Year Six of the great foreclosure crisis came to a close on June 30 with no real end in sight. Five million homes have been foreclosed and another million or more were surrendered by distressed home owners in short sales or otherwise. We are still far from returning to a stable mortgage market. In normal times (from 1942 to 2005 for example) about 1% of mortgages are in the foreclosure process at any given time, and another 4% or so are delinquent. At June 30, about 7% of mortgages are delinquent and more than 3% are in the foreclosure process. These distress rates are down from their peak (10%/4.6%) of March 2010, but are still double to triple their pre-crisis levels.
This foreclosure crisis has already outlasted the foreclosure crisis of the Great Depression. Foreclosures exceeded 1% only from 1931 through 1935, then slowly returned to normal levels by 1942. State foreclosure moratoria, along with the massive New Deal loan purchases and modifications by the HOLC, mitigated and eventually ended the crisis.
On the bright side, new foreclosure starts are now down to only 1.5 times pre-crisis levels. For two reasons, this is not a signal that foreclosures will soon return to normal. First, there is a large inventory of seriously delinquent mortgages held up by robosigning and other problems that must work through the system. Second, millions of modified mortgages could blow up in the next five years, when temporary rate reductions phase out. The typical HAMP modification brought the interest rate down to 2% for five years, but then returns to market rates (now around 4.2% and likely to rise). This means that many homeowners' payments will double in the near future, at a time when incomes are stagnant.
There may be no quick policy fixes at this point, but if there was any inclination to try, a couple of measures might help. First, FHFA could direct Fannie and Freddie to do what banks are doing with their distressed mortgages, and start writing principal balances down to home values. Second, homeowners successfully paying on their 2% modified loans could receive a notice that the 2% rate will be fixed for the life of their mortgage. Third, the CFPB and the Attorneys General could keep turning up the heat on the major servicers for as long as it takes to get them to underwrite and process modifications as efficiently as they underwrite new mortgage originations.