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Foreclosures Rise, along with Borrowers Helped by Refinance Program

Aug 14, 2009 - Foreclosures hit record levels in July for the third time in five months, but new eligibility rules and expansions for the Obama administration's Making Home Affordable refinancing program could slow the rising tide.

According to RealtyTrac, foreclosures rose 7% month-over-month in July, and 32% over last year. This amounted to 360,149 homes going into foreclosure, or one in every 355 housing units. Foreclosure in these instances could range from simple loan default notices to bank repossessions.

This record amount of foreclosures was grouped in four states, those hit hardest by the housing downturn. Foreclosures in California, Nevada, Arizona and Florida represented half of the foreclosure activity reported by RealtyTrac.

The rising foreclosures may seem rooted in a relatively simple cause. We've been told time and again about adjustable-rate mortgages resetting, which have resulted in monthly payments borrowers can no longer make, and banks eager to take the property back. But it may be more complicated than that.

Analysts also point to a number of other economic factors creating this foreclosure-ripe environment. Unemployment has been rising, meaning many borrowers have less income to rely upon each month. Additionally, home values are falling drastically and have been for months. Zillow reports that 22% of mortgages are underwater, meaning that borrowers owe more than the house is now worth. Zillow anticipates this number could go as high as 30% by the end of next year. Borrowers are now facing payments that can't and won't allow them to catch up, and foreclosure is a result.

Meanwhile, the Obama administration is expanding and pushing the Making Home Affordable program to stem these foreclosures. This program is aimed at borrowers who couldn't qualify for traditional loan refinancing because of home equity loss. But the program is facing significant obstacles, and has helped only a small number of those affected. According to Treasury Department estimates, less than 10% of delinquent borrowers eligible for the foreclosure prevention plan have received help. The department's report indicated that implementation of the program has been haphazard, and many homeowners who seek help aren't getting it.

Some of the limitations of the program have been eliminated of late, and may point the way towards more help in the future. Initially applicants were eligible only if their mortgage did not exceed 105% of their current property value. Last month the eligibility was expanded to borrowers whose mortgage is up to 125% of their current property value.

This week the administration reported new numbers, noting that 60,000 homeowners have been helped so far. But half of this refinancing activity was completed in July, suggesting the program is ramping up and will be able to help more in the coming months. Officials have said the program was hampered early on by the limitations and difficulty determining eligibility. Now the program is running more smoothly, they say, and the administration still aims to help 500,000 borrowers by Nov.1 and up to 4 million before the program expires in 2012.

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