The whole year was a hard one for this family. They gotten four months behind on their mortgage and Arurora Loan Services began foreclosure proceedings in February. But an attorney at Housing and Economic Rights Advocates stepped in and she reminded Aurora that federal law protects active military personnel from foreclosure.

"One I reminded them again that he was in the military they did hold off in doing any foreclosure in terms of the Service Members Civil Relief Act, they did comply with that," attorney Lisa Sitkin said.

But the problems didn’t stop here. Negotiations for a loan modification dragged on for months and the Capristos were ready to give up their home. Finally, after long months of talking and negotiating the modification was granted. The loan mod Lisa negotiated for the military family sets their interest rates at 2% for five years, followed by 1 percent increases until it hits the ceiling of 5%. The family can ow enjoy the important moments in life, like their grandson Nathaniel.

The housing finance agency of California – CalHFA – is expected to roll out this limited program to Californians, several months later than expected, at least from January onwards. According to the Treasury Department, four states out of the 18 states funded with grants from the Department have programs up and running – including California where the pilot program is running.

As described by the Treasury Department, “the program would make money available to help low and moderate income homeowners avoid foreclosure; catch up on overdue mortgage payments; reduce the amount they own; or, as a last resort, help them transition to rental housing.”

The official site of the program prescribes the following eligibility criteria:

Borrower need not be a CalHFA borrower; must own and occupy the home as their primary residence; must meet low and moderate income limitations; must complete and sign a Hardship Affidavit and document the reason for the hardship, which may include – loss of employment; reduction of income; disability or illness; the documentation to support income should not be more than 60 days old, from the date of application.

In addition, there are other conditions such as – borrower has adequate income to sustain modified mortgage payments; mortgage loan is delinquent etc. Importantly the mortgage must be a first lien loan; the total original mortgage cannot exceed $729,750; the property must not be abandoned, vacant, condemned or in a serious state of disrepair; the property must be located in California and the borrower fulfills the eligibility qualifications of CalFHA.

However critics raise a question as to how many people from California in general and SF Bay Area in particular, will be helped by the above program in the short run, since it appears the program will not start with all of the state’s many loan servicers.

In another county of the Bay Area, San Mateo, there were 1,183 notices of default filed against homeowners and 1,330 homes were scheduled for sale or had the sale cancelled, while 1,090 sold back to the bank as a trustee sale. These numbers were published by ForeclosureRadar in their latest report.

As the cancellation numbers show there is an effort coming from both lenders and borrowers to work out a loan modification or a short sale. There were 529 cancellations in Santa Clara County in October, which is up 2.7% from September and almost double the number from October a year prior.

A good example of the long-running foreclosure crisis has had on lots of people is the Dennis Chavez case. He spent two years working on a loan modification under the HAMP, after he and his wife defaulted on their loan. ogram after he and his wife, a schoolteacher, fell behind on their mortgage when they both were seriously ill. "They said, ‘you make too much money,’ then they said, ‘you don’t make enough,’ " Chavez. said. "Then they said, ‘you aren’t behind on your payments.’ We said that is not a requirement. Then they said, ‘We don’t have to tell you why you don’t qualify.’ "

What they did is they wrote to their congresswoman, Anna Eshoo, who wrote the lender, which did an about-face and granted the modification. "So that’s how we got qualified," Chavez said.

"From the homeowner’s standpoint, it’s good that the banks are taking a look at their foreclosure process," said Karl Lee, president of the Santa Clara County Association of Realtors. "Some of these modifications will work out, but a large percentage may not because of the unemployment situation," he said. And that may mean a jump in the number of homes on the market next year, he said.

Looking at the big picture: home sale are down with almost a quarter in October, compared with September, and the housing inventory declined 7% for the month.

Because of its shadowy properties there are some questions marks around the amount of the Shadow Inventory. According to DataQuick, Bay Area can be ‘proud to have’ more than one third of the REOs – that is they are not registering in county records as having been resold.

Starting from January 2007 through February 2009 banks repossessed 51,602 homes and condos in the nine-county area. During the same period only 30,823 foreclosures were resold. This leaves around 20,000 bank repos unaccounted for.

And this is only one part of the Shadow Inventory. On the other had another wave of foreclosures are in the pipeline. These properties are delinquent with their payments and the bank is preparing the foreclosure process. Some of these might get out with a loan modification or other way to keep the home.

Another important factor is that some banks price a little higher the property which just hit the market. With around 10%. Banks typically lower the listing price every 30 days. If the bank is pricing the property 10% over market then it could take at up to 60 days to get the property priced correctly.  By that time the property is stale and those potential buyers have moved on.

In the end, the exact number of properties in the Shadow Inventory remains in the shadow.  What is obvious: the number of distressed properties is continuously rising and the economical setup isn’t helping the situation – and we are referring to the current economical situation, the high unemployment rate which are major facts influencing the housing problems.

The year 2009 passed by with a kind of stagnation and the federal as well as state governments intervened with foreclosure mitigation plans (also criticized as bail-out programs) to help the distressed home owners retain their homes, with loan modifications; short sales; tax-break incentives for home buyers etc. which to a certain extent contained the crisis, though not addressed the problem fully.

Since the start of this year, particularly in the first quarter ended April, we were hearing good news of spurt in home sales, increase in median home prices and return of customer confidence etc. The tax-credit incentive acted as a morale-booster in increased sales of homes – both under distress sale and traditional sale – as reported by every market including SF Bay Area.

After the expiration of the tax-break benefits by 30^th April, as expected there was decline in home sales in the months of the latest quarter ended July. But what is intriguing market watchers is the report for August. The number of foreclosed properties sale is sagging, despite the fact that mortgage interest rates bottomed out a record low points in the last 50 years.

For example in Santa Clara and San Mateo counties, while the number of properties stuck in the foreclosure process is really high, those reaching the market for distress sale is only a portion of them. See the figures – in Santa Clara County 4,045 homes and in San Mateo County 1,429 homes have been scheduled for foreclosure sale, but not yet auctioned off.

In the pre-foreclosure stage there were 3,947 homes in Santa Clara County and in San Mateo County the number is 926 homes – which received default notices, but surprisingly not scheduled for foreclosure sale.

Real Estate experts see the reason behind as lenders are acting smart – giving more time for delinquent borrowers; work out loan modifications; encourage short sales and thereby stall these properties reaching the market, to avoid total fall in the prevailing prices.

The suit states that Aurora reaped more than $100 million in what the court documents call "illicit profits" from the alleged scheme.

The suit was filed in the U.S. District Court fro the Northern District of California in San Jose, and it represents the homeowners who paid the Littletoon, Colorado-based company money for the company to help them in "curing’ delinquent home mortgages.

The fraud scheme was the following: Aurora promised the troubled homeowners the foreclosure process’ halt if they engage themselves in three to six large monthly payments. In addition, the company will work with the homeowners to restructure, modify of resell the loan, allowing homeowners a chance to keep their homes.

"We intend to prove that Aurora’s workout plan was nothing more than a cynical ploy to take advantage of homeowners desperate to hold on to their homes," said Steve Berman, managing partner of Seattle-based Hagens Berman Sobol Shapiro LLP and the attorney representing the proposed class.

The suit states that after a give period of months Aurora foreclosed on the homes without giving the borrowers any notice that their requests for loan modifications were denied and they not let the borrowers to access any method for ending their loan deficiency, despite the provisions of the workout agreements. This provided four methods of ending loan deficiency: bringing the loan current, refinancing with another lender, modification of the terms of the loan at the discretion of Aurora and another workout option at the company’s discretion.

"The pas three years have been tough enough on homeowners without them having to worry about being preyed upon by unscrupulous loan services," said Berman.

The suit papers outline two stories of married couples who tried to stop foreclosure by contacting Aurora for a loan modification. The first couple refinanced their home with a mortgage company in early 2006. The couple suffered economic setbacks in 2008: loss of work and poorly performing investment. They contacted Aurora in 2009 and signed one of the so-called workout agreements.

The couple paid a total of $33,500 during the next several months and in return Aurora promised them to modify the terms of the loan. But this never happened. In May 2010 the couple received a Notice of Vacate indicating their home has been sold in foreclosure. They have never received a notice of  foreclosure sale or something about the foreclosure process to be completed. In addition, Aurora did not notify the family that it had been denied for a loan modification according to the complaint.

"We’ve heard of cases like this a lot over the last few year,"Berman said. "We’d like to bring struggling homeowners some sense of belief."

Berma believes the workout agreements were fraudulent in nature and he seeks to have the agreements declared void. In addition the law firm seeks an injunction against Aurora in order to forbid the company to continuously offer this deceptive workout agreements.

This new phenomenon is far more radical than the previous housing crashes, when the lenders moved very quickly. They could make the move in speed, since there were much fewer troubled loans; nowadays there are so many people with financial troubles that banks and lenders simply can’t keep up. This situation adds up to a continuous instability of the Bay Area housing market, because lenders move slowly and the homeowners endure uncertainty that could last for months.

"It’s bad all the way around, for the neighbor, the community, the city, state, nation. It’s continued indication that there are a lot of people in trouble particularly with their job situations" said Chris George, founder and CEO of San Ramon-based CMG Mortgage.

On the other hand, homeowner don’t have a much of a choice, they must ignore their mortgage. Jeff Dunking, a Bay Area homeowner has been employed only sporadically since past year, and the unemployment checks he’s collected just aren’t enough for covering the mortgage. "I stopped paying payments about 12 months ago" said the homeowner, who was rejected twice for loan modification on his condo. He is aware that many people think living mortgage-free sounds like a great deal, but this isn’t how he feels "It’s a lot of anxiety, a lot of stress," said Jeff Dunkin.