Bernanke Announces Economy Is Improving

WASHINGTON (Reuters) – Three days after news of a surprise fall in the jobless rate prompted investors to speculate the Fed might move more quickly to raise rates than had been expected, Bernanke said the Fed — the U.S. central bank — was sticking to its pledge to hold benchmark borrowing costs at exceptionally low levels for an “extended period.”

“We still have some ways to go before we can be assured that the recovery will be self-sustaining,” he told the Economic Club of Washington. “Also at issue is whether the recovery will create the large number of jobs that will be needed to materially bring down the unemployment rate.”

A report on Friday showed the U.S. labor market last month turned in its best performance since the economy fell into recession two years ago as the unemployment rate receded slightly from a 26-1/2-year high and job losses slowed sharply.

The data led investors to ramp up bets benchmark U.S. rates would rise by the middle of next year, lifting the dollar to its biggest gain in nearly a year.

However, Bernanke on Monday suggested the Fed’s policy-setting Federal Open Market Committee (FOMC), which meets next week to debate policy, would bide its time to let the recovery gather strength. His comments drove the dollar and prices for U.S. government bonds lower, while offering temporary support to stocks.

“Right now we are still looking at the extended period given that conditions remain — low rates of (resource) utilization, subdued inflation trends, and stable long term inflation expectations,” he said. “That remains where we are.”

This view was echoed by another top Fed official, New York Federal Reserve Bank President William Dudley, speaking at Columbia University in New York on Monday evening.

“The recession now appears to be over, but the economy is still weak and the unemployment rate is much too high,” Dudley said.

“These circumstances underpin the FOMC’s commitment to keeping short-term rates exceptionally low for an extended period.”

FORMIDABLE HEADWINDS

Bernanke said tight credit and the weak job market still posed “formidable headwinds” to recovery, but he said officials would need to consider recent signs that the economy was gaining strength at their meeting on Tuesday and Wednesday.

The Fed cut rates to near zero a year ago and has pumped more than $1 trillion into the economy to battle a deep recession. Now, analysts are beginning to wonder when it will begin to remove its extraordinary support.

Financial markets will parse the Fed’s policy statement next week closely for any fresh clues, but Bernanke suggested the central bank remains focused on nurturing the recovery.

“He’s being appropriately cautious about the outlook,” said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. “The economy is not going to come roaring back.”

While underscoring the recovery’s fragility, both Bernanke and Dudley took pains to argue that worries the Fed’s easy money policies are setting the stage for runaway inflation later are unfounded.

“Will the Federal Reserve’s actions to combat the crisis lead to higher inflation down the road?” Bernanke asked. “The answer is no. The Federal Reserve is committed to keeping inflation low and will be able to do so.”

Bernanke said that although the Fed will continue to monitor inflation closely, it appears likely to remain subdued for some time and could in fact move lower.

FED HAS EXIT TOOLS

The challenge the Fed faces in withdrawing its massive support for the economy is not how to do it but when, he said.

The central bank has all the tools it needs, and could raise rates even if its balance sheet — swollen by purchases of mortgage-related debt and longer-term Treasury securities — remains large, Bernanke added.

He said the Fed’s ability to pay interest on the reserves banks hold at the Fed would be “an important tool” to push borrowing costs higher, and said there were a number of ways it could withdraw money from the financial system.

“If necessary, we always have the option of reducing the size of our balance sheet by selling some of our securities,” he said.

The New York Fed’s Dudley also emphasized that while the exit from easy monetary policy will be more complicated than usual due to the array of stimulus the Fed has put in place, he believes the process is “manageable”.

“The fact we have more levers doesn’t mean we will have trouble exiting when the time comes, it just means we have more choices to make,” Dudley said.

OFFICIALS PUSH BACK ON AUDITS

Bernanke, who is in the midst of a contentious Senate confirmation process for a second four-year term as Fed chairman, used his remarks to push back against congressional proposals he argues would hurt the bank.

He praised the contribution the 12 regional Federal Reserve banks make to monetary policy by bringing insight into conditions around the country. Some lawmakers have proposed greater congressional control over those regional banks.

Bernanke and the New York Fed’s Dudley also criticized a congressional proposal to audit Fed monetary policy decisions, saying it could undercut the Fed’s independence.

The Senate Banking Committee held a hearing on Bernanke’s nomination last week, but has not yet set a date for a vote. His current term expires on January 31.

Two More Banks Fail

NEW YORK (CNNMoney.com) — Two more banks shut their doors Friday, according to the federal government, bringing the total number of failures up to 31 in 2009.

The first failure was a wholesale banking operator that served 1,400 other lenders across the country and was the fifth biggest bank failure during the current recession in terms of assets.

Georgia “bankers’ bank”

The Federal Deposit Insurance Corp. said in a statement that it created a bridge bank to take over the operations of Silverton Bank, National Bank, headquartered in Atlanta.

Unlike the other 30 banks that have failed so far in 2009, Silverton Bank did not take deposits directly from the general public or make loans to consumers. Instead, it was a “bankers’ bank,” offering a wide variety of services, such as foreign wire transfers, as well as clearing and cash management, to other banks.

Silverton was cooperatively owned by community banks throughout the Southeast and was heavily invested in loans to real estate developments in Florida, Georgia, and other parts of the Southeast, according to Christopher Marinac, managing principal of financial firm FIG Partners LLC based out of Atlanta, Ga.

When real estate values sank in the current downturn, the assets backing those properties also lost their value. The Southeast has seen numerous regional banks topple as the housing bubble burst.

At the time of its closing, Silverton Bank had approximately $4.1 billion in assets and $3.3 billion in deposits, all of which are expected to be within the FDIC’s insurance limits.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $1.3 billion, making it the fourth costliest bank failure since the start of the recession. “It is a bigger hit to the insurance fund than they have seen in the last couple weeks,” Marinac said. “This is a bigger issue than we have seen in awhile.”

Silverton served banks in 44 states and operated six regional offices. The FDIC created a bridge bank to take over the assets of the institution and has contracted The Independent Bankers Bank, out of Irving, Texas, to assist. The FDIC does not expect to see any significant impact to the bank’s clients, at least in the near term.

However, the bridge bank only plans to be operational for 60 days, with a possible 30-day extension. When the bridge bank services terminate, the banks that were serviced by the cooperatively owned bank will have to go out and find another institution to take care of those services.

“There is no clear cut answer on a situation like this,” said Marinac. “This is a little bit more complex and therefore there are more uncertainties about how this will unfold.”

Thus far, the FDIC has not been able to find another wholesale bank to agree to take over Silverton’s operations. The FDIC will attempt to sell off the assets, but it could pose a challenge to find a buyer for risky commercial loans. However, the FDIC could try to find a buyer by discounting the debt. “Everything has a price,” said Marinac.

New Jersey bank shuts

State regulators shut down Citizens Community Bank Friday night, and named the FDIC as the receiver. The Ridgewood, N.J.- based bank had total assets of approximately $45.1 million and total deposits of $43.7 million as of December 31.

North Jersey Community Bank, of Englewood Cliffs, N.J., has agreed to assume all of the deposits of the failed bank. The failed bank’s single office will reopen Monday as the North Jersey Community Bank.

North Jersey Community Bank paid a premium of 0.67% to acquire all of the deposits of the failed bank and has agreed to purchase approximately $11.5 million in assets. The FDIC will hold onto the rest of the assets to dispose of later.

Through the weekend, depositors of Citizens Community Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the failed bank will continue to be processed, and the FDIC said loan customers should continue to make their payments as usual.

The FDIC will continue to fully insure individual accounts up to $250,000 through the end of 2009.

Stress tests awaited

Local banks have been shutting down in droves as the recession has made it harder for customers and businesses to pay their loans. Nearly every Friday so far this year, at least one bank has failed. Last week, four regional banks were shuttered.

Even as the government has committed unprecedented amounts of money to increase liquidity and jumpstart the economy, the pace of bank failures has accelerated. In all of 2008, 25 banks failed, compared with 2009′s 31 banks.

It is not only smaller, regional banks that have felt the pressure of the recession. The nation’s largest banks have also been hit by rising default rates and a decline in business spending.

Among the big banks that have received government aid, Citigroup and Bank of America have each received $45 billion in funds from the government’s Troubled Asset Relief Program, or TARP.

In order to assess the health of the nation’s financial industry, the Obama administration has unveiled details of its plan to conduct “stress tests” on 19 of the nation’s largest banks.

The assessment of the bank’s health was expected to be made public May 4, but an announcement from the Treasury Department Friday indicated that results would be delayed until May 7.

Market watchers are anxiously awaiting the results of the stress tests, which have been designed to assess the banks’ preparedness to weather further downturns in the economy, including further increases in unemployment and decreases in home prices.Two

Now We Own A Part Of Citi

NEW YORK (CNNMoney.com) — You now own a big piece of troubled bank Citigroup.

Although some housekeeping issues remain, Citigroup effectively completed its long-awaited plan to turn preferred shares owned by the government into common stock Thursday. That gives U.S. taxpayers a 34% stake in one of the world’s largest financial institutions.

The New York City-based bank said Thursday that it converted a $25 billion preferred share stake the government acquired as part of rescue efforts for the firm taken earlier this year and last fall into common shares.

Facing concerns about its underlying health and ability to endure future losses, Citigroup agreed to the deal with the Treasury Department in late February.

By converting preferred shares into common stock, regulators hope to boost Citigroup’s level of tangible common equity, a widely watched measure of a bank’s ability to withstand losses.

Part of the agreement included the option for other preferred share investors to convert their holdings into common shares as well. About $58 billion worth of preferred and trust preferred securities have been exchanged to common stock as result of the exchange offer, according to the company.

Citigroup has earned a reputation as one of the nation’s most troubled financial institutions. From the time the credit markets began to unravel in late 2007 up until the end of last year, the company lost more than $28 billion.

The bank’s problems subsequently led the government to take a $45 billion stake in Citigroup to help stabilize the bank.

Following the conversion, the government will still own $20 billion in preferred shares on which it is earning an 8% dividend. Although the remaining amount could be converted if Treasury determines more assistance is needed, Citigroup officials have maintained that the company’s position is quite secure.

“Following completion of the exchange offers, Citi will be among the best capitalized banks in the world,” Citigroup CEO Vikram Pandit said in a statement about the exchange offer in June.

When the government first announced the stock conversion plans, there were fears about just how far the government would become involved in Citi’s day-to-day operations, perhaps going so far as nationalize the company.

Government Bails Out Banks But Not Consumers

When it comes to bankruptcy reform, the only type that the politicians and bankers like is changes which make it more difficult, more time consuming, and less efficient for borrowers and homeowners. The point is to push foreclosure victims into a difficult bankruptcy, while the banks themselves get bailed out by these same taxpayers to avoid the same fate.

Over the past year of the housing crisis, with foreclosure rates remaining at historic highs, one of the proposals to fix the problem was allowing bankruptcy judges to reduce the amount that homeowners owed on a first mortgage. This would have made it easier for the borrowers to pay back part of the loan in the event the property value had fallen.

Of course, the fact that this solution makes some sense and is perfectly acceptable in the case of second homes and other types of debt and other types of bankruptcies (Chapter 11, for instance) did not change the banking industry’s opposition to it. Although giant corporate-government bank Citigroup supported the bill, the Senate defeated legislation that would have allowed it.

Homeowners facing foreclosure, according to the politicians, should not be able to enter into a government bankruptcy court and have their mortgage balance reduced. Instead, they should be forced to enter into a government foreclosure relief program to have their mortgage balance reduced. The key difference is how much control the banks have over the reduction.

In most of the government programs to help homeowners qualify for mortgage modifications, the lenders participation in the plan is voluntary. And in practice, the lenders’ participation has been lukewarm at best or nonexistent at worst. Take, for example, the FHA Hope for Homeowners program, which has been given $320,000,000,000 in taxpayer money and has helped one single homeowner.

Thus, the government modification programs have been a disaster because they allow banks to work as hard as they want to help borrowers. The banks, in turn, give homeowners bad deals or fail to negotiate in good faith with borrowers. Instead, they rely on their bailouts and other free money programs to prevent them from having any motivation to assist borrowers in stopping foreclosure.

The banks know that, if homeowners could file bankruptcy and get their mortgages modified, there would be fewer reasons to go to the government for free handouts. Borrowers would be able to file a Chapter 13, have the mortgage balance reduced to the market value of the home, and be able to make payments to the lenders again. This would be a tragedy for the lobbyists and mortgage companies!

One of the objections to the legislation was that it would make mortgages more expensive. But during the real estate boom, mortgages were as expensive as they ever have been. Although this was not in terms of interest rates, once the bubble inflated to astronomical levels, the amount of a loan a borrower needed to take out just to qualify for a mortgage was extraordinarily high.

The Federal Reserve had lowered interest rates to historic lows. Banks reduced lending standards knowing they could get bailed out by the government if anything went wrong. Loans were given to people who could never afford to pay them back, inflating the demand and rising prices even further. Some of these loans reset at high interest rates after a few years on extremely overvalued properties. None of this was a good deal.

And now, the main objection to allowing bankruptcy judges to reduce mortgage balances is that it would make it more expensive to take out a mortgage? How could it be any more expensive than taking out a loan for 250% of its actual value at a teaser rate that would reset to 12% interest in a couple of years? The banks could not make the mortgage market any more expensive if they tried.

Regardless, the banks worked hard to lobby politicians to defeat the legislation, and now the mortgage banking industry is celebrating its victory. But what have they won? Nothing more than ability to force homeowners to keep paying for properties that are overvalued, while the banks themselves line up to receive more and more taxpayer money in order to avoid the same fate of a difficult bankruptcy.

Credit Crisis Persists

You knew things were bad in the credit department, but now there are some new numbers to back it up: We’re collectively about 27% riskier credit bets than we were a decade ago, according to the TransUnion credit bureau. The firm’s national Credit Risk Index for the first quarter of this year clocked in at 127.3 compared to the 1998 start-point of 100. The index is based on the average weighted probability of 90-day delinquencies on mortgages, auto loans and credit cards.

TransUnion’s global chief scientist Chet Wiermanski didn’t even try to position the latest reading as a green shoot. “ The index remains at an all-time historical high,” he commented, “indicating that delinquencies and foreclosures will continue to rise in the coming months.”

The five states that pose the biggest credit risk, according to TransUnion:

•    Mississippi (Credit Risk Index of 166.45)
•    Texas (162.59)
•    Nevada (158.97)
•    South Carolina (158.76)
•    Louisiana (153.84)

The least risky states:
•    North Dakota (82.02)
•    Minnesota (88.53)
•    Vermont (91.82)
•    South Dakota (94.75)
•    Iowa (95.26)

The high/low credit risk lists might suggest a new Weather Channel indicator: Is there something about cold-weather winter states that engenders better credit management? Okay, okay, what’s really at play is of course something more down to earth, like jobs. All five of the lowest-risk states have unemployment rates below the 9.5% national average.

The worst year-over-year Credit Risk Index changes occurred in poster-child states for mortgage duress: Arizona (up 14.8%), Nevada (up 14.4%) and California (up 13.8%).

You can check out your state’s delinquency rate for auto loans, credit cards and mortgage at TransUnion’s website Even if your personal FICO credit score is sterling, merely being in a state with a high delinquency rate could expose you to more scrutiny if you plan on applying for any credit in the near future.

Cue up the chief scientist one more time:

“It is apparent that many of the states experiencing the highest increases in credit risk are the same when looking at the Credit Risk Index statistic on both a quarterly and yearly basis,” said Wiermanski in the release that accompanied the data. “This leads TransUnion to believe that consumers in these states will experience prolonged systemic difficulties in both their ability to satisfactorily repay their existing credit obligations and in their ability to acquire new credit.”

Ouch. Good luck with your mortgages and credit cards, everybody.

US Trade Gap Declines

WASHINGTON (Reuters) — The U.S. trade gap narrowed unexpectedly to $26 billion in May to the lowest reading since November 1999, as exports rose and imports shrank, government data on Friday showed. The Commerce Department said exports increased 1.6% to $123.3 billion, while imports declined by 0.6% to $149.3 billion. Analysts polled by Reuters had expected the trade deficit to widen to $30.2 billion in May.

The trade gap in April was revised to $28.8 billion from a previously reported $29.2 billion deficit. May’s import level was the lowest since July 2004 and the 10th straight monthly decline, providing further evidence that the recession-mired United States has diminished as a source of demand for the rest of the world. The auto sector has been hard hit in the economic slowdown and May imports of automotive vehicles and parts slipped to $10.2 billion, the lowest level since March 1996, while auto exports were the lowest since July 1998.

The monthly deficit on goods trade with China grew to $17.5 billion from $16.8 billion in April and was the largest with any single country. But the U.S. trade deficit with other big trading partners declined, falling to $2.8 billion with the European Union in May, for the lowest reading since March 1999, and retreating to $1.9 billion with Japan, which was the lowest since February 1984.

Imported oil cost $51.21 a barrel in May, up from $46.60 in April. The value of crude oil imports in May declined only slightly to $13.4 billion, despite a sharper decline in the quantity of oil actually imported, to 262 million barrels from 293 million in April, the Commerce Department said.

US Consumer Debt Worsens

NEW YORK (Reuters) – Soaring U.S. unemployment and a shrinking economy drove delinquencies on credit card debt and home equity loans to all-time highs in the first quarter as a record number of cash-strapped consumers fell behind on their bills.

Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter as more cardholders relied on plastic to meet day-to-day expenses, the American Bankers Association said.

Late payments on home equity loans rose to 3.52 percent from 3.03 percent, and on home equity lines of credit climbed to 1.89 percent from 1.46 percent.

A broader gauge showing late payments on eight categories of loans rose for a fourth straight quarter to a new record, edging up to 3.23 percent from 3.22 percent. That rate actually understates consumer pain because it excludes credit cards. The ABA tracks loan payments that are at least 30 days late.

“The biggest driver is job losses,” ABA Chief Economist James Chessen said in an interview. “When people lose their jobs or work fewer hours, it makes it that much harder to meet their obligations. Unfortunately, we’re going to see higher job losses in the next year, and I expect elevated delinquencies.”

The ABA represents most large U.S. banks and credit card companies. Tuesday’s data are a bad sign for them as they prepare to report second-quarter results starting next week.

While improved capital markets may boost the bottom lines of some, analysts expect lenders such as Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Capital One Financial Corp and American Express Co to suffer higher credit losses, especially in cards.

BRIDGE TO EMPLOYMENT

Borrowers are struggling as the nation’s jobless rate sits at a 26-year high of 9.5 percent, with 6.5 million jobs having disappeared since the recession began in December 2007. The Obama administration expects the unemployment rate to hit double digits before declining.

U.S. consumers ended March with $939.6 billion of revolving credit outstanding, a rough approximation of credit card debt, according to Federal Reserve data.

“Consumers tend to rely on credit cards as a bridge to cover their daily needs until they find new jobs,” Chessen said. “It’s taking longer to find those jobs.”

Meanwhile, home prices are down 32.6 percent from their peak in 2006, according to the Standard & Poor’s/Case-Shiller Home Price Indices of 20 large metropolitan areas.

The ABA in June said it expects the recession to end this quarter, despite rising unemployment.

The overall ABA delinquency rate includes direct auto, indirect auto, closed-end home equity, home improvement, marine, mobile home, personal, and recreational vehicle loans.

Delinquencies rose to 3.01 percent from 2.03 percent on direct auto loans, to 3.70 percent from 2.96 percent on mobile home loans, to 3.47 percent from 2.88 percent on personal loans, and to 1.52 percent from 1.38 percent on recreational vehicle loans.

Swiss Bank Secrecy Under Fire

ZURICH (Reuters) – Switzerland has vowed to prevent UBS from handing over client information to U.S. authorities, in an attempt to defend bank secrecy, saying a tax case targeting its main bank is souring diplomatic ties.

Wealth management giant UBS is facing a court hearing in Miami next week after refusing to disclose data on 52,000 Americans holders of secret Swiss bank accounts to U.S. tax authorities.

The Swiss Justice Ministry said on Wednesday that Swiss law prevents UBS from handing over client information and the government would seize UBS client data, if necessary, to stop that happening.

The case, which comes amid a global fight against tax cheats supported by the U.S. administration, has damaged the UBS brand and could result in an expensive settlement for the bank at a time when the bank needs to focus on restructuring.

“Switzerland will use its legal authority to ensure that the bank cannot be pressured to transmit the information illegally, including if necessary by issuing an order taking effective control of the data at UBS,” the Swiss government said in a response to U.S. authorities filed in Miami on Tuesday.

The tax litigation is also crucial for the future of the multi-billion dollar wealth management industry and is pushing several offshore banks to force clients to come clean.

A court hearing that will lead to a ruling on the UBS data issue is due to start on July 13. Washington has accused UBS of hiding nearly $15 billion in assets in secret accounts.

The Swiss statement came in response to a filing by the U.S. Justice Department last week asking the Miami court to enforce tax compliance with the full weight of U.S. law.

Although Swiss criminal law prohibits banks passing on client information to foreign authorities, UBS and Switzerland have already made concessions on their treasured bank secrecy.

UBS agreed to pay in February $780 million, admitted wrongdoing and disclosed about 250 client names to avert tax fraud criminal charges the Swiss government said threatened the bank’s survival.

And faced with the threat of possible sanctions from the G20, Switzerland — along with other tax havens — vowed in March to redraft its tax treaties with the United States and other countries and cooperate more on tax evasion.

“INTERNATIONAL CONFLICT”

Switzerland said in its latest court filing it hoped it would not have to take the “extraordinary action” of issuing an order to seize the UBS client data.

“The IRS (Internal Revenue Service) now inappropriately seeks to provoke international conflict through this civil proceeding,” the statement read.

In its brief last week, the Justice Department said that UBS had already acknowledged that its bankers committed “very serious crimes on U.S. soil” and had therefore subjected the bank to the full jurisdiction of U.S. law. “Swiss banking secrecy is not an impenetrable wall,” it said.

Google Challenges Microsoft

NEW YORK (CNNMoney.com) — Google Inc. is planning to hit Microsoft Corp. where it hurts by challenging the software giant’s dominance in the world of computer operating systems.

The search firm said late Tuesday that it will begin offering its own operating system, called Chrome, in the second half of 2010.

While Google already offers a host of products that compete with Microsoft, the new operating system is a direct challenge to Microsoft Windows, which is the most widely used operating system in the world.

“Google really can challenge Microsoft, because the proliferation of Web-based applications makes the operating system much less important,” said Zeus Kerravala, analyst at Yankee Group. “As we pave the way towards real Web 2.0, there will be less of a real tie-in to Windows.”

The new system will initially be targeted at netbooks, the company said. Netbooks are small, inexpensive laptop computers used mostly for Internet access.

Google said the new operating system will make use of open source programming, which allows third-party developers to design compatible add-ons. (Think of the applications created for the iPhone or Facebook.)

“We hear a lot from our users, and their message is clear: computers need to get better,” Google said in a statement. Chrome is “our attempt to re-think what operating systems should be.”

The new operating system comes after Google launched its Chrome Internet browser late last year.

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Foreclosures Fall

NEW YORK (CNNMoney.com) — Lenders filed fewer foreclosure notices in May, but the total number of filings was still the third-highest monthly total on record.

One of every 398 households in the United States received some kind of filing, including notices of default, scheduled auctions or bank repossession, during May. That was a decline of 6% from April but an increase of 18% compared with May 2008.

And the ultimate type of foreclosure filing – bank repossessions – increased during the month, according to RealtyTrac CEO James Saccacio.

“While defaults and scheduled foreclosure auctions were both down from the previous month, bank repossessions, or REOs, were up 2%” he said, in a prepared statement. “We expect REO activity to spike in the coming months as foreclosure delays and moratoria implemented by various state laws come to an end.”

But overall, the May statistics underscore what may be a slight improvement. The number of filings trailed off toward the end of the month, according to RealtyTrac spokesman, Rick Sharga.

“We’re still coming through a three-month period like nothing we’ve ever seen before,” he said, “with nearly a million filings in all.”

The month saw big increases of repossessed homes in several states, including Michigan, Arizona, Washington, Nevada, Oregon and New York. In Michigan alone bank repossessions went to 6,246 from 3,560 in April, a 75% increase.

And it could have been worse. Sharga said he’s been hearing anecdotal reports of banks taking homes all the way through the foreclosure process and then suspending further action.

“We hear the servicers are pulling back from the brink,” he said. “They want someone in the house.”

Vacant homes are subject to vandalism and looting and often quickly lose whatever value they have. Thieves crash through plaster walls to get at copper wiring and plumbing or strip aluminum siding from exteriors, in many cases eliminating any chance of salvaging the property.

States of foreclosure

The foreclosure problem is widespread but reaches plague proportions in 10 states; those hardest-hit areas account for 77% of all foreclosure filings. California had more than any other state with with 92,249 – nearly 29% of all U.S. filings.

Florida posted the nation’s second highest number at 58,931, up 50% from May 2008. Other top 10 states were Nevada (17,157), Arizona (16,865), Michigan (13,891), Ohio (11,360), Illinois (10,942), Georgia (10,516), Texas (9,813) and Virginia (5,385).

Nevada had the highest foreclosure rate with one filing for every 64 households. California, with one for every 144, and Florida, with one for every 148, were second and third respectively.

Working through the problem

The foreclosure boom has depressed home prices and that has brought homebuyers back into some markets. In fact, sales volume is much stronger in many states compared with 2008, and affordability has improved to levels not seen in many years.

“In some of the ‘ground-zero’ places, like Stockton, parts of Phoenix, San Diego and some others, buyers are bidding bank-owned homes up, way, way over the the asking prices” said Sharga.

What could slow down this market revival, however, is the recent bump in mortgage interest rates.

Rates for a 30-year, fixed-rate loan have jumped to about 5.5% from about 4.8% five weeks ago. That adds about 12% to monthly mortgage payments, almost as if the house increased that much in price.

If the higher rates cause demand for foreclosures to slacken, the nation could see further addition to its supply of repossessed homes. That could send more home prices plummeting, pushing more mortgage borrowers underwater (owing more than their properties are worth) and closer to foreclosure.