Why housing slump isn't getting better © Ingram Publishing/Jupiterimages

Extra4/8/2010 5:30 PM ET

Why housing slump isn't getting better

Foreclosures are down in many areas even as rising numbers of homeowners fall behind on the their mortgages. And the government's new relief plan won't help.

By Mark Gimein, The Big Money

In late March, the Treasury Department unveiled its new foreclosure relief plan. Like the previous lackluster plan rolled out a year ago, the new program is built to fail. The premise behind it is that lenders will cut the principal of at-risk mortgages and give debtors new, federally guaranteed loans for something close to their homes' real values.

For the parts of the country hit hardest by the housing crash and the foreclosure boom, this is a pipe dream. In places like Miami (where prices are down 45% from their high), San Diego (close to 40%) or Phoenix and Las Vegas (more than 50% off their housing-bubble peaks), lenders would have to cut loans by half to get them down to the real market values the government hopes for. There's no indication at all that lenders, who've resisted cutting mortgage principal in any way, will make these kinds of reductions, and the new government plan won't force them to.

The new foreclosure plan does invite a question that lurks in the background of any housing discussion: Have we reached the end of the housing bust?

In short, the answer is no.

One reason the foreclosure plan won't work is that, despite recent rosy talk, the housing bust is worse than ever, and even now neither banks nor policymakers are willing to confront just how bad it is.

Which is odd, because if you have been following the news from the realty and mortgage trade, you might think that it's time to break out the bubbly and celebrate the end of the housing crisis. The National Association of Realtors points in its latest report to "stabilizing prices," "steadying home prices" and "consistent price gains" in the market -- a veritable potpourri of calming language. "We are likely seeing the beginning of the end of the unprecedented wave of delinquencies and foreclosures," declares the chief economist of the Mortgage Bankers Association. Prices are up, foreclosures are down: There's always a reason to be happy in mortgage land.

The dirty secret of the housing recovery, though, is that in the worst-hit markets -- Florida, California, Nevada, Arizona and other places where the foreclosure boom is concentrated -- there's one important number that hasn't gotten better. That's the percentage of people who can't pay their mortgages. Believe it or not, that number is rising faster than ever.

Consider California: In the first quarter of 2009, according to the Mortgage Bankers Association, banks started foreclosures on 2.15% of all mortgages (roughly one in 50). In the last quarter -- the latest period for which data are available -- that was down to 1.3%, a sizable drop. (For the Mortgage Bankers Association's latest report on this, click here.)

But if you conclude from this that more folks have gotten their arms around their mortgages, think again. The number of new foreclosures may have dropped, but the number of people seriously behind on their mortgages has risen -- from 4.75% of mortgage holders all the way up to 6.9%, an increase of close to 45%.

Continued:  What's happening here?

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