Why the foreclosure crisis isn't improving

Rising unemployment and higher interest rates may be to blame for another record month.

The economy may be leveling off, but a new wave of foreclosures is starting to build this summer.

Housing analysts attribute at least some of the rising level of foreclosures on the jobless rate, which now stands at 9.4 percent. But the economy alone is not to blame – a large number of adjustable-rate mortgages are coming due for higher interest rates.

In addition, with real-estate values stabilizing, some analysts think some mortgage-servicing companies think it’s now more profitable to foreclose on a house than to make a loan modification. In California, the largest center of foreclosures, banks have beefed up their foreclosure departments, an indication that they expect unfortunate home losses to continue.

“We knew a second round of foreclosures would be starting this summer, and we will have to live through that,” says Joel Naroff, an economist at Naroff Economic Advisors in Holland, Pa. “It’s another reason to think the recovery will be slower.”

In a new report Thursday, RealtyTrac, Inc., a housing-research organization, reported the number of foreclosure filings – default notices, scheduled auctions, and bank repossessions – totaled a record 360,149 in July. This represents a rise of 7 percent from June and up 32 percent from a year ago. One in 355 households received some sort of filing, either foreclosure or default, according to RealtyTrac. This was the third record in the last five months.

The rising level of foreclosures recently prompted the Obama administration to ask executives of the major mortgage servicing companies to Washington. The administration has been trying to get the banks to voluntarily do loan modifications to reflect lower home prices.

More than 400,000 modifications have been extended and more than 230,000 trial modifications – efforts to see if the homeowner can actually afford to pay a lower monthly payment – have begun, the Making Home Affordable loan-modification program reported on Aug. 4.

The Obama administration wants to double trial modifications by Nov. 1.

“There is a recognition they are not getting the response they want to get,” says John Taylor, the president of the National Community Reinvestment Coalition, a pro-consumer housing group, in Washington. “The industry has waited on the sidelines for the market to improve so they have to give less.”

The worst states for foreclosures were Nevada, California, Arizona, and Florida, according to RealtyTrac. It is the 31st consecutive month that Nevada has had the dubious distinction of leading the RealtyTrac's national numbers. In California, initial defaults in California rose 15 percent from June, the report said. Only four states accounted for more than half of the foreclosure activity.

Mr. Naroff thinks the RealtyTrac data distorts the real picture of the housing market.

“Because some of these numbers are so large, it’s skewing the national data, especially in terms of prices,” he says. “While prices in those areas [the worst foreclosure states] are falling, in most of the rest of the country they are stabilizing if not improving.”

There is even some disagreement over the foreclosure numbers.

DataQuick, a home research company in La Jolla, Calif., thinks the filing of trustees deeds in California, which happens immediately before foreclosure, is down 12 to 15 percent from the prior month.

But that may change. Banks and other mortgage servicers were staffing up in their foreclosure departments, DataQuick noted. “There were all sorts of paperwork backlogs,” he says. “We have to be ready for a burst of new filings.”