1.5 million homes in foreclosure in '09

Homeowners fell behind on mortgage payments in record numbers during the first six months of 2009. The future doesn't look much better.

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By Les Christie, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The foreclosure plague is not going away -- it's only getting worse.

A record 1.53 million properties were in the foreclosure process -- default notices, auction sale notices and bank repossessions -- during the first six months of 2009. That was 9% more than the previous six months and 15% more than the same period of 2008, according to a report released Thursday by RealtyTrac.

There were a total of 1.91 million filings resulting in 1 out of every 84 U.S. properties receiving at least one filing in the first half of the year. Banks repossessed 386,800 properties.

"What this means is, despite the intensity of the efforts on the part of government and lenders we don't have a handle on foreclosures yet," said Rick Sharga, a spokesman for RealtyTrac.

And, in a bad sign for a housing recovery, there was no recorded improvement in June, the last month of the cycle. More than 336,000 homes reported foreclosure filings, the fourth straight 300,000-plus month. Filings were up 33% over last June and nearly 5% compared with May.

"Foreclosure activity continues to increase to record levels," said James J. Saccacio, chief executive officer of RealtyTrac in a prepared statement. "Unemployment-related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes' are now worth represent a potentially significant future risk."

It's the economy

The biggest problem affecting foreclosure figures is the recession. As job losses mount, more out-of-work borrowers are falling behind on payments. And home prices are still falling, albeit at a slower rate, which by itself is enough to drive more homeowners into default.

The home-price drop means more homeowners are underwater on their mortgages, owing more than their home is worth. That discourages some borrowers from repaying loans because they see it as a poor financial decision to keep paying on a declining asset.

Homeowners are apt to walk away from their mortgages once their home values fall 15% below their mortgage balances, according to recent research reported by Paola Sapienza of the Kellogg School of Management at Northwestern University, and Luigi Zingales of the University of Chicago Booth School of Business.

They claim that at least 25% of all mortgage defaults may be "strategic," borrowers walking away from their homes because they've lost so much value. And in many of the areas hardest hit by foreclosure, home prices have fallen by 40% or more.

Others, however, are working with their lenders, trying to get the terms of their loans modified so they can stay in their homes. But that process has been slow and infuriating to many borrowers and community activists.

The Federal Housing Finance Agency, the government watchdog created to manage Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), reported Wednesday that only 13,800 mortgages had been modified by Fannie/Freddie lenders in April. That is down 12% from March.

The stats did not include workouts arranged through the Home Affordable Modification Program, the administration's foreclosure prevention effort that seems to be making very slow progress.

The program, which got up to speed in April, has resulted in 43,000 refinances and more than 325,000 offers to modify loans. Another 160,000 have borrowers accepted and are currently in the process of restructuring. But before these modifications can be recorded as final, the borrowers must make three months of on-time payments.

Another reason for the slow progress, according to a research paper released by the Federal Reserve of Boston, is that some banks have some sound financial reasons to drag their heels.

Many delinquent homeowners, for example, "self-cure," that is, start paying again without assistance. In a report issued last week, the Fed found that an estimated 30% of all borrowers who miss two payments start repaying on their own.

If the lenders had modified these loans, the would have lost money unnecessarily.

A second reason, according to the report, is that so many modified loans re-default, with up to 50% of all modified mortgages succumbing. That costs the banks twice: They bear the expenses of the initial workouts and they pay again to finish the foreclosures, including any additional missed payments.

And by postponing foreclosures, lenders absorb any subsequent housing value losses. If the final repossessions are delayed a year, the lenders could be getting houses worth 10%, 20% or even 50% less than they were at the point of the original default. The banks would have been better off foreclosing then.

"We think these are very powerful forces [acting against modification]," said Manuel Adelino, one of the authors of the report.

Where the pain is

The Sun Belt suffered more foreclosures than other region during the last six months.

California, with 391,611 filings, one for every 34 households, recorded more than any other state. Nevada had the highest foreclosure rate with one for every 16 households. Arizona, one for every 30, and Florida, one for every 33, were next. Utah had the fifth highest rate at one for every 69.

Midwestern industrial states did little better with Michigan recording one foreclosure for every 74 households, seventh among the states. Illinois came in eighth with one for every 76; and Ohio, with one for every 86, was twelfth.

Georgia, at one for every 70 households, and Idaho, one for every 79, were sixth and ninth respectively. Colorado, with one for every 80, rounded out the top 10. To top of page

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