Nearly one in four U.S. borrowers owe more on their mortgage than their home is worth, indicating that the housing recovery could see another wave of defaults. 23% of mortgage holders, were underwater in the third quarter, and 5.3 million have mortgages that are 20% higher than the value of their home since the recession began. Analysts expect prices to dip again this winter as foreclosures increase and economic growth remains modest. The Wall Street Journal reports.

Its not a new idea and many have always clamored for the banks to take some responsibility for loose lending practices that helped fuel the boom. But now it seems that a major institution is on board and will spearhead a push for mortgage debt forgiveness.

Citigroups quarterly reports on mortgage borrowers

As unemployment rises, more borrowers need principal forgiveness on their mortgages, not just restructured loans, Citigroup Inc.’s mortgage chief said. see chart here To date, Citigroup helped 130,000 homeowners with $20 billion in mortgages outstanding avoid potential foreclosure last quarter. But that number increased 20% from the second quarter. The sub prime debacle is behind us, the culprit now is unemployment.

Unemployment
The Main Cause of Delinquencies

The main problem of the mortgage industry changes from house-price depreciation to unemployment, the mortgage market needs more programs where there is principal reduction for borrowers with negative equity in their home, as opposed to just a loan restructure, Mr. Das said. (Via Wall street Journal).

Loan mods alone are not enough to avoid another tsunami of foreclosures. The housing recovery’s momentum has slowed, and it seems likely that house prices will now resume their fall. Re-default rates on loans that had already been modified in the quarter were nearly 39 percent, up 10 percent from the second quarter. High unemployment coupled with a loss of home equity are too big a burden for many home owners and the temptation to walk away, may begin to look like good business sense.

Foreclosures initiated in the third quarter rose about 10% from the second quarter but fell about 11% from a year earlier. Completed foreclosures fell less than 1% from the second quarter and about 48% from a year earlier. Things appear to be moderating, although I dont think Citigroup is addressing the Alt A recasts, which are expected to add to the problem, in a big way, beginning this year and into 2012.

Citigroup Speaks Out

Citi proposes new programs to forestall impending foreclosures. Recognizing that existing programs are not enough, the bank wants to reduce the principal owed and to bring this down to a number homeowners could cover. In return for forgiveness of some debt, Citi wants to share any potential upside. Banks step up and take a hit along with the home owner, home owner gets to stay in the house, Home stays off the market helping home prices stabilize and bank gets equity share for the effort. Having the lenders in an equity share position with home owners is a solid idea.

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