Lenders are on track to take back more than 1 million homes in 2012

Dubious mortgage practices and lax lending standards were blamed for contributing to a housing bubble that eventually burst and thrust the economy from 2007-2009 into the worst recession since the 1930s. Many Americans took out home loans that they didn't understand and bought homes that they couldn't afford. As a result, foreclosures have soared to record highs. It's one of the negative forces restraining the economy's ability to get back on sounder footing.

The foreclosure crisis started years ago when borrowers took out risky loans with variable interest rates that they couldn't afford. Many also qualified for mortgages without providing documented proof of income.

But now, the foreclosure crisis is spreading to homeowners with good credit who took out safe, fixed-rate mortgages.

Allegations of faulty foreclosure paperwork will likely increase the foreclosure inventory into 2011, the Mortgage Bankers Association has estimated. Several major lenders temporarily suspended foreclosures to review thousands of cases for improper handling. Attorney generals in all 50 states launched a joint investigation into the issue.

However, this will only delay foreclosure sales coming on to the market, not stop them. Lenders are on track to take back more than 1 million homes in 2010, according to foreclosure listing service RealtyTrac Inc.

That will continue to weigh on home values because foreclosures are sold at deep discounts and slow the country's housing recovery.

During the next year, lawmakers plan to review the nation's mortgage-lending system and consider a potential replacement for government-controlled mortgage buyers Fannie Mae and Freddie Mac. The financial overhaul signed by President Obama in July didn't address that issue, despite protests from Republicans that it was incomplete without such a plan.

The government rescued McLean, Va.-based Freddie and Washington-based Fannie nearly two years ago to cover their losses on soured mortgage loans, and it estimates the bailouts will cost taxpayers up to $259 billion.

That's nearly twice the $133 billion Fannie and Freddie were in line to receive from taxpayers as of November 2010 and would make theirs the costliest bailout of the financial crisis.

As of November 2010, Fannie and Freddie together have repaid $16.7 billion as dividends to the Treasury Department.

Fannie and Freddie buy up home loans from lenders, bundle them together into securities with a guarantee against default and sell them to investors worldwide. They own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans, which is worth more than $5 trillion. They buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors.

Separately, an Obama administration foreclosure-prevention program intended to help those at risk of foreclosure by lowering their monthly mortgage payments. But the Treasury Department reports that the effort is still plagued by high failure rates.

Many homeowners have complained that the government mortgage-aid program is a bureaucratic nightmare. They say that banks often lose their documents and then claim borrowers did not send back the necessary paperwork. The banking industry contends that borrowers are not sending back their paperwork.

The housing market, however, remains a huge challenge. High unemployment, tepid economic growth, tight credit and uncertainty about home prices have kept people from buying.