As Washington continues to debate policy options for reducing foreclosures, banks and servicers are struggling to deal with the glut of homes they are taking over when homeowners cannot make their mortgage payments.

By some estimates, lenders now own 900,000 homes, and the Federal Deposit Insurance Corp. said "real estate owned" at insured institutions rose 21% from a quarter earlier and 134% from a year earlier, to $23 billion at Sept. 30.

Foreclosures now make up a huge chunk of the homes available for sale. The National Association of Realtors said 45% of sales involve foreclosed homes, compared with roughly 10% a year ago.

And lenders have yet to shift the bulk of their supply to the sale market. Rick Sharga, a spokesman for RealtyTrac Inc. said nearly 70% of the foreclosed homes in the firm's database have not been listed for sale.

"There's too many foreclosures right now for anybody — including us," Mr. Sharga said. "The foreclosure problem has dragged the housing market down, which has led to an economic meltdown, and this has affected everybody. If the problem continues to worsen, none of us are going to be in business."

Alan White, an assistant law professor at Valparaiso University, agreed that the pipeline is huge and "clogged at every step of the way."

Observers say lenders are so preoccupied with other effects of the housing crisis that they are not focused on preparing homes for resale.

"Banks can't and don't have the time or willpower, and it's hard fixing up homes when you're managing them from a distance," said Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. Inc. "The system is not built to deal with this number of foreclosed properties. Even the people they've hired to deal don't have the capacity."

Potential buyers face a Catch-22 for REO properties, he said — an existing servicer will not perform the necessary repair work, and a new lender will not agree to pay for something that is as uncertain as a house in disrepair.

Ironically, according to Mr. Miller, given the size and complexity of banking operations today, the same bank could be working on both sides of a failing deal. "It could be B of A on both sides of the equation, and the complaints are coming from two different departments."

Observers said that despite the extensive resources being spent on upkeep, the sheer volume of foreclosed homes is creating holes in property management. Borrowers forced to move have left behind houses in various states of disarray. Problems range from unwashed floors to holes in the wall where appliances once stood. In some neighborhoods, vandals have broken into unwatched houses to steal copper piping, and basements are flooded.

Also, homeless families have moved into abandoned homes, sometimes by design. News reports have described housing advocates breaking into foreclosed homes to let in squatters.

Kenneth Thomas, a Miami banking consultant, said that in some cases families who foreclosed homes from banks move in to discover someone else living there.

"In one case," a new buyer "went to go inspect the property, met with a person living there, and the person living there had a bat," Mr. Thomas said.

Others say institutions are being stingy in rehabilitating homes to attract buyers.

Dick Esposito, a Maryland developer who repairs and flips REO properties for Chevy Chase Bank, said it rarely approves work he deems necessary. In one instance, Mr. Esposito said, he argued for a $3,500 kitchen renovation to make a house saleable, but the bank's strategy was to reduce the price of the home by $5,000 every month until it sold. (The bank did not respond to requests for comment.)

"When the basement floods, there's mold. We rip out drywall, dry it out, spray it with mold retardant," and the bank does not "want us to put the drywall back," said Mr. Esposito. "They become unfinished basements.

Also, foreclosed homes in his area demand 24-hour surveillance, he said.

"I could see them putting a minimal amount of money in and...making more money," Mr. Esposito said.

Lenders providing credit to buyers of foreclosed homes say banks that own the real estate are shirking their responsibility to make repairs in time for moving day.

Mark Savitt, the president of the National Association of Mortgage Brokers, said his members have encountered situations where servicers will not pay for repairs.

"If they really want to unload these properties, and I'm sure they do, what they need to do is move more quickly," Mr. Savitt said. "When they get an offer, and if there are repairs, they need to work with real estate agents to facilitate that repair."

Prof. White said foreclosures are eating up a lot of cash. "Right now the mortgage servicers have made a lot of advances. They're paying legal fees, maintenance fees — they're just unwilling to put another nickel into the house when they're not sure if they're going to get it back or not."

Those defending the industry's practices say servicers are not skimping on resources.

"A lot of banks get a bad rap," said Alan Jaffa, the chief financial office of Safeguard Properties Inc., a Cleveland firm that lenders hire to manage foreclosed properties. "They're spending hundreds of millions of dollars — if not billions — protecting homes."

Ben Windust, the senior vice president of default and retention operations for Wells Fargo Home Mortgage, said REO resales get tricky when more than one firm is involved in any step in the process.

"If you're servicing for others, like if you're working on a short sale and the loan is with Fannie Mae or Freddie Mac, we have a certain amount of delegated authority to accept offers, and sometimes we don't," Mr. Windust said. "If there's mortgage insurance, then you have to get approval from the mortgage insurance company. The approval process can sometimes delay a response."

Federal efforts to respond to the crisis have made a dent in the supply. Housing advocacy groups and municipalities working to utilize the $4 billion of block grant money authorized by the Housing and Economic Recovery Act to help communities buy, rehabilitate, and flip foreclosed homes.

Several large banking companies also have undertaken voluntary modification programs. Those efforts may be mandated by Congress soon. The FDIC has been pushing a plan to use some of the Treasury Department's $700 billion bailout to subsidize wide-scale modification efforts by servicers, and the Obama administration has said it supports the plan.

This month regulators unveiled guidelines instructing banks on how they could receive Community Reinvestment Act credit for preventing foreclosures through voluntary programs, reducing the blight of vacant homes on neighborhoods.

Robert Davis, the American Bankers Association's executive vice president for government relations, called the guidelines "a very welcome recognition of activities that banks are already undertaking, that they should get CRA credit for."

But not everyone says the institutions should be rewarded.

"We think it's the responsibility of the banks to fix these loans, the bad loans that they made — they shouldn't get extra credit for rectifying a predatory loan, for keeping the neighborhoods that they want to lend to intact," said Alan Fisher, the executive director of the California Reinvestment Coalition.

Advocates touted other programs designed to keep homes occupied. For instance, Fannie, realizing that maintaining vacant homes poses challenges, is implementing allowing tenants in foreclosed properties to remain there and pay rent to the government-sponsored enterprise.

"Given that we're trying to find a bottom" to the housing market, "that can't really happen, given that you've got an excess level of supply," Prof. White said. "We need to continue improving on ways of finding foreclosure alternatives, so if there's any possibility that you've got a warm body in a house with any kind of cash flow, it's worth working something out."

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