Many economists say that the economy won't regain its health until the housing market recovers. But the number of homeowners facing foreclosure continues to rise. And the foreclosure crisis is deepening in a number of states, including Massachusetts, which initially had been spared the worst of the real estate collapse.
Paul Collier, an attorney in Cambridge, Mass., who represents homeowners facing foreclosure, is busier than ever these days.
"The financial conditions that created this meltdown and the legal conditions that created this meltdown are still there," Collier says.
Massachusetts Foreclosures Double
Last month banks took more than 1,300 Massachusetts homes -- more than double the rate for the same period last year.
"People are entering foreclosure at a very high rate," says Timothy Warren, CEO of the Warren Group, which tracks real estate in Massachusetts. "That indicates a high level of economic distress, and we're going to be facing it for some period of time."
The historically high foreclosure rates are due in part to banks working extra hard to get those non-performing loans off their books. In other words, they want to close out the bad loans and resell the homes to people who can afford them. Beyond that, Aaron Gornstein, who heads an affordable housing advocacy group in Boston, says the unemployment rate remains stubbornly high.
"People are losing their jobs or they're underemployed," Gornstein says. "We have a lot of people in the construction trades who are unemployed -- close to 40 percent. So those people are falling behind on their mortgages and can't keep up, and as a result, they are going into foreclosure."
Joel Searby polled 500 Pennsylvanians who lost their homes to foreclosure and asked them why as part of a survey for the Pennsylvania Association of Realtors. Searby says the high foreclosure rate has more to do with the tough economy than with the fallout of the subprime mortgage crisis.
"Forty-one percent had a prime, fixed-rate loan, while only 8 percent had a subprime adjustable loan," he says.
The Connection Between Foreclosures And A Bad Economy
Beyond that, his most significant finding was that those experiencing foreclosure suffered a job loss along with some other economic blow. "That is, they didn't just simply lose their job," Searby says. "They lost their job, and then something else happened." Something like medical bills, divorce or a relative moving in. He says the message is that foreclosures are tied more closely to bad economic conditions than to the type of loan. Searby says he found the same results in Florida and Nevada, two states that have been hit the hardest by the real estate crisis.
According to a recent RealtyTrac report, in the first half of this year, the number of foreclosures went up in three-quarters of the largest U.S. metropolitan areas, compared to a year ago.
"And until we do something about it we are going to be unable to resolve the current economic crisis," says Collier, the Cambridge attorney. He says foreclosures not only hurt millions of individual homeowners, they also destabilize neighborhoods and drag down housing prices.
Collier says federal initiatives that encourage banks to rework loans and avoid foreclosures are too weak because they're basically voluntary. But he says it doesn't have to be that way. In the wake of the Great Depression in the 1930s, some states enacted tough measures to compel banks to lower monthly payments, which dramatically reduced foreclosures.
"States like Kansas and Iowa simply adopted mandatory mediation," Collier says. "That is, every lender had to sit in a room with the homeowner and a mediator. And the foreclosures went down within 20 months of passage of that bill by 94 percent."
A 'Disconnect' Between Homeowners And Government
In the absence of that kind of legislation, it might help if more Americans facing foreclosure knew about state and federal programs that could help them, such as programs that provide incentives to rework loans and lower monthly payments.
But Searby -- who conducted the polling on those facing foreclosure in Pennsylvania -- found that a majority of those surveyed didn't know how or where to get help.
"There's no doubt that there's been a disconnect between what the federal and state governments have been offering and what these folks who are experiencing foreclosure are needing," he says.
But until that changes, or until the economy dramatically improves, foreclosures will likely continue to rise in the months ahead.
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