Another destructive wave of foreclosures is crashing down on U.S. homeowners as banks begin to deal with the massive "shadow" inventory of bad mortgages on their books.
Defying costly government efforts to keep Americans from losing their homes, banks are foreclosing on properties and repossessing them at a record pace.
RealtyTrac reported Thursday that foreclosures reached a new high of 367,056 in March, up 8 per cent from the same month last year. Banks also took possession of a record 260,000 properties in the first quarter, up 35 per cent from a year earlier, according to RealtyTrac, which began issuing its reports in 2005. "Lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year," RealtyTrac president James Saccacio said.
The so-called shadow inventory is made up of mortgages where borrowers have fallen behind on payments, but the bank has not yet moved to seize the property. U.S. banks were under intense political pressure to stem the rising tide of foreclosures last year in the thick of the financial crisis.
Nevada, Arizona, Florida and California - the same states where the housing crisis began - continue to lead the U.S. in foreclosures. In Nevada, for example, one in every 33 homes received a foreclosure notice in the first quarter - four times the national average.
The first wave of foreclosures, which began in 2007, was mainly caused by risky subprime loans to marginal borrowers.
But RealtyTrac spokesman Daren Blomquist said this latest surge is being driven by homeowners with more conventional mortgages, who have either lost a job or are making a conscious decision to walk away because their home is worth less than the outstanding mortgage.
"It's not necessarily the case that people can't afford their payments," he said. "It's often that it's not in their economic interest to keep their homes."
In many U.S. states, banks lack the authority to seize a homeowner's other assets or income in the event of a default. In Canada, banks have relatively more power.
On the one hand, it's a good thing that banks are finally working off all their bad mortgages because then they can start making new loans.
But it also suggests that the U.S. housing problem will continue to weigh heavily on the recovery. Builders can't start building new homes at a healthy clip or employ many more people until most of the cheap foreclosed homes are sold off. And until the jobless rate, now at 9.7 per cent, comes down, Americans won't resume buying new or existing homes at a substantial rate.
"I'm just not seeing much of a recovery in housing," conceded Desmond Lachman, a resident fellow at the American Enterprise Institute in Washington. Mr. Lachman, a former top International Monetary Fund official, said there's a "huge amount of stock overhanging the market," adding that's likely to persist as long as unemployment stays high.
"The biggest problem for housing is unemployment."
Roughly seven million households are now behind on their mortgage payments. And increasingly, they are people with conventional mortgages, rather than risky subprime or so-called alt-A mortgages.
Like the labour market, which could take years to recover to prerecession levels, the housing market could be stay depressed for some time.
"We're going to have a serious problem in the housing market as far as the eye can see," said Thomas Zimmerman, managing director of mortgage credit and asset-backed security research at UBS. All the federal, state and local programs aimed at heading off foreclosures have merely "pushed the can down the road," he added.
That's left too many bad mortgages stuck in the pipeline, Mr. Zimmerman said.
On Wednesday, U.S. government officials acknowledged that efforts to stem the tide of foreclosures aren't working as well as expected. Between February and March, the number of home loans that failed after qualifying for government-backed modifications doubled to nearly 3,000.
The government set a target of helping four million households avoid foreclosure. But a Congressional oversight panel said this week that only a small number of modifications will last as long as five years.
"In the final reckoning, the goal itself seems small in comparison to the magnitude of the problem," the panel said.