Breaking the Cycle of Foreclosures without Economic Recovery is Daunting

Foreclosures continue to surge, up 55% from last year and the future doesn't look any better. Estimates by Economy.com forecasts 7.3 million homeowners will default between 2008 and 2010, with 4.3 million expected to end in foreclosure. How do you break this trend? Or, perhaps more importantly, $700 billion in taxpayer allocation later why haven't we?

The puzzle is certainly complex, but there are several key pieces that continue to hold us in this dangerous downward spiral.

Declining Housing Prices

Typically housing prices are a very local phenomenon, some fluctuate up while others head down. However, this crisis has put all home prices in a dramatic downward crash. According to the National Association of Realtors (NAR) median home prices dropped 9 percent in September alone and is down 17 percent since July of 2006. These are national numbers not one soft market.

This amazing, never fathomed drop in home prices has put millions in a squeeze. Sold on the promise of never sinking home value, many homeowners are in interest-only, negative amortization, or lowdownpayment financing that now exceeds the value of the home.

Making payments on an home that no longer has positive value or facing adjusting payments that you can no longer afford or refinance is a recipe for compounding the problem.

Real Estate Investors

The housing boom put a lot of investors into the market. Speculating on endless appreciation this percentage of the housing and mortgage market rose as high as 33 percent in 2005 and still was as high as 20 percent last year, according toNAR.

This group is even less tolerant of consistent losses and find it easier to walk away. This percentage of speculative investment dumps even more homes into the bulging housing inventories, at rock-bottom prices. Continuing the cycle of pushing down home prices.

Complex Mortgage Financing

Mortgage have moved far beyond the simple concept of banks taking in deposit and lending them out at higher rates on mortgages secured by peoples' homes. No, far beyond that.

Today's mortgage market is littered with creative ways to package individual mortgage loans into securities, sell and insure multiple tranches of default risk, and even sell of various blends of credit risk. The resulting complexity makes it hard to build a quick solution.

Unlike the old bank loans where your could simple renegotiate the loan into a win-win for both the lender and the borrower. Today's complex mortgage financing makes it hard to even find all of the investors you would need to talk with to negotiate a more affordable mortgage payment.

This scenario is one of the made impediments to the FDIC proposed broad loan modifications plan.

Unemployment on the Rise

Meanwhile, as Congress and banks are attempting to unwind the mortgage mess and crashing housing prices the bottom is falling out of jobs. The number one factor in mortgage repayment, default prevention, and foreclosure--the simple ability to make a payment with income from a job.

According to Freddie Mac, as the unemployment rate has risen to 6.1 percent the cause of mortgage delinquencies attributed to job loss is on the rise, up to 45 percent of delinquencies from 36 percent in 2006.

Now For Double Jeopardy

The confirmation that this is truly a cycle that is challenging to break is rising indications that work-outs are not solving the problem. Many homeowners are catching up or working-out their mortgage woes only to have one of the other factors hittheir household and send them back into default.

The Solution?

Obviously little will be solved without a strong economic recovery, but most experts are coming to the conclusion that stopping the cycle of foreclosures is the start. Keeping people in their home allows for the housing market to adjust to a bottom and begin a recovery. The converse just continues to dump more and cheaper homes into a market that has no demand.

This is where more and more government assistance is placing its focus.

Alliances like Hope Now, a coalition of the top banks in the nation are concentrating on programs to keep homeowners in homes and making payments. This group has reported 765,000 loan modifications and 1.5 million borrowers on temporary repayment plans.

Meanwhile, FHA assistance has kicked in with its Hope for Homeowners plan. This program is targeted at helping 400,000 homeowners swap their exotic interest-only, adjustable rate, and option ARM mortgages for the more traditional 30-year fixed rate mortgages.

Then of course the latest monumental rescue package, with a $700 billion price tag is intended to help banks support these enormous work-outs and stabilize their own balance sheets.

Unfortunately, much of this government assistance relies on voluntary compliance and execution by financial institutions. Will it happen? Will it happen fast enough?