State of the Union: U.S. Faces Growing Foreclosure Crisis

(MoneyWatch)  One word was noticeably absent from President Obama's State of the Union speech last night: foreclosure.

Too bad. Along with double-digit unemployment, people losing their homes is one of the nation's most pressing economic problems. The two are linked, of course. But with foreclosure activity surging, it would've been good to hear Obama address the issue directly. Because things are getting worse.

Foreclosures are at record levels, according to RealtyTrac, a real estate research firm. One in 45 U.S. homes were hit with at least one foreclosure filing last year, a big hike from 2008 and more than double the rate in 2007.

More alarming, the disease is spreading. Although the problem remains most severe, and may have crested, in radioactive real estate markets such as Arizona, California, Florida and Nevada, foreclosures are rising fastest in parts of the country that escaped the worst of the housing bust.

"While it was expected that cities from states with the highest levels of foreclosure activity would top the charts, there is evidence that we're entering a new wave of foreclosures, driven more by unemployment and economic hardship than what we've seen over the past few years," said RealtyTrac CEO James Saccacio said today in a statement.

That means foreclosures in cities such as Minneapolis, Honolulu and Seattle are rising at twice the national average. The housing virus that entered the economy's bloodstream four years ago is turning into a full-blown national infection.

One reason Obama may have omitted any talk of foreclosures is that the government's solution -- the Home Affordable Modification Program -- has been a dud. While well-intentioned, the program has fallen woefully short of its goal of helping millions of Americans modify their mortgages.

Why? Because it's not in banks' financial interest to do it. And because the courts, and the federal government, aren't forcing them to comply with HAMP or proposing other forms of relief. Shame doesn't work on the shameless.

That may sound like a cheap shot, but consider this recent report from the U. of North Carolina-Chapel Hill (hat-tip to Rortybomb's Mike Konczal). It's not that banks are simply refusing to alter people's mortgages under HAMP. For many homeowners, they're actually increasing the principal amount of the loan, while cutting monthly payments:

Despite the growing number of loans that are "underwater"... only nine percent of loan modifications in October 2009 involved reducing the unpaid balance by more than 10 percent. More troubling, more than 70 percent of modifications result in an increase in the principal amount owed (underline mine).

I've known loan sharks who give better terms. Going "upside down" on a mortgage greatly increases the chances of losing your home. Which means that banks, as I've said before, are deliberately making things worse for their valued customers in order to wring more fees out of the situation before the curtain comes down. This is the definition of predatory lending.

The problem isn't going away, at least not without leaving an ugly scar. One in seven homeowners is behind on his or her mortgage (see chart at bottom). One in four owes more than the home is worth. Many people remain stuck with disastrous "pay option" adjustable rate loans, which reset at higher interest rates. The contagion is spreading from subprime to prime borrowers.

This piece is getting long, so I'll leave discussion of possible solutions to the foreclosure crisis for a future post. And I'd love to hear what readers favor.

But one thing is transparently clear: Banks are fueling the problem. That leaves government to intercede. Our elected officials should man up, admit that the current policy prescriptions aren't working and come up with ones that will.

Graph courtesy of the State Foreclosure Prevention Working Group.