The number of foreclosure filings -- from default notices to repossessions -- continued to surge in March, increasing 47% from the same period a year earlier and 7% from February. The 149,150 filings represent a foreclosure rate of one in every 775 households, according to Irvine, Calif.-based RealtyTrac.
The March increase in foreclosures bucks the historical trend, lenders say. Typically, foreclosure activity declines in March, as more homeowners use tax refunds to bail themselves out of mortgage shortfalls caused by job loss, health problems or divorce.
But this year, industry insiders and economists expect it only to get worse, as more adjustable-rate mortgages reset and borrowers with risky loans continue to falter.
"I don't think we've hit the bottom of the market yet," says Rick Sharga, RealtyTrac vice president. "We should see at least one more short-term spike," as more subprime loans continue to go into default.
Subprime loans add to problem
Subprime lending has grown rapidly in recent years. These loans accounted for 2.4% of all outstanding loans in 2000, according to the Mortgage Bankers Association. But by the end of last year, they accounted for 13.7%.
Nevada, which has had a lot of speculation and risky lending, had the highest foreclosure rate in March. The number of filings there increased 29% in the last month to 4,738, or one new filing for every 183 households. This was more than triple the amount reported the same time last year and four times the national average. Las Vegas had one of the nation's highest metro foreclosure rates in March, second only to Detroit.
"You take high-risk properties and layer on high-risk loans and you have a recipe for high foreclosure rates," Sharga says.
In California, the link between subprime lending and increases in foreclosures is even more clear. By the end of last year, California residents had the most subprime mortgages of any state -- 22% of all mortgages by the end of 2006, according to First American LoanPerformance, a unit of mortgage giant First American Corp. Foreclosures in California surged 36% from the previous month in March, with 31,434 foreclosures, or one in every 389 households. This represented the greatest number of any state and accounted for 21% of the nation's total.
Indeed, six of the 10 cities with the highest foreclosure rates in the nation were located in California. No. 1 was Stockton, Calif., with a 137% spike in foreclosure activity between February and March to 1,477 -- or one in every 128 households. That rate was six times the national average. Other California cities with foreclosure rates in the top 10 included Vallejo-Fairfield at No. 3, Modesto at No. 5, Sacramento at No. 6, Riverside-San Bernardino at No. 7 and Bakersfield at No. 10.
Lenders reacting to subprime mess
The huge casualties from subprime lending and so-called "no-doc" or "Alt-A" loans that don't require verification of income have helped slow the economy and affected the entire mortgage business, causing a credit crunch that has some borrowers unable to secure financing for a home.
Sen. Charles Schumer, D-N.Y., has proposed new legislation that would crack down on subprime lending and ban Alt-A loans, often referred to as "liars' loans." "The subprime market is the Wild West of mortgage loans, and it's time we brought a sheriff into town," Schumer said on a recent conference call.
For their part, lenders are scrambling to contain the crisis. Citigroup and Bank of America, in conjunction with the Neighborhood Assistance Corporation of America, recently set aside $1 billion of mortgage money to help about 7,000 victims of abusive lending practices avoid losing their homes.
And Wells Fargo is enacting new policies, allowing struggling homeowners to refinance at a lower rate, change the schedule on their interest rate increases and fold unpaid mortgage amounts back into the outstanding principal. "We want to give them back that affordability," says Patrick Carey, Wells Fargo senior vice president of default and retention operations. "Foreclosures don't benefit anybody. They are bad for the customers, the community ... and we don't make money on them."
States, local governments jump in
States and municipalities are also getting into the act, trying to boost their local economies.
In Ohio, where a wave of foreclosures has saturated some suburbs with vacant houses, a new state program is helping to refinance subprime borrowers with a low fixed-rate mortgage. State officials hope the program, funded by a state bond sale, will rescue at least 1,000 borrowers who might otherwise lose their homes.
Maryland, Rhode Island, Massachusetts and Virginia are already running similar programs. And Florida has a new foreclosure prevention hot line, which is getting about 100 calls a week, says manager Mario Silva. California, Colorado, Washington and Wisconsin are also said to be mulling similar bailout programs.
Of course, some skeptics wonder whether these bailout programs are only delaying the inevitable or helping some unscrupulous buyers avoid payment.
Jason Allnut, vice president of credit loss management with Fannie Mae, says he's heard of people refinancing time after time and never making a single loan payment. "There's been an abuse of modifications historically, which just creates bigger losses for the investor," he says.
Some lenders are requiring that borrowers trying to get their loan refinanced go through consumer credit counseling first.
In Euclid, Ohio, the city maintains vacant homes
Still, analysts say it's clear that something must be done about the foreclosure problem, which is expected to further depress real-estate values and increase crime in many neighborhoods.
Euclid, Ohio, located 12 miles from downtown Cleveland, for one, is taking matters into its own hands. About 300 to 400 of the town's 17,400 single-family homes now sit vacant. That's too many, says Mayor Bill Cervenik. "It sends a message that there's a problem here."
Euclid has begun using city funds to maintain and repair these houses, doing everything from cutting the grass, to repairing gutters to repainting vacant eyesore properties. "We've put together a nuisance-abatement program," Cervenik says.
With a $1 million loan from the country treasurer, city officials hope to buy back more properties for demolition, or rehabilitation so they can be put back on the market. Cervenik says the city will recoup these expenses in property taxes when these properties are sold. But in the meantime, it has begun charging fees for upkeep to the lenders who refuse to take care of the repossessed properties, spurring many into action.
"When we know who the owner is, we charge $150 to cut the grass. That gets their attention," Cervenik says.
After all, he thinks the lenders share much of the blame for the area's woes.
Ahead, 'another leg down' for housing
All of northeastern Ohio has felt the pall cast by these mortgage problems, Cervenik says, and he believes it could be three or four years before the market improves.
Economists echo that prediction for the rest of the country.
"We are forecasting another leg down in the housing market," says economist David Shulman of the UCLA Anderson Forecast. "This could last into 2009 or 2010."
Indeed, with many adjustable-rate mortgages originated three years ago now resetting, he notes, the pace of foreclosures should continue to accelerate through the end of this year and extend into other segments of the mortgage market.
New mortgage applications, which have already begun to decline as a result of tighter lending standards, should also continue to decline, he says. "We are only in the second inning of the game now," Shulman says. "(This problem) is going to take awhile to play out."
