Foreclosures Hit New High Point

The news isn't getting any better for people who work in default management departments.

The percentage of loans in the foreclosure process and the number of loans entering foreclosure both reached record highs in the third quarter as loan performance continued to weaken across the board.

While credit deterioration was widespread, the biggest increase in defaults was concentrated among adjustable-rate mortgages, especially those made to subprime credit quality borrowers.

While subprime ARMs account for only 6.8% of loans outstanding, those loans accounted for 43% of foreclosures that were started during the third quarter. Prime credit quality ARMs, at 14.5% of outstanding loans, accounted for 18.7% of foreclosures that were started, according to the Mortgage Bankers Association's quarterly delinquency survey.

MBA chief economist Doug Duncan said the third quarter marked the first time that the market felt the "full combined effects" of the collapse in the nonconforming mortgage securitization market, broad home price declines, economic weakness in much of the Upper Midwest and rate adjustments on ARM loans.

"In Michigan and Ohio, the problem continues to be the declines in demand due to drops in employment and population that have left empty houses in cities like Cleveland, Detroit and Flint. In states like California, the problem is excess supply due to speculative overbuilding and properties coming back onto the market," he said.

In California, a hotbed of ARM lending, the number of foreclosure starts on subprime ARMs during the third quarter equaled the number from 35 other states combined, according to the MBA.

Mr. Duncan said that in high-cost California, homebuyers often had an adjustable-rate first mortgage with a second-lien ARM attached. Those home values started to fall just as monthly payments were adjusting upward.

"It's the worst possible scenario for maintaining a high probability of people making their payments," Mr. Duncan said during a conference call with reporters.

While the credit problem is nationwide, foreclosure and delinquency increases are concentrated in a number of states, including California. Other states with notably higher default rates include Ohio, Michigan, Indiana, Illinois, California and Florida.

Mr. Duncan noted that in Michigan, six consecutive years of population outmigration have been accompanied by the loss of 340,000 payroll jobs. He called this "demand side destruction" that will continue to plague housing markets in the Midwest.

And with 90-day delinquencies rising in big states like California and Florida, which have a hangover of homes on the market, the foreclosure problem probably hasn't crested yet.

Nationwide, 5.59% of home loans of all types were at least 30 days past due in the third quarter, the highest delinquency rate seen since 1986. More tellingly, the foreclosure inventory rose to 1.69% of all loans, and the foreclosure start rate rose to 0.78%. Both the foreclosure inventory and start rates are at the highest level seen in the history of the MBA survey, which dates back to 1972.

Meanwhile, holders of mortgage securities backed by subprime loans may feel more pain before the market turns around. The MBA now predicts that home prices will decline nationally not only this year, but in 2008 as well. Moreover, Mr. Duncan noted that as stronger subprime borrowers refinance and leave loan pools, the remaining loans in the pool will become incrementally weaker.

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