Gainesville

Why Banks Are Reluctant To Redo Ailing Mortgages
Topics:Subprime Lending | Mortgages | Housing | Real Estate | Consumers
Sectors:Construction and MaterialsBy Kenneth Stier, Features Writer | 28 Oct 2008 | 02:58 PM ET Text Size

In another worrisome sign for the housing crisis and US economy, home foreclosures are surging to record levels and are likely to get even worse in the months ahead.

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.

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More than three million homes are now expected to be in foreclosure by year’s end, a million more than even the most dire predictions.

On top of that, lenders are taking possession of delinquent properties at twice the normal rate, according to RealtyTrac, which has one of the industry’s most comprehensive databases.

That means more than one million homes are likely to be repossessed by the end of the year, which is roughly one-quarter of all US homes for sale. And it could rise to one-third of all homes for sale, which would push already distressed home prices even lower as lenders scramble to unload the properties.

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“In my wildest dreams I couldn’t have imagined that the market could have gotten this much worse, as bad as it was last year,” says Rick Sharga, senior vice president of RealtyTrac.

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.

The downturn in real estate continues. See video at left.

“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.

On Tuesday, GOP presidential candidate John McCain told CNBC that the government's top priority should be to buy up these troubled mortgages and allow people to stay in their homes. Click here to watch the interview.

"The administration is not doing what I think they should do, and that's go in and buy out these bad mortgages, give people mortgages they can afford, stabilize home values and start them back up again," McCain said in a live interview with his vice presidential running mate, Sarah Palin.

Democratic presidential candidate Barack Obama has already proposed helping distressed homeowners, as have Sheila Bair, head of the Federal Deposit Insurance Corporation, and members of Congress from both parties.

“Our position is that it's more advantageous [for all parties] to modify the loans and keep the families in their homes,” says David Barr, a spokesman for the Federal Depository Insurance Corporation. “Foreclosures are not good for values of home in the community and if you are an investor, a modified loan provides a continued income stream.”

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Some states have actually frozen foreclosures, but this offers only temporary respite, as Massachusetts recently found out. After imposing a 90-day notification period before foreclosures can be initiated, a quiet summer was followed by foreclosures shooting up 465 percent in September.

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.”

© 2008 CNBC.com

Our regular meeting on Wednesday, November 5 is cancelled, as we will be meeting the night before to watch election returns roll in:

When: Tuesday, November 4, 2008
Where: Gator's Dockside at Plaza Royale

Call 374-9873 for more details.

Remember, although the election is the only topic right now, this group is set up for permanent discussion and will continue!

Emily

Don't forget "W" group viewing is today at 3pm at Royal Park Cineman on Newberry Road: meet out front.

Our regular meeting on Wed. Nov 5 is cancelled in favor of the prior night (Tuesday, Nov 4) election return watch party: stay tuned for location.

Emily

Whew! We had a fantastic time at the debate watch parties and got some publicity in today's Gainesville Sun, with thanks to Donna Tuckey and John Reiskind for their enthusiastic interviews with Cindy Swirko.

SCREENING LIBERALLY EVENT! The first Screening Liberally event will be October 26 (next Sunday) at 3:00 pm at Royal Park Cinema on Newberry Road, where we will gather to watch Oliver Stone's "W". Then join us for supper afterward at a nearby restaurant.

In case you've been in a cave, you might want to take note of the following from our local Democratic office:

FOR IMMEDIATE RELEASE

October 17, 2008

Contact: Florida Press Office, 813-857-2563

MICHELLE OBAMA TO VISIT GAINESVILLE WEDNESDAY ON FLORIDA 'EARLY VOTE FOR CHANGE' TOUR

GAINESVILLE - On Wednesday, October 22, at 2:30 at The Hippodrome, Michelle Obama will host a rally in Gainesville to urge area residents and students to get out and 'Early Vote for Change.'

Early voting sites open across Florida on Monday, October 20. Voters can cast their ballots at any early voting location in their county. To find the nearest location, visit www.VoteForChange.com or call 1-877-2FL-OBAMA.

The event is free and open to the public. Tickets are NOT required, but an RSVP is strongly encouraged. Members of the public can RSVP at http://fl.barackobama.com/GainesvilleChange. Parking is limited. We encourage the use of public transportation.

Lastly, November will be another busy Drinking Liberally month. We are meeting first and third Wednesdays at Brophy's: there will also be an election watch party on November 4 - stay tuned for details.

Comments or suggestions? Please contact us by email through the LivingLiberally.org website.

We've had a great time at the presidential debates! Please join us at 8:30pm at Gator's Dockside next Wednesday, October 15 for the final debate...with so many important issues at stake, this could be one of the most important presidential elections for generations. Energy, economics, foreign policy and supreme court nominations are all at a critical intersection. Whomever you vote for will face challenges that are the perfect storm.

Remember: Living Liberally is not here just for the election...we are a permanent discussion group that will continue to meet every first and third Wednesdays at Brophy's Irish Pub at 7pm. We are very pleased to provide Gainesville with a forum to discuss and debate issues that affect us now and in the future: Salut!

In the meantime, c'mon down for the party next Wednesday: BINGO continues with fun swag, the food is good, and we appreciate Gator's Dockside (even if they initially tried to foist FOX news on us, lol...)

The regular meeting of the Gainesville Drinking Liberally Chapter is still on tonite. Please come out to Brophy's Pub @ 7pm in downtown Gainesville. Devorah, Debbie, & Donna will be there. There will also be two UF journalism students attending to interview for a story/project.

If your schedule doesn't permit your attendance this evening, we highly encourage you to attend the VP Debate Watch Party tomorrow night @ Gator's Dockside from 8:30-10:30pm. There will be games, fun, conversation, and a very special guest from the far north!

Hope to see everyone there!

Devorah, Debbie, & Donna