Why the Foreclosure Settlement Could Mean More Pain for Homeowners

Clarity on foreclosure procedures likely means more Americans will lose their homes this year.

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The government's recent multibillion-dollar settlement might seem like a godsend given the still-rickety shape the housing market is in. But while the agreement will certainly help some people—close to 2 million, according to some estimates—it will undoubtedly hurt others, experts say.

That's because the cloud of uncertainty hanging over how mortgage servicers should legally proceed with foreclosure filings is starting to clear. As details of the settlement are worked out, it will allow lenders and servicers to move forward with the foreclosures they delayed during the 16-month robo-signing saga.

"All of this will result in more foreclosure pain in the short term as some of the foreclosures that should have happened last year instead happen this year," Daren Blomquist, director of marketing communications at foreclosure information website RealtyTrac, wrote in an E-mail. RealtyTrac projects that another 1 million Americans stand to lose their homes this year—a 25 percent increase from 2011—adding yet more downward pressure on home prices.

Yesterday's foreclosure settlement is a little like saltwater in the wound, says Scott Ryles, CEO of Home Value Protection, a California-based insurance provider. "[Home] seizures have been stalled awaiting this settlement," he says. "The homes in the foreclosure pipeline are four times the REO [current bank-owned properties], and yesterday's settlement is going to accelerate the seizure process. They have a total green light to seize those homes that are in the foreclosure process."

[Read: Mortgage Settlement: Do the Big Banks Owe You Money?]

Still, government officials hope the settlement encourages lenders and servicers to seek alternatives—such as principal reductions, short sales, and other loan modifications—to foreclosures, the massive influx of which has crippled the nation's housing market and wrecked banks' balance sheets.

"State attorneys general anticipate the settlement's requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay," a new government website dedicated to the foreclosure settlement says.

Blomquist is also optimistic about the long-term impacts of the settlement on the housing market. "A finalized settlement will help to more quickly clear the so-called shadow inventory, which will in turn help the housing market finally bottom out once and for all," he says.

Only then can the housing market begin to recover and underwater homeowners—those who owe more on their mortgages than their homes are worth—start digging out from more than $7 trillion in lost household wealth over the past few years.

mhandley@usnews.com

Twitter: @mmhandley

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