First, via Mortgage Insider, here’s “The Twelve Months of Default,” which starts with bill collectors and ends with a homeowner finding great rentals and happily walking away from a mortgage. It’s amusing enough as a song, but as the New Year begins, it’s not at all a given that walking away would be the smartest strategy for a homeowner, or that it would come with few repercussions. In fact, I’d expect the ethics and personal responsibility controversies over walking away only to increase in 2010, as more homeowners find themselves underwater on their mortgages and strategic default becomes a more accepted strategy. As one former homeowner told the Wall Street Journal recently, he felt fine sleeping at night, despite walking away from his loan, because he believed lenders manipulated the housing market during the boom by accepting dubious appraisals. Strategic default is a debate that’s now in the open, rather than a slightly shameful alternative rarely discussed in the mainstream.

Next up, courtesy of Mish, is “Oh, CRE,” an ode to the growing volume of rapidly souring commercial real estate loans. It also questions, to the tune of “Oh Christmas Tree,” whether the FDIC really should be encouraging banks to modify troubled CRE loans.

So mix up some hot chocolate, add the marshmallows, sit by the fire and listen in. With high unemployment levels causing even prime borrowers to fall behind on their mortgages, and foreclosures showing no signs of slowing down, it’s the best way to celebrate the season these days.

Reports of increasing mortgage defaults signal that foreclosures are likely to increase again and peak in mid-2010. With increasing unemployment and high rates of negative equity, we have a fertile breeding ground for even more foreclosures, which add to the already-high level of for-sale inventory that needs to be cleared before values begin to rise.

Last week, the Treasury Department released the latest figures surrounding its efforts to entice mortgage servicers to modify loans voluntarily, revealing that more than 230,000 mortgages are in trial modifications under that $75 billion program. The administration says it’s on pace to alter 500,000 loans by the start of November. Yet as The New York Times pointed out earlier in the week, the effort is hardly keeping pace with the rising number of foreclosure filings, which topped 336,000 in June alone, according to RealtyTrac.

On top of the pace, some servicers are using dubious modification tactics, like forcing homeowners to waive their legal rights when they agree to the changes. Also, most servicers are reducing their rates, but not the principal balances of the loans. The result is that homeowners have little chance to build equity — and therefore little incentive to fight to stay put. From the Times:

With home prices falling, a better way to avoid redefault would be to forgive principal. In apparent deference to banks that do not want the losses associated with principal reductions, Obama officials have not pressed lenders to adopt that approach.

Democratic leaders in both the House and Senate have warned that, if the voluntary modification program doesn’t pick up speed, they’ll push for the return of legislation empowering homeowners to escape foreclosure through bankruptcy — a measure killed by the Senate in May April. Of course, roughly 1 million more homes are projected to foreclose in the meantime.

Citing data from RealtyTrac, an online foreclosure database, Bloomberg said the rising number of notices shows how job losses and falling property values are making the housing crisis even more severe.

More than 1.5 million properties received a default or auction notice or were seized by banks in the six months through June, the Irvine, California-based seller of default data said today in a statement. That’s a 15 percent increase from the year earlier. One in 84 U.S. households received a filing.

“People are losing their jobs, seeing their income go down and are underwater on their mortgage,” Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, said in an interview. “It’s a toxic combination.”

The foreclosure jump even prompted RealtyTrac CEO Joseph Saccacio to echo TWI’s story on Monday, and call for a new strategy to tackle the crisis.

Stemming the tide of foreclosures is a critical component to stabilizing the housing market, so it is imperative that the lending industry and the government work in tandem to find new approaches to address this issue.

The Wall Street Journal, in the meantime, takes a look at servicers trying to do loan modifications, and offers a glimpse into why so few loans are getting reworked. The story profiles the troubles of Morgan Stanley’s mortgage loan servicing firm, Saxon Mortgage Services Inc., which has been slower than most servicers to get loan modifications off the ground.

Part of the problem at Saxon is that it didn’t ramp up its ability to modify loans as early as other servicing companies. A spokeswoman for Saxon says that when Morgan Stanley purchased the company in 2006, it lacked enough employees and systems to undertake massive numbers of modifications. It wasn’t until the spring of 2007 — after its portfolio of subprime loans had already started to sour — that Saxon began to focus on modifying loans. Not until the fourth quarter of 2008 did Saxon boost its capacity to handle a large flood of requests.

All this takes its toll, not just by increasing foreclosures but by adding to the woes of already troubled borrowers. The story profiles Steve Applegate, owner of a Lake Mary, Fla., building-supplies business. Hurt by the construction downturn, Mr. Applegate last fall asked Saxon to modify his $750,000 home loan.

Mr. Applegate, a 60-year-old father of two, says he was told in January that he’d been approved for a rate cut to 2.08% from 6.5%, which would cut his $4,063 monthly payment by more than half. But the confirming paperwork from Saxon never arrived, he says, and in March, he was notified he was in default. When he phoned Saxon, a different loan negotiator recommended foreclosure.

He tried to resuscitate the earlier modification. At one point in April, he spent nearly two hours on the phone with Saxon, got disconnected twice, and was routed to four individuals, according to a recording of the call.

In May, Mr. Applegate was informed by Saxon that he had approval under HAMP for a modification starting June 1.

The good news didn’t last. When he tried to make a second payment on the modified loan, he was told he hadn’t qualified after all. When the Journal asked what happened, a Saxon spokeswoman said that the company had erred in sending him paperwork for a HAMP modification because his outstanding loan balance exceeded the program’s limit of $729,750.

Earlier this month, Saxon said it would modify his loan outside the federal program. Mr. Applegate is still waiting.

If you want to know why foreclosures seem unstoppable, there’s one reason. And the more foreclosures there are, the more dramatic the domino effect. Foreclosures drive down home values for everyone else, forcing more people into negative equity situations, which can lead them to quit paying on their loans, which means more foreclosures. And the cycle repeats itself.

Foreclosures that are delayed don’t just go away; they resurface eventually. Borrowers like Steve Applegate sit in limbo, hoping to avoid a foreclosure that may be inevitable. How many more loans are in the pipeline, just like his? How much longer will the lending industry and Washington wait before heading this off? Time is not on their side, and each month that brings fresh evidence of record high foreclosures only proves that point.

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The editorial notes a reality that is coming increasingly into focus: Loan modification programs that reduce monthly payments may not be effective, because the bigger problem is negative equity. Millions of Americans owe more than their homes are worth, and can’t tap them for cash in emergencies, such as job losses. But the Obama administration’s anti-foreclosure plan, The Times says, does little to address this:

One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.

This page has long argued that a robust anti-foreclosure plan should directly address the plight of underwater homeowners by reducing the loans’ principal balance. That would restore some equity to borrowers — and give them a further incentive to hold on to their homes — in addition to lowering monthly payments. The mortgage industry has resisted this approach, and the Obama plan does not emphasize it.

The Times also noted that the latest figures show some 5.4 million Americans either delinquent on their mortgages or in some state of foreclosure, a staggeringly high figure. The Obama administration needs to step up its efforts to aid the middle class — or the financial crisis will have no end in sight.

There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

This editorial is significant, I think, because it takes on the Obama administration’s efforts in a much more critical way than in the recent past. Until now, the administration has largely been given credit for at least trying and allowing some of the anti-foreclosure efforts time to work.

The Times seems to be saying that waiting period is over — and it’s also questioning Obama’s much-touted middle class agenda, as it applies to the foreclosure crisis. It appears the gloves are coming off, prompted by the steady stream of Americans continuing to lose their homes. For the Obama administration, the grace period for its anti-foreclosure programs is coming to an end.

Lots of people think that when they trade in their old car to buy a new one, that they’ve somehow wiped away any remaining debt on the old car. Not so, says Keest. She outlines a practice she calls “Drive One, Pay for Two,” which occurs when dealers bury the cost of refinancing the old car into the new loan.

From Keest: