The total value of the agreement with lenders including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. may grow to $40 billion if the next nine largest mortgage servicers sign on to the agreement, according to Housing and Urban Development Secretary Shaun Donovan. In a best-case scenario, if all banks participate fully, the deal might be worth $45 billion to homeowners and victims of foreclosure.
The money may have an added benefit: It will test the effectiveness of principal forgiveness in preventing defaults, and may spur a larger-scale program if it's successful, Diggle said.
After a six-year slide in home prices, demand is showing signs of strengthening, bolstered by a jobless rate that fell to 8.3 percent last month. The number of Americans who signed contracts to buy previously owned homes in December held near a 19-month high, indicating that stabilization in the market that began in late 2011 may continue this year.
The surge of home seizures may drive down home values, at least for a while, in a fragile market. The number of new foreclosure filings fell 34 percent last year, according to RealtyTrac, building up a backlog of homes that now may flood the market with low-cost properties.
"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, a RealtyTrac vice president, said in an e-mail today.
About 1 million foreclosures with be completed this year, up 25 percent from 2011, according to the firm.
"I think there'll be more price weakness, because we'll see the number of distressed sales pick up," said Mark Zandi, chief economist for Moody's Analytics Inc. in West Chester, Pennsylvania. "But I think the price declines will be modest. I think the banks themselves are going to be very sensitive to market prices. I don't think they're just going to dump property. That wouldn't be in their best interest."
No Robo-Signing
Lenders are unlikely to flood the market because it will damage prices for all properties, according to Sam Khater, senior economist for CoreLogic. Banks may be limited by their own capacities to process foreclosures. The settlement prohibits the practice of robo-signing, which employed assembly lines of workers to sign thousands of foreclosure documents at a time without verifying them.
"You can't dump all these properties at the same time," Khater said. "That would be disastrous. You have to release them in a slow and measured fashion, so the market can absorb them."