Four years after a wave of rogue mortgage lending sent the U.S. housing market into the worst collapse since the Great Depression, the devastating flood of resulting foreclosures shows no sign of abating. In some ways, the problem is getting worse.
House prices are falling again, forcing more homeowners “underwater” — owing more than their house is worth. Lenders’ shoddy document practices have brought widespread court challenges, slowing the process and leaving millions of homeowners in limbo.
And the foreclosure crisis continues to weigh heavily on the fragile economy.
“Right now, it’s the second-biggest drag on the economy after the surge in oil prices,” said Moody's Analytics chief economist Mark Zandi.
Already some 5 million homes have been lost to foreclosure; estimates of future foreclosures range widely. Zandi, who has followed the mortgage mess since the housing market began to crack in 2006, figures foreclosures will strike another three million homes in the next three or four years.
Congress and the White House have run out of ideas to save those homes, he said.
"There's no political appetite to do anything," he said. "So we're on our own."
There were many causes of the foreclosure crisis — and plenty of blame to go around among mortgage lenders, regulators and, in some cases, the borrowers themselves. But as the crisis has accelerated it also has swept up families who, through no fault of their own, have lost or are in danger of losing their homes.
The government's efforts to stem the crisis are widely viewed as a failure. Its flagship foreclosure relief program, the Home Affordable Modification Program, has been hampered by confusion over its terms, lenders’ widespread refusal to forgive loan principal and a “trial modification” process that, in some cases, leaves homeowners worse off than when they entered the program.
“The biggest problem with the program is that noncompliance is still rampant, and it’s not improving,” said Alys Cohen, an attorney with the National Consumer Law Center, which is lobbying for more effective foreclosure prevention programs.
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Despite the heavy toll on families, communities and the economy, the response from Congress, the White House and an alphabet soup of federal and state agencies has been a piecemeal approach that hasn't fixed the problem.
"This is an industry that was simply not prepared for this crisis, hasn't had the procedures in place, hasn't had the people to deal with it," said Tim Massad, who oversees HAMP as acting assistant secretary for financial stability at the Treasury Department. "And we've seen that over and over again. I think they're better, but they're not nearly where they need to be."
The government has repeatedly tried to offer effective solutions. Recent federal budget cuts have made matters worse by eliminating funding for frontline housing counselors, who are already spread thin in their efforts to help homeowners.
Federal bank regulators, citing widespread “unsafe and unsound practices,” recently announced a series of new regulations for lenders to follow to try to fix the problem. Critics argue the new rules don’t go far enough and merely codify changes the industry already is making.
Bankers have agreed to review their practices and report back to regulators with a plan to fix them, for example, but those reports won’t be made public. They also agreed to hire their own auditors to look into cases where homeowners were wrongly foreclosed.
The House recently voted to scuttle HAMP, which has dispersed only a fraction of the $50 billion Congress authorized in 2009. There are no signs the Senate plans to follow suit, although the program officially ends next year.
In the Senate, Jack Reed, D-R.I., has reintroduced a bill that died last year which would toughen requirements on lenders to modify loans. Democratic Sen. Sherrod Brown of Ohio has introduced a bill that would include a range of consumer protections for mortgage borrowers. Neither bill has made it out of the Banking Committee.
Other agencies are pressing mortgage lenders to break the logjam. Attorneys general from all 50 states — along with the Justice Department, the Federal Trade Commission and the new Consumer Financial Protection Board — are in talks with major lenders that would require them to follow steps that are currently voluntary, including modifying loans by writing down the principal owed. Bankers have raised numerous objections to the initial proposals.
The Treasury continues to tweak the HAMP program. It recently introduced a requirement, for example, that lenders assign a single point of contact to help homeowners cut through a thicket of red tape.
Yet families continue to lose their homes at a pace not seen in decades. Last year set a record for foreclosures, according to RealtyTrac. The pace slowed in the first quarter but is expected to pick up again as banks work through a thicket of legal challenges to faulty document practices.
The glut of unsold homes and the overhang of foreclosures are weighing on the housing market. Construction of new homes has fallen to levels never recorded. Government tax credits for home buyers briefly helped stabilized home prices, but prices have begun falling again as those incentives have expired. Falling home prices chip away at household wealth, dampening consumer spending.
Each new foreclosure brings another distressed property on the market, pushing prices lower. The greatest risk, said Zandi, is a downward spiral that becomes difficult to unwind.
"Prices decline, that pushes people underwater," he said. "There's 14 million people now underwater. Half of those are underwater by more than 30 percent. That's the fodder for (more) default."
The depression in the housing industry, which accounts for up to 20 percent of U.S. employment in good times, has stalled economic growth and contributed to a stubbornly high jobless rate of 9.0 — far higher than is typical this far into a recovery.
With effective solutions in short supply, attorneys and housing advocates say the ranks of distressed borrowers continue to swell.
"I've never seen a flood like this," said Gary Klein, an attorney at Roddy, Klein and Ryan in Boston who has spent 25 years defending homeowners facing foreclosure. "There are so many people that need help at this point that we can't even begin to handle all of the phone calls."
The companies tasked with collecting payments from borrowers are just as overwhelmed. More than four years after the housing bubble burst, the mortgage servicing industry is grappling with its own dysfunctional thicket of red tape, missing documents, false affidavits and conflicting guidelines.
"We are finding that the documents themselves are manufactured," said James Kowalski, an attorney in Jacksonville, Fla., who handles foreclosure defense and prevention. "We're finding that the affidavits, which are the pieces of paper by which the servicer testifies in court, are not true. Once you get underneath the surface of all those made-up documents, you find homeowners that shouldn't be in foreclosure.”
In many cases, homeowners who were granted a "trial" modification under the HAMP program wound up worse off. Unless they won final approval, the lower monthly payments during the "trial" period placed them in default and speeded the path to foreclosure.
"I've seen homeowners that have everything that they need in order to qualify for that modification," said Chris Wyatt, a former vice president at a major mortgage loan servicing company who has worked in the industry for 20 years. "They meet all the criteria for that modification, yet were denied. So the customer actually gets caught into this kind of Catch-22, and at the end of the day the servicer says, 'Sorry, I can't do them all, and so I'm going to foreclose.'"
Government officials compounded the problem by setting overly aggressive targets for the program and then pressing mortgage servicers to show quick results.
"They would do anything to get trial modifications on the board," said Caroline Herron, a former Fannie Mae official who worked as a consultant to HAMP. "Nobody made it a priority to figure out what the real problem was, and what needed to get fixed to make sure the program could work. Instead, it was pressure to report on findings and pressure servicers to bring the numbers up."
For their part, mortgage servicers say they were stymied by repeated revisions in the rules once the HAMP program started, which made it harder to follow shifting guidelines.
Treasury's Massad admits the system was flawed and created frustration on both sides.
"We certainly acknowledge we haven't done as much as we would like, he said. "But I think the fact remains that people have a lot more options because of this program than they did before we started. And the program has changed the way the industry approaches modification so that we're seeing a lot more modifications than we otherwise would have."