Foreclosures Climb to New Record High, Again

Sept. 6, 2007— -- Confirming what sent stock markets on a roller coaster in August, the Mortgage Bankers Association Thursday said a record number homeowners received foreclosure notices in their mailboxes this past spring.

Millions more were late making their monthly payments.

U.S. markets dropped after the figures were released, but then quickly rebounded and traded higher.

For the third quarter in a row, the number of homes entering foreclosure rose. From April to May, 0.65 percent of the 44 million homes surveyed by the Mortgage Bankers Association entered into foreclosure.

Nationwide, the total number of homes in foreclosure increased to 1.4 percent from 1.28 percent at the start of the year.

This rate is approaching the percentage of homes in foreclosure seen during the 2002 recession. But unlike five years ago, when job losses led to the rise in foreclosure, this time it's homeowners struggling to make their payments as mortgage interest rates reset from low teaser rates to higher levels.

The number of homeowners with adjustable rate mortgages falling into foreclosure has been steadily increasing over the past year.

Delinquencies Rise, Subprime Hardest Hit

The MBA in its quarterly National Delinquency Survey also found that nationwide, 5.12 percent of mortgage loans were more than 30 days delinquent. That represents an increase of nearly three-quarters of a percentage point from a year ago.

The news for subprime lenders was even worse. For all types of subprime loans, 14.82 percent were delinquent, an increase of more than 3 percentage points from the same period a year ago.

Subprime borrowers with adjustable rate mortgages had the toughest time making their monthly loan payments, 16.95 percent of them were late, nearly 5 percentage points more than a year ago.

Subprime loans are provided to customers with poor or risky credit histories and often carry higher interest rates.

Investors to Blame?

Doug Duncan, chief economist with the mortgage banking group, stressed that the rise in foreclosures and delinquencies can be largely attributed to specific regions of the country.

"This is not really a national problem, but rather it is a story of seven states," he said.

While the real estate market in Rust Belt states like Ohio and Michigan continues to suffer due to these states' floundering local economies, Duncan said much of the increase in foreclosures and delinquencies can be put on real estate investors.

Many of these speculators thrived during the recent housing boom when interest rates were low and home prices increased by double digits. Now with home prices falling, making it difficult to refinance adjustable rate mortgages, and as inventories of homes surge, many of those investors find themselves unable to make the payments.

In particular, four states -- California, Arizona, Nevada and Florida -- where investors had flocked to buy and then sell homes quickly for a profit, saw a disproportionately larger number of mortgages becoming delinquent when compared with the rest of the country. For example, 32 percent of homes in Nevada more than 90 days late making payments or in foreclosure were owned by investors or second-home owners, compared with the nationwide total of 13 percent.

"The problems in these states will continue," said Duncan in a statement, "and they will continue to drive the national numbers, but they do not represent a national problem."

The real estate market could worsen, however, should the fallout from foreclosed homes spill out into the overall economy, leading to difficulties in individuals and companies obtaining loans, which in turn could negatively affect consumer spending and the U.S. economy.

"The rise in delinquencies this time is mostly due to resetting ARMs," said Ian Shepherdson, chief U.S. economist with High Frequency Economics. "In '02, job losses did all the damage. So what happens now if unemployment goes up as resets increase too?"

If people start losing their jobs as the economy slows, more people could face a tougher time paying for their homes.