Each day from July through September, more than 2,700 Americans lost their homes in foreclosure.
That number, up from 1,200 a day a year ago, is a sign that the mortgage industry and government programs have done little to help troubled homeowners.
The mortgage market’s troubles have proved to be far more serious and intractable than most in government or the private sector had predicted a year ago.
“We are behind the curve. We are falling behind,” Sheila Bair, head of the Federal Deposit Insurance Corp. told a Senate hearing Thursday. “There has been some progress, but it’s not been enough, and we need to act. And we need to act quickly, and we need to act dramatically to have more wide-scale, systematic [loan] modifications.”
More than 4 million homeowners with a mortgage were at least one month behind on their payments at the end of June, according to the latest data from the Mortgage Bankers Association, and a record 500,000 had entered the foreclosure process.
So why is the foreclosure crisis so hard to fix?
There are five main reasons:
c Crashing home prices: A massive speculative bubble in housing prices caused millions of Americans to think of their homes as an investment, rather than a place to live.
Now prices are plummeting, especially in once-sizzling markets like California, Florida and Nevada. And the bleeding might not stop until the end of next year.
The median home price in the U.S. dropped 9 percent in September from a year ago to $191,600, and is down 17 percent from the peak in July 2006, the National Association of Realtors said Friday.
c Investor speculation: Plunging prices have had even more impact on investors than on homeowners because investors have less emotional attachment to a house. They’re even more likely to walk away, especially if they’ve put little money into a property.
Investors purchased one of every five homes last year, and almost one of every three when the market peaked in 2005, according to the Realtors trade group.
They took advantage of risky loan products that didn’t require down payments or proof of income. Other loans allowed the borrower to pay only the interest on the loan, or even less, and none of the principal for a certain time.
Now, more than 30 percent of properties in the foreclosure process are owned by someone with a different address, indicating that the home is likely owned by an investor, according to foreclosure listing service RealtyTrac Inc.
c Complex investments: Traditionally, lenders evaluated borrowers because they held onto the mortgages for the life of the loan. That process started to change in the late 1980s, as Wall Street found new ways to package the loans into securities to sell to investors.
Investors were attracted to these new mortgage-backed securities because they paid better returns than government bonds.
At the beginning of this decade, the Federal Reserve started cutting interest rates to historic lows. So investors poured money into the U.S. mortgage market, particularly into securities made up of high-interest mortgages made to borrowers with poor credit records.
The high-interest, risky mortgages, called “subprime,” boomed, from $160 billion in new loans in 2001 to more than $600 billion in both 2005 and 2006, according to Inside Mortgage Finance, a trade publication.
c Job losses: The No. 1 reason people fall behind on their mortgage is loss of a job, or some source of income, perhaps from a divorce or death of a spouse. If a borrower is unemployed, lenders don’t have many options but foreclosure.
Two years ago, about 36 percent of mortgage delinquencies were caused by loss of income or unemployment, according to research by mortgage finance company Freddie Mac. But that number has risen to 45 percent this year as the unemployment rate has ticked up to a five-year high of 6.1 percent.
c Falling behind again: It’s hard to fix something that keeps breaking.
Roughly one-third of all subprime loans modified in the third quarter of last year were delinquent again within 10 months, according to a Credit Suisse report released this month.