The Coming Foreclosure Flood

Heartened by the recent rise in home prices? Don't get too comfortable. Standard & Poor's, the credit-rating agency that tells investors what mortgage-backed securities are worth, reports that the increase was just an illusion. It predicts the nation is about to see a deluge of new foreclosures that will drive real estate values back down.

Blame the "shadow inventory" – nearly 1.8 million homes that are on the road to foreclosure but for all kinds of reasons haven't gotten there yet.

Many homeowners have fallen behind on their mortgages or stopped paying, but foreclosure has not yet arrived. Mortgage servicers, the folks who send you the bills and file for foreclosure when you can't pay them, are overwhelmed. Courts, too, are backed up. Mortgage modifications and foreclosure moratoriums have put off the day of reckoning for borrowers, but not forever. And unemployment is sabotaging more homeowners every day.

Out of more than $1.6 trillion in existing mortgages that were packaged into mortgage-backed securities by Wall Street, some $425 billion worth are extremely late on their payments, and therefore likely to go into foreclosure. Only a fraction of borrowers who fall seriously behind are able to catch up, with the help of a loan modification. And even then the majority end up falling behind again. That amount of bad mortgage debt has been spiking up every month, slowing down just a little thanks to the government's Home Affordable Modification Program, but still continuing to rise.

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