Slowing Foreclosures May Mask Woes

When the research firm RealtyTrac Inc. releases its latest foreclosure report Thursday, don't be surprised if the number of filings declines again.

Last month, RealtyTrac reported that foreclosure filings totaled 252,363 in June, down 3% from the previous month. Some analysts are expecting the July data to show another decline or very little change.

If that happens, could the improvement be a sign that the foreclosure problem is ebbing? Probably not. The data may reflect several developments aimed at reducing foreclosures, including new state and municipal laws that put a temporary moratorium on foreclosures. Such laws are designed to give homeowners more time to work with their lenders and modify troubled loans. Some cynics say the laws are designed to give the appearance that the housing crisis is easing ahead of the November elections.

Whatever the reason for the laws, they are starting to kick in. A new state law in California requires lenders to wait an additional 30 days after a homeowner misses the first payment before filing a default notice and use more "due diligence" to attempt a loan modification. The law took effect July 8.

In Massachusetts, homeowners now have a three-months grace period after they default on their mortgage before the lender can file to foreclose. The Massachusetts law is credited with an 84% drop in foreclosure petitions -- the first step in the foreclosure process -- filled statewide in June from a year earlier, according to the Warren Group, a Boston-based research firm.

"The 90-day cure period will lead to more dialogue between borrowers and lenders and increase the prospect that loans can be modified," says Dan Crane, Massachusetts's undersecretary of Consumer Affairs and Business Regulation.

Several other states are following, including New York which passed a bill last week that requires lenders to send a preforeclosure notice to certain borrowers at least 90 days before foreclosure proceedings may be initiated.

Mortgage companies and lenders on their own are also showing more patience with borrowers who fall behind. Mortgage giant Fannie Mae, for example, said it will increase fees it pays loan-servicing companies, which collect payments, for "workouts" that prevent foreclosures. Freddie Mac also said it will give servicers more time to pursue workouts.

Critics, however, say the new laws are only delaying inevitable foreclosures and may signal a false bottom in the housing market.

"It's all smoke and mirrors," says Vincent Valvo, group publisher at the Warren Group. "People are going to trumpet this and say foreclosures are going down. But three months from now it will surge right back up."