The Mortgage Lenders' Dual Masters

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Call it a convergence of reality and desperation. Earlier this week, the Federal Reserve, along with the nation's banking regulators, issued special guidance asking those companies that service mortgage loans to work with homeowners who risk foreclosure on their homes.

On Thursday it was reported that the crush of homeowners who have received foreclosure notices surged to a record level in the spring. This mounting trend obviously cannot benefit the homebuilders, especially those who cater largely to first-time buyers, including D.R. Horton (NYSE: DHI), Beazer (NYSE: BZH), and Ryland (NYSE: RYL). At the same time, the world continues to be tough for mortgage lenders like Countrywide (NYSE: CFC) and Washington Mutual (NYSE: WM). And even luxury builder Toll Brothers (NYSE: TOL) is being hit by a tightening in the market for jumbo loans.

According to the Mortgage Bankers Association, the number of mortgage holders just beginning the foreclosure process in the June quarter hit 0.65%, the third straight quarter that the rate has moved upward. Beyond that, the portion of holders who have gotten behind in their payments but haven't yet been pushed into foreclosure proceedings moved up nearly 75 basis points year over year to 5.12%.

Hardest hit were Midwestern states Ohio and Michigan, both of which have lost a large number of manufacturing jobs. In Ohio, the number of mortgages that have fallen 90 days or more past due is now more than double the national average. And in Michigan, mortgage holders who were hit by new foreclosure procedures in just the past quarter reached 1% of the state's total loans.

Think that's troubling? There's more -- about 2 million adjustable-rate mortgages (ARMs) across the U.S. will reset by 2008, typically hitting their holders with much higher monthly payments. With this and the already-growing pace of foreclosures in mind, the guidance issued to lenders by banking authorities included consideration of modified loan terms or payment deferrals for affected borrowers. Those modifications could include converting ARMS to fixed-rate loans or extending loan lengths and rolling payment arrearages into the full amount to be repaid.

Whatever steps some lenders and loan service agents are willing to take to help troubled mortgage holders, I'm convinced that the crush of delinquencies and foreclosures -- along with radically tightened credit standards in the mortgage industry -- will make for a slow recovery for the U.S. housing market. That being said, I hope that Foolish investors will accordingly research the above-named companies before investing.

To borrow from related Foolishness:

• Bush's Housing Bailout: Bad Idea
• Home Prices Just Keep Crashing
• Homebuilders Up 25% in One Day?