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A Pretty Deep Hole

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Several grim records were set in the housing market last year.

There were 2.82 million foreclosures, the most since the government started compiling records. More than 3.9 million default notices were sent to homeowners who fell at least 60 days behind on their mortgage obligations.

According to RealtyTrac, the Irvine firm that compiles housing industry statistics nationwide, 2009 saw an overall increase of 21 percent in the number of properties facing default. In comparison to 2007, there was an eye-popping 120 percent jump in total number of properties in some stage of foreclosure.

An astonishing one in 45, or 2.21 percent of all U.S. housing units, received at least one foreclosure filing last year.

Four states, California, Arizona, Florida and Illinois, accounted for more 50 percent of the 2009 foreclosure notices. Nearly 1.4 million homes in those states were at some point in the foreclosure process. Nevada, however, still had the highest foreclosure rate with more than one in 10 of households receiving at least one filing.

Taking Time Out to Celebrate

A holiday moratorium towards the end of the year caused foreclosure actions to significantly dip. December notices of default dropped 17.5 percent compared with November. The number of homes seized by lenders dropped 12 percent, and the number of homes sold to third parties declined 28.9 percent.

It’s a new year, and millions of homeowners, like their government, are still upside-down.

Despite the nascent economic recovery, industry analysts are projecting more than 4.5 million filings this year, including default or auction notices and bank seizures. Driving these numbers will be continued job market weakness and home prices that have begun to stabilize far below mortgage amounts.

Efforts by the federal government and lenders to stem the tide of foreclosures have fallen flat.

Figures released by the Treasury Dept. last month show that U.S. lenders permanently modified only 31,382 mortgages, or 1 percent of the 4 million loans targeted under the Obama administration’s foreclosure prevention plan. This is fewer than the 3.2 million Americans who were projected to qualify for this type of assistance.

While the White House program may be well-intentioned, it does not address the issue of negative equity.

Sizable Drop in Home Prices

Although at-risk borrowers may welcome the type of relief offered by the President’s plan, many still are unwilling to continue paying for homes whose assessed market value has dipped below their original mortgage. Lenders may likewise be amenable to modifications, but are hamstrung because they have neither the reserve liquidity nor regulatory leeway to modify existing mortgages in conformance with present market values.

The growing issue of negative equity affected 10.7 million homeowners, 23 percent of all U.S. homes.

In 2009, home prices tumbled 13 percent. This followed 9.5 percent drop in 2008.

Contrary to popular reports, this is not just a problem among subprime borrowers who may have paid too much for homes in already marginalized areas. Defaults among prime borrowers are also likely to accelerate. This will add to a huge inventory of properties that banks possess and haven’t yet put on the market; which in-turn may result in even more negative equity pressure on homeowners.

Falling prices have been good news for homebuyers, especially first-time purchasers who have been rushing to take advantage of the $8,000 federal tax credit. The expiration of this tax credit along with the projected end of the Federal Reserve’s $1.25 trillion purchase of mortgage bonds will push home values even lower.

The TARP program may have helped major lenders, including Fannie Mae and Freddie Mac, to balance their books. But programs like this have done nothing to stabilize prices.

Unfortunately, no amount of government intervention will stop the bleeding. Given the magnitude of the problem, it’s like trying to put a band-aid on a bullet wound.

Even though lenders are more solvent because of government assistance, the increasing supply of homes on the market is causing prices to continue falling. Instead of lending to potential buyers, banks have been pre-occupied with shoring-up their books to cope with plummeting mortgage portfolio values.

The White House and other policymakers may be long on rhetoric, but they’re short the trillions of real dollars that would be required to plug the hole in the equity bucket.

Housing prices were simply too high. Painful though it may be to those homeowners who still remain at risk, we have no alternative other than to wait while this cycle runs its course.

John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com