Could the Mortgage Deal Lead to a Jump in Foreclosures?

A $25 billion mortgage settlement announced between major banks and state and government officials is supposed to bring aid to troubled home owners, but it could also bring a wave of new foreclosures, CNNMoney reports.

During the yearlong negotiations, some banks slowed down repossessing homes, and now they may have a backlog of troubled loans on the books — loans that can’t be saved by the deal’s aid on refinancing or mortgage principal reduction.

"The bottom line is that 2012 will see a lot of foreclosures that should have taken place in 2011 and didn't," Rick Sharga, executive vice president for Carrington Holdings, told CNNMoney.

Last year, foreclosure filings dropped 34 percent. This year, Daren Blomquist, vice president of RealtyTrac, estimates that new foreclosure filings will increase to between 2.2 million and 2.5 million compared to last year’s 1.9 million filings in 2011.

The mortgage deal is aimed at helping home owners avoid foreclosure. One million struggling home owners may see their mortgage principal reduced as part of the deal. But the home owners must be able to afford new, lower payments. The banks will have no choice but to foreclose on home owners who stop making payments altogether or cannot afford a new payment structure on their loan.

But the spike in the backlog of foreclosures may not be all bad for the housing market, experts say.

"The market needs to clear out a lot of the distressed inventory before prices start to come back," Sharga said. There are more than 3 million home owners seriously delinquent on their mortgage or in foreclosure currently.

The five banks part of the settlement are Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Ally Financial.

Source: “Mortgage Deal Means More Foreclosures,” CNNMoney (Feb. 10, 2012)