Free housing, anyone? According to a recent Treasury report covering 34 million mortgages nationwide, an average of 840,000 homes were in the foreclosure process over a 15-month period ended Sept. 2009. But during that same period, an average of just 108,000 homes actually completed the foreclosure process.

That leaves a small army of homeowners who have been "foreclosed" on and who stopped making monthly payments, but still live in their old homes while the foreclosure process drags on.

Free housing, baby!
Some of the more extreme examples of this are utterly comical. Consider a story the popular Irvine Housing Blog posted yesterday [emphasis mine]:

The owner of today's featured property paid $465,000 on 10/23/2003. She used a $372,000 first mortgage, a $93,000 second mortgage, and a $0 down payment. On 12/30/2004 she refinanced into an Option ARM for $486,500. Two months later on 2/3/2005 she opened a HELOC for $67,000. Total property debt is $553,500 plus 3 years of missed payments, negative amortization, and fees. Total mortgage equity withdrawal is $88,500.

Read that again: Three years of missed payments after extracting over $88,000 in home equity loans. The blog continues:

The owner of this property stopped making payments sometime in late 2006. It has been over ... [three years] since this owner stopped paying, and she is still listed as the property owner, so one can assume she still occupies the property.

Not a bad deal -- for her.

Of course, free riding for three years is hardly typical. The Treasury report notes that foreclosures "can take more than 15 months to complete." Even that seems extreme.

However long it takes, the backlog of pending foreclosures is massive almost everywhere you look. A recent report by Barclay's Capital shows how deep the problem is in major cities:


Percentage of Loans Already Liquidated Through Foreclosure*

Percentage of Loans Seriously Delinquent Waiting to Go Through Foreclosure










Las Vegas



Los Angeles






New York



San Diego



San Francisco






Sources: Barclays Capital, WSJ.
*Since Jan. 2008.

That's a lot of people living for free, waiting for the bank to kick 'em out.

Some of this monster backlog has to do with laws that slow foreclosure process -- New York is a good example. Most of it, though, is simply that banks can't keep up with an onslaught of delinquent loans (not that you should feel bad for them). Fannie Mae (NYSE: FNM) and Freddie Mac's (NYSE: FRE) 2009 foreclosure moratoria didn't help, either.

When a bank comes across a seriously delinquent mortgage, it usually has two options: Renegotiate with the homeowner and modify the loan, or foreclose. Even with the horrendously long backlog process, the choice is usually foreclosure.

One way to track banks' unwillingness to modify is to look at participants of the government's HAMP mortgage modification program. The most recent report shows that Citigroup (NYSE: C) has only 50% of eligible borrowers in some stage of a mortgage modification; JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) have just under 40%; US Bancorp (NYSE: USB) 27%, and Bank of America (NYSE: BAC) just 22%.

Why so low? One explanation is that the redefault rate on mortgage modifications is huge. Knowing homeowners will default even with a modified loan, and not wanting to go through the hassle and cost of the modification process, banks are inclined to foreclose, even if it means months -- maybe years -- before they'll actually take control of the property.

Money sloshing around, looking for a home
The most interesting observation on this topic comes from Motley Fool blogger dwot, who inquisitively wrote that with so many homeowners living free while waiting for banks to do something, "a heck of a lot of money [is] not going into housing and probably going into other areas of the economy. That seems like a heck of a lot of money other areas of the economy will lose when these people eventually start paying for housing again."

As far as total economic activity is concerned, that shouldn't matter. As long as money is moving around, we'll all be good. But this crisis started with crazy imbalances that directed too much money into housing. Have the tides turned? Is an equally ridiculous amount of money now being diverted from housing? Perhaps. But it's too early to tell what effect it's had on areas like consumer spending.

Just another example of how strange this recovery has become.

What do you think about staying in a home without making payments? Fire away in the comments box below.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.