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Foreclosure Starts On The Rise, Driven By Fannie Mae And Freddie Mac

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President Barack Obama, joined by federal and state officials, speaks about the details of a housing settlement between federal and state officials and mortgage lenders on Feb. 9, 2012, in Washington, D.C.
President Barack Obama, joined by federal and state officials, speaks about the details of a housing settlement between federal and state officials and mortgage lenders on Feb. 9, 2012, in Washington, D.C.

Looks like the mortgage industry is ready to snake out a foreclosure pipeline clogged with millions of defaulted home loans.

Foreclosure starts on homeowners who have defaulted on their loans climbed 28 percent in January, to 203,458 from 159,092 the previous month, according to the LPS Mortgage Monitor, a housing report published by Lender Processing Services.

Most of the increase comes courtesy of Fannie Mae and Freddie Mac, the report says. Foreclosure starts on loans controlled by the government-owned mortgage companies jumped 60 percent in December. Foreclosure starts on loans controlled by all other investors -- private, bank-owned, and Federal Housing Authority -- were up about 10 percent.

A spokeswoman for the Federal Housing Finance Agency, the government regulator that has controlled the companies since they nearly went bankrupt in 2008, did not immediately respond to a request for comment.

The numbers seem to bring new urgency to a series of recent efforts by the Obama administration to throw a lifeline to struggling homeowners. In recent weeks, the government has announced an expansion of the Home Affordable Refinance Program, an opportunity for as many as three million homeowners with Federal Housing Authority insured loans to refinance at lower rates, as well as a settlement with five big banks over servicing misconduct that will provide $20 billion in principal write-downs and other aid to borrowers.

These initiatives, though, mostly provide assistance to mortgage holders who are current on their payments and are underwater. The outlook for most who are seriously delinquent, or who have stopped making payments altogether on their loan, is more bleak. Many of these homeowners do not qualify for government assistance, and in some instances, have not made payments for several years.

Other mortgage holders whose loans are delinquent have accused the financial institutions managing their loan of making a wide range of costly mistakes: lost paperwork, improper rejection for a loan modification, or an accounting error that triggered a wrongful foreclosure. Under the foreclosure settlement, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial have promised to make dozens of reforms designed to make servicing more fair for borrowers, though their past history of promising reforms leaves ample reason for skepticism.

A jump in foreclosure starts in the wake of the settlement was expected, as banks worried about the threat of lawsuits over "robo-signing" and other fraudulent activities relating to foreclosures once again. But the settlement was announced on Feb. 9 -- and the Lender Processing Services report is for January.

Also surprising is the degree to which the spike in January foreclosure starts was driven by Fannie Mae and Freddie Mac. The reason for this is not clear, but the fact that the mortgage giants seem to be leading the charge to push through foreclosures will likely provide additional fuel to critics of the agencies. Edward DeMarco, the acting director of the Federal Housing Finance Authority, has recently come under fire for refusing to allow principal reductions on the roughly 60 percent of outstanding loans controlled by the mortgage giants.

A bit of bright news in the report: While delinquencies and foreclosures are still well above historical norms, they have begun to edge down in most states. In Nevada, for example, 16.2 percent of home loans were in default -- more than four times the rate of North Dakota -- but down 20 percent since the same time last year.

All told, according to a report by Core Logic, a data company that tracks mortgages, about four million U.S. loans are seriously delinquent or in some stage of foreclosure.

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