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Will the mortgage foreclosure settlement renew calls for foreclosure?

News spread rapidly earlier this month that the attorneys general of 49 states, including Ohio, settled their differences regarding the foreclosure crisis. The parties agreed to settle matters in a deal that came with a $25 billion price tag for the major banks. The agreement includes a provision that is aimed at writing down debt on the principal balance of some homeowners across the country. The major banks will direct roughly $17 billion to write down debt on underwater mortgages.

CoreLogic, a real estate data company, estimates that 11 million homes across the country are currently underwater on their mortgage. An underwater mortgage involves a home that has a market value that is less than the outstanding balance of the home loan.

Despite the big foreclosure settlement with the big banks, some sources predict that a new wave of foreclosures is looming. A report in Bloomberg Businessweek recently outlined that the big banks slowed down in their foreclosure practices as the banks and state attorneys general grappled with what to do to remedy the foreclosure crisis. The legal wrangling involved the allegations that the banks bungled paperwork and used faulty and fraudulent evidence to foreclose on American homeowners, including many in Ohio.

Sources say the now that the settlement has been reached, the banks are likely to resume efforts to foreclose on more homes. The Chief economist for Zillow, a home-sales data tracking firm on the West Coast says that the settlement negotiations and legal wrangling created a shadow, hanging over the housing market for a year.

U.S. homeowners are wrestling with $750 billion in negative equity due to the sharp drop in the housing market in recent years. The Federal Reserve told Congress in January that reducing principal balances on underwater mortgages-- those with negative equity--may reduce the number of defaults, leading to foreclosures. Some homeowners have walked away from their home under a "strategic default." That is, because the homeowner owed more on the loan than the home is worth, the homeowner decided, strategically, to allow the home to go into foreclosure.

If sources are correct in their predictions that banks will resume foreclosures now that the $25 billion settlement has been reached, analysts predict the housing market may not improve in the near short-term. A resumption of foreclosures could keep housing prices low, or push the market lower, adding to an increase in negative equity for homeowners.

Source: Bloomberg Businessweek, "Foreclosures to Climb Before Bank Deal Helps U.S. Housing Market," Prashant Gopal and John Gittelsohn, Feb. 10, 2012

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