Foreclosures Go Into Reverse: The Ticker

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By Mark Whitehouse

The U.S. financial system's foreclosure plumbing is backing up. That's good news for some delinquent mortgage borrowers. It's also likely to prolong the pain in the housing market.

Amid persistent problems with documentation, banks are pulling tens of thousands of loans out of the foreclosure process, putting them back into the pool of merely delinquent loans. The delinquency rate rose to 8.34 percent of all active loans in July, up from 7.78 percent in March, according to data provider LPS Applied Analytics. The foreclosure rate fell to 4.11 percent of all loans, from 4.21 percent in March.

The reverse flow provides a boost to some homeowners, who can benefit by staying in their homes -- or renting them out -- while not making mortgage payments. As of July, the average borrower in foreclosure hadn't made a payment in 599 days, up from 549 in March.

The backed-up plumbing could take some pressure off house prices by keeping foreclosed homes off the market. The S&P/Case-Shiller index of house prices rose 3.6 percent in the second quarter of 2011, as the pace of foreclosure sales declined.

Ultimately, though, all those homes will have to go through the burdensome process of foreclosure and sale, weighing on the market and precipitating losses for lenders. The only way to prevent that outcome -- short of bulldozing the houses -- is to recognize the losses in a different way, by offering borrowers principal reductions large enough to enable them to pay their mortgages and stay in their homes.

(Mark Whitehouse is a member of the Bloomberg View editorial board)

-0- Aug/30/2011 20:31 GMT