is still struggling to find its footing.

"We're not lacking clients, I can tell you that," Mr Claggett says.

Recent data on the US housing industry - especially on new and existing home sales - have disappointed economists who were hoping for a swifter rebound as a consequence of exceptionally low mortgage rates and home prices.

And foreclosures are expected to hit an all-time high of 3m units this year - despite ramped-up efforts by the Obama administration to bolster loan modifications, which have so far yielded mixed results.

"I believe it will probably take until 2013 for the overall foreclosure levels to get back to normal," says Rick Sharga, executive vice-president at RealtyTrac, the largest US database of foreclosed properties.

He noted that a new wave of adjustable-rate mortgages were expected to reset to higher rates later this year. This will affect more affluent neighbourhoods than those that have been hit so far, Mr Sharga said.

Data from RealtyTrac released yesterday showed a slight decrease in foreclosures in February compared with January, but levels were still 6 per cent higher than a year ago. One in every 418 US households received a foreclosure filing in February.

One big driver of foreclosures in recent months has been the persistently high level of unemployment and underemployment, when workers' hours are cut.

Another has been that home prices have continued to fall, albeit at a much slower rate than at the height of the downturn and with some cities even experiencing price increases.

According to Standard and Poor's Case-Shiller index, home prices in the largest 20 US cities were down 3.1 per cent during 2009, with some cities such as Las Vegas still experiencing a 20.6 per cent annual decline. Others fared better, including San Francisco, which witnessed a 4.8 per cent appreciation in home prices over the year.

But overall, many homeowners are still stuck with underwater mortgages - in which the value of their loans are higher than the value of their homes.

Nevertheless, Mr Sharga argues that the number of foreclosures could be smaller this year if certain states approved mandatory mediation between homeowners and lenders, which would encourage more modifications, and banks agreed to delay the reset of rates above the low introductory "teaser" rates.

One wild card is the effect of a new Obama administration plan, which takes effect next month, under which lenders will be compelled to agree to short sales if a modification deal cannot be reached.

"The big question is how we take steps to prevent the foreclosure pipeline from being the driver of the next leg down," says Mahesh Swaminathan of Credit Suisse. "We haven't solved the problem, but we haven't lost the game either."

Also complicating the situation are hundreds of billions of dollars in second-lien debt, often in the form of home equity loans. The large banks that hold this debt have resisted government pressure to modify these loans, even though they hold no value once the borrower defaults on the primary mortgage.

Borrowers, meanwhile, are making payments on second-lien loans before primary loans, because home equity lines provide a source of cash at a time when other types of financing are scarce.

The future role of Fannie Mae and Freddie Mac, the nation's two largest mortgage finance companies, is still unresolved and continues to weigh on the housing market.

Facing ballooning losses on bad loans, the companies were taken over by the government in 2008, and along with another government agency, the Federal Housing Authority, provide financing for 90 per cent of all mortgages.

A debate is brewing in Washington about how best to overhaul the agencies, with some politicians arguing that the government should scale back its long-standing policy of promoting affordable home ownership, a move that could potentially lead to higher mortgage rates.

For now, though, rates, which are hovering around 5 per cent, have remained near record lows, despite the planned end later this month of a Federal Reserve programme to buy $1,250bn in mortgage-backed securities. Some economists fear that as this support is withdrawn, it could cause further distress in the housing sector.