Delinquent Loans Plateau at High Level Wall Street Journal By James Hagerty 05-20-2010

Delinquent Loans Plateau at High Level
The Wall Street Journal
By James Hagerty
My 20, 2010

Troubled Mortgages Edged Up to 14% in Past Year, but New Cases Fell; People Stay in Homes Much Longer Before Foreclosure

The number of American households behind on mortgage payments appears to have reached a plateau at a high level as the economy recovers, a survey showed Wednesday.

At the same time, people who fall behind on their mortgages are staying in their homes longer as banks struggle with huge volumes of calls for help and with the complexities of federal and state foreclosure-prevention programs.

Diane B. Robertson of Oldsmar, Fla., said she had to stop making mortgage payments around the end of 2008 after a drop in her income. She said her lawyer advised her "to just sit tight because you may be sitting there for two years." Seventeen months later, foreclosure proceedings are under way, but Ms. Robertson is still waiting to be evicted.

The Mortgage Bankers Association, a trade group, reported that 14% of mortgage loans on one-to-four-unit homes were 30 days or more delinquent or in the foreclosure process as of March 31. That represents about 7.3 million households. The rate was 12% a year earlier.

The portion of borrowers between 30 and 60 days overdue—mostly representing newly delinquent homeowners—declined to 3.45% as of March 31 from 3.77% a year earlier.

Jay Brinkmann, chief economist of the MBA, said the number of borrowers falling behind has dropped modestly partly because of recent job growth.

Even so, around 2.6 million households were 90 days or more overdue but still not in the foreclosure process, which can take more than a year, the MBA said. In some cases, the process is extremely slow: About 153,000 borrowers were 18 months or more overdue and still awaiting the start of foreclosure proceedings as of April 30, according to LPS Applied Analytics. That's up from 30,000 a year earlier.

Homeowners typically can stay in their homes nine to 12 months without making any payments, said Aaron Horvath, a senior vice president at Springboard Inc., a nonprofit counseling service based in Riverside, Calif.

Josh Zollinger, owner of Orange Coast Realty in Mission Viejo, Calif., said some of his clients have gone two years without paying. Some homeowners extend their free stays by seeking loan modifications shortly before their homes are due to be auctioned, he said.

Distressed borrowers are staying put for long periods, partly because the federal government has leaned on banks to offer lower payments to avert as many foreclosures as possible, a time-consuming process. New laws in some states also require banks to take more steps to determine which borrowers might be rescued. Further slowing the process, many banks still don't have enough capacity to handle all the requests from borrowers for help.

"There is a certain triage that takes place," Mr. Brinkmann said. "In some cases, it's: 'We'll get to you when we can get to you.' "

In Florida, Ms. Robertson said she had been struggling to live on Social Security payments of $554 a month since her alimony was cut off. She said she didn't know when she would be forced to find a new home, adding: "I'll have to face that music some time."

Becky and Jeff Mehaffey of Marysville, Wash., haven't made payments since early 2009, but are still in the home where they raised four children. Mr. Mehaffey is out of work because of health problems and the failure of a drywall-installation business he helped create. His wife is also looking for work.

"A lot of calamities hit at once," Mr. Mehaffey said. "One way or the other, we'll get through it."

Delaying the foreclosure process is "definitely a bad thing," said Anthony Sanders, a professor of real-estate finance at George Mason University. "You want to recognize losses, get over the pain, move on as quickly as possible."

But Tom Lawler, an independent housing economist in Leesburg, Va., said the delays haven't been entirely bad, because banks needed time to figure out which homeowners could be helped in a way that served the interests of both lenders and borrowers. The delays also avoided swamping the housing market with too many foreclosed homes all at once.

But Mr. Lawler said banks now need to become more efficient at foreclosing in cases where borrowers clearly can't afford their homes.

For now, some borrowers have little idea what the consequences will be for failing to make payments. To revive mortgage lending that doesn't carry a government guarantee against defaults, "people need to know what the ground rules are," Mr. Lawler said.

At the end of the first quarter, about 9.4% of borrowers were overdue on payments but not yet in foreclosure, and about 4.63% were in the foreclosure process.

"If mortgage delinquencies are not yet clearly improving, it also appears they are not getting worse," Mr. Brinkmann said. "However, a bad situation that is not getting worse is still bad."