Banks' Foreclosure Pain Worsens With U.S. Job Losses

NEW YORK (TheStreet) -- Foreclosures continue to pile up on bank balance sheets, and financial companies are faced with some difficult challenges to dealing with the mounting problem.

According to new data from the Mortgage Bankers Association released on Thursday, loans in the foreclosure process at the end of the second quarter rose to 4.3% of all loans, up 45 basis points from the first quarter and 155 basis points from the year-earlier period. The MBA says that while foreclosures on subprime loans have fallen, increases in the foreclosure rates on prime fixed-rate loans had the biggest increase -- a sign that mortgage performance is being driven by unemployment.

"As for the outlook, it is unlikely we will see meaningful reductions in the foreclosure and delinquency rates until the employment situation improves," MBA's chief economist Jay Brinkmann said. "In addition, in some areas where a number of borrowers have mortgages that are larger than the current value of their homes, any life events such as divorce or loss of a job are likely to translate into foreclosures until prices in those areas recover, not just flatten."

Foreclosure listing service RealtyTrac suggests that one in every 355 households received some form of foreclosure filing in the month of July. The number likely will only get worse as more adjustable-rate mortgages reset at higher rates in 2010 and unemployment remains at record levels, making existing home loans too expensive for many homeowners.

Moreover, the Obama administration's Making Homes Affordable loan modification program is set to expire soon, which could soon flood the market with even more foreclosure inventory, says Brad Geisen, the founder and CEO of Foreclosure.com, a national database for distressed real estate data. The bulk of loan modifications made through the program "are going into foreclosure anyway," Geisen says.

"That's really a short-term solution to a long-term problem," he says. "We're going to see a big wave of those properties come onto the market ... probably at the end of the year into next year."

That is unwelcome news for banks, which are becoming overwhelmed with inventory, many industry insiders say. Lenders will be forced to continue to hold elevated levels of loan loss reserves and subsequent capital until the troubled mortgages work their way from delinquent to foreclosed status, and are eventually sold back into the market.

Banks' portfolios of real estate owned for reasons other than direct business purposes, which includes foreclosed properties, are expected to experience peak losses in 2011, even though impairments could remain elevated until 2013, according to analysts at Credit Suisse.