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Foreclosures Up: A Caveat for 2011?

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Just a couple of days before entering the New Year, a report from bank regulators revels that the U.S. home foreclosures jumped in the third quarter as lesser number of distressed borrowers received assistance related to loan modifications from mortgage servicers. This seems to be one of the reasons for the extensiveslip in home prices in 20 of the largest U.S. cities in October. Should we view this as one of the warnings for 2011?

Though an increase in foreclosures is one of the major negative forces that could pull back the economy, we don’t expect this issue to be malignant in 2011 as the report claims that mortgage servicers have already identified the most delinquent borrowers and decided whether to modify their mortgages.

How Frustrating is This?

According to the report from bank regulators, which covers only 64% of mortgages that are held by national banks and thrifts, the number of completed foreclosures increased 11.2% sequentially to about 245,000 in the third quarter.

The newly commenced foreclosures rose 31.2% over the prior quarter to 382,000. Also, the foreclosures in process increased 4.5% over the prior quarter to 1.2 million.

On the other hand, banks and government programs have altogether helped about 470,000 homeowners in the third quarter, down 17% from the second quarter.

According to Moody's Analytics, a wing of Moody's Corp. (MCO - Free Report) , 2010 is expected to end with 1.8 million foreclosures in total. The firm also expects the number to swell to 2.1 million in 2011.

Ineptness of Government Efforts

The Obama administration's flagship effort - Home Affordable Modification Plan, or HAMP -- designed to help people in danger of losing their homes, saw a sharp drop in the third quarter. During the quarter, loans modified under HAMP plunged 46% to 59,000.

At the time of initiating the program in 2009, the officials expected it to modify about 4 million loans of delinquent borrowers. But according to a congressional panel’s estimate, the program will finally be able to modify only about 700,000 to 800,000 delinquent loans. With this imminent wave of foreclosures, the inefficiency of the program is a major concern at this juncture.

Foreclosure Mess Nearing End?

The U.S. bank regulators and a task force of Attorneys General (AGs) of all 50 states are gearing up to settle the foreclosure mess at large financial institutions including Bank of America Corporation (BAC - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) next month, Reuters reported on December 20. This would undoubtedly lessen the looming threat on housing recovery.

But the aftermath of faulty paperwork might still make it difficult for lenders to find home buyers in the years to come. The foreclosure mess would probably cast a long shadow on U.S. housing.

A Jarring Road Ahead

With encouragement from regulators to increase modifications outside of HAMP, lenders will probably be able to address the problem related to rising foreclosures to some extent. During the third quarter, the efforts of mortgage servicers to modify more loans out of HAMP increased 10% over the prior quarter. Also, those borrowers who agreed to make mortgage payments remained steady with respect to their commitment.

On the other hand, though the proposed settlement is expected to lessen paperwork goof ups, which will gradually put an end to the foreclosure mess, we expect the problem to persist for a long period as in some cases the lenders have no information about the owners of the loan. As a result, a significant stress will persist in housing recovery. We will have to wait to see how well the shock is absorbed.

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