Friday, September 7, 2007

The number of mortgage loans entering the foreclosure process in the second quarter set another record, according to the latest data from the Mortgage

According to the group's quarterly delinquency survey, a seasonally adjusted 0.65% of loans on one- to four-unit residential properties entered the foreclosure process during the period, the highest level in the survey's 55-year history. In the first quarter, when the previous record was set, 0.58% of loans entered the process; a year ago, 0.43% entered the process.

The delinquency survey covers more than 44 million mortgages, meaning more than 286,000 loans entered the foreclosure process during the quarter. Coverage of home buying and selling, housing prices, mortgage information and home improvement

Driving the numbers were the states of California, Florida, Nevada and Arizona, said Doug Duncan, MBA's chief economist and senior vice president of research and business development, in a news release.

"Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings. Thirty-four states had decreases in their rates of new foreclosure and the increases were very modest in the states with increases, other than those four," Duncan said.

Duncan said there was a "clear divergence" in performance between fixed-rate and adjustable-rate mortgages because of the impact that rate resets have.

"While the seriously delinquent rate for prime fixed loans was essentially unchanged from the first quarter of the year to the second, and the rate actually fell for subprime fixed- rate loans, that rate increased 36 basis points for prime ARM loans and 227 basis points for subprime loans," he said.

Less clear is whether rate increases in subprime ARMs are causing major problems for those four key states, or whether local market conditions that are causing prices to drop are the main culprit because the lower prices are making it more difficult for people in unaffordable loans to refinance, said Jay Brinkmann, the MBA's vice president of research and economics, in a telephone interview.

California has 17% of the subprime ARMs in the country and more than 19% of the foreclosure starts on subprime ARMs. California, Florida, Nevada and Arizona have more than one-third of the country's subprime ARMs and more than one-third of the foreclosure starts on subprime ARMs.

Home prices have dropped in all four states, and 52 of the 59 metropolitan areas in the four states saw home price declines during the second quarter, according to the Office of Federal Housing Enterprise Oversight, the MBA said. The inventory of new homes for sale in the Western region hit an all-time high at the end of the second quarter, and Florida is dealing with a glut of condo supply, Duncan said.

These are also markets that have experienced a high share of investor loans, Duncan said. The share of non-owner-occupied loans that are 90 days or more past due or in foreclosure, as of June 30, was 32% in Nevada, 25% in Florida, 26% in Arizona and 21% in California. Comparatively, 13% of these loans were in default in the rest of the country.

"Whatever happens in those states is going to drive the national numbers but they don't represent national performance," Brinkmann said.

More statistics
According to the survey, 1.40% of all outstanding loans were somewhere in the foreclosure process during the second quarter, up from 1.28% in the first quarter and 0.99% a year ago.
Greatly factoring into those figures are markets such as Ohio, where mortgages that are 90 days or more past due or in foreclosure was still more than twice the national average, Duncan said. In addition, 1% of mortgages in Michigan entered the foreclosure process in the second quarter, and nearby states including Indiana, Illinois, Kentucky, Tennessee and Pennsylvania are also seeing foreclosure problems, he added.

"While Michigan's problems continue to escalate, however, Ohio's have shown signs of leveling off, albeit at a high level," Duncan said in the release.

The delinquency rate for mortgages on one- to four-unit proprieties was 5.12% in the second quarter, up from 4.84% in the first quarter and 4.39% a year ago.

Looking ahead
The freeze up and turmoil in the mortgage markets that has occurred since June 30 will have an effect on these numbers in the coming quarters, Duncan said during a conference call with reporters.

Because credit availability has been constrained, refinance options are limited for borrowers, curtailing opportunities for homeowners on the margin of being in trouble, he said.
Due in part to the turmoil -- and possibly the affect of resets in 2/28 ARMs that were originated in 2005 and 2006 -- the MBA suspects that the peak in foreclosures and delinquencies hasn't yet been reached and won't until the next two to four quarters, Duncan said.

A research note by Lehman Brothers Economics said that the MBA results are consistent with the view that "the housing recession looks far from over," adding that tighter lending standards and the shrinking availability of credit should cause the performance of mortgage loans to get worse.

"As subprime ARMs continue to reset to higher rates, many borrowers will be forced to default and in some cases ultimately foreclose," the note read. "Higher foreclosures will add to already bloated inventory of homes, extending the housing recession."

Another note from Ian Shepherdson, chief U.S. economist for High Frequency Economics, pointed out the increase in the number of subprime loans compared with 2002, explaining that the number of subprime delinquencies is magnified as a result.

According to the MBA report, the delinquency rate for subprime loans was 14.82% in the second quarter, up from 13.77% in the first quarter. But while in the second quarter of 2002 there were 1.19 million subprime loans outstanding, today there are about 5.9 million, Shepherdson said.

"That's why the problem now is so much worse despite similar headline delinquency rates. Also, note that the rise in delinquencies this time is mostly due to resetting ARMs; the unemployment rate has not moved up. In '02, job losses did all the damage."

"So what happens now if unemployment goes up as resets increase too? Well, you ain't seen nothing yet," he wrote.

The MBA expects the Federal Reserve to cut rates a quarter percentage point in the next two meetings, a response to projections of weaker economic growth and higher unemployment, Duncan said.

He also commented that the rise in delinquencies and foreclosures has been the tradeoff to the steep rise in homeownership, which has come about after a major policy push to create more homeowners. He also pointed out that 35% of people who own a home don't have a mortgage.

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