Lenders are on track to take back more than 1 million homes in 2012

Dubious mortgage practices and lax lending standards were blamed for contributing to a housing bubble that eventually burst and thrust the economy from 2007-2009 into the worst recession since the 1930s. Many Americans took out home loans that they didn't understand and bought homes that they couldn't afford. As a result, foreclosures have soared to record highs. It's one of the negative forces restraining the economy's ability to get back on sounder footing.

The foreclosure crisis started years ago when borrowers took out risky loans with variable interest rates that they couldn't afford. Many also qualified for mortgages without providing documented proof of income.

But now, the foreclosure crisis is spreading to homeowners with good credit who took out safe, fixed-rate mortgages.

Allegations of faulty foreclosure paperwork will likely increase the foreclosure inventory into 2011, the Mortgage Bankers Association has estimated. Several major lenders temporarily suspended foreclosures to review thousands of cases for improper handling. Attorney generals in all 50 states launched a joint investigation into the issue.

However, this will only delay foreclosure sales coming on to the market, not stop them. Lenders are on track to take back more than 1 million homes in 2010, according to foreclosure listing service RealtyTrac Inc.

That will continue to weigh on home values because foreclosures are sold at deep discounts and slow the country's housing recovery.

During the next year, lawmakers plan to review the nation's mortgage-lending system and consider a potential replacement for government-controlled mortgage buyers Fannie Mae and Freddie Mac. The financial overhaul signed by President Obama in July didn't address that issue, despite protests from Republicans that it was incomplete without such a plan.

The government rescued McLean, Va.-based Freddie and Washington-based Fannie nearly two years ago to cover their losses on soured mortgage loans, and it estimates the bailouts will cost taxpayers up to $259 billion.

That's nearly twice the $133 billion Fannie and Freddie were in line to receive from taxpayers as of November 2010 and would make theirs the costliest bailout of the financial crisis.

As of November 2010, Fannie and Freddie together have repaid $16.7 billion as dividends to the Treasury Department.

Fannie and Freddie buy up home loans from lenders, bundle them together into securities with a guarantee against default and sell them to investors worldwide. They own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans, which is worth more than $5 trillion. They buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors.

Separately, an Obama administration foreclosure-prevention program intended to help those at risk of foreclosure by lowering their monthly mortgage payments. But the Treasury Department reports that the effort is still plagued by high failure rates.

Many homeowners have complained that the government mortgage-aid program is a bureaucratic nightmare. They say that banks often lose their documents and then claim borrowers did not send back the necessary paperwork. The banking industry contends that borrowers are not sending back their paperwork.

The housing market, however, remains a huge challenge. High unemployment, tepid economic growth, tight credit and uncertainty about home prices have kept people from buying.

Foreclosures continued to plague the U.S. housing market : Biggest drop since Great Depression

Foreclosures continued to plague the U.S. housing market last quarter, while a a growing backlog has caused the length of the foreclosure process to drag on and on.

Nationwide, foreclosure filings totaled 610,337 in the third quarter, an increase of less than 1% from the previous quarter, said RealtyTrac, an online marketplace for foreclosed properties.

Even though the increase was small, it is significant since it broke the trend of three consecutive quarterly decreases, said RealtyTrac Chief Executive James Saccacio.

Foreclosures down 26%

Region's pace slower than state, nation

Regional foreclosure filings continued to decrease in the third quarter, but at a slower pace than state and national averages.

Neil and Marilyn Strawbridge have not received a foreclosure notice on their Oviedo home despite not making payments. (Jacob Langston, Orlando Sentinel / October 5, 2011)

Mortgage default notices, property auction warnings and bank repossessions dropped by 26 percent in the Scranton/Wilkes-Barre/Hazleton metro area between July and September, compared to the same 2010 period, according to RealtyTrac, a Los Angeles-area company that collects foreclosure information.

Third-quarter foreclosure activity in the state decreased by 43 percent, and it dropped nationally by 34 percent, according to RealtyTrac.

The local data probably reflects a smaller volume of foreclosures in recent years compared to similar areas. The slower decrease than state and national rates probably reflect high regional unemployment.

"Nationally, when foreclosures started to perk up, it didn't reach us or start to percolate here until six to eight months later," said Mike Elick, president and CEO of Consumer Credit Counseling Service of Northeastern Pennsylvania, a Pittston-based agency that provides budget counseling and debt management in an 23-county region.

But the region's 9.8 percent unemployment, the state's highest, likely prevents foreclosure totals from falling faster.

"For people coming in, the No. 1 issue is that they can't pay their bills because they don't have a job, or they don't have enough income," said Jesse Ergott, executive director of Neighborhood Housing Services of Lackawanna County, a nonprofit budget counseling service.

Consumer Credit Counseling assisted more than 750 homeowners in the third quarter who needed foreclosure-related services, Mr. Elick said. The majority of counseling services were for foreclosure prevention, he said.

Foreclosures nationally decreased for the 12th straight month on a year-over-year basis, RealtyTrac reports. Activity started slowing last fall after a "robo-signing" scandal revealed that banks seized thousands of homes without adequate proof or documentation.

Evidence indicates the downward trend reversing, with foreclosure activity accelerating slowly, according to RealtyTrac.

"There's some slow up because of the delay from the robo-signings," said Joe Donato, broker/owner at Vision Realty, a Clarks Summit agency that handles foreclosed properties. "They are getting their paper straight and proceeding with more caution."

Banks also delay foreclosures to prevent further property depreciation, Mr. Elick said.

The average price of single-family homes in the metro area in August was down 11 percent from August 2010, according to a recent report from CoreLogic, a California real estate data processor.

"Some of the lenders are sitting on some potential foreclosures because if they flood the market, how are they going to get rid of those properties?" Mr. Elick said.

An extended slump in housing prices has convinced more banks to reconfigure mortgage payments and terms to forestall foreclosures, Mr. Donato said.

"The banks are willing to work with homeowners more than before, trying to restructure loans to avoid foreclosures," he said.

All banks, though, are not so flexible, Mr. Ergott said.

"It's still a hit-or-miss thing," he said. "Some lenders are interested in trying for find workouts. Others are interested in pushing the process through."