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New Foreclosures Reach Record

The rate of loans entering the foreclosure process in the first quarter of 2007 set a record at 0.58% on a seasonally adjusted basis and delinquencies are up for the year, but 24 states actually saw a decline in foreclosure starts and delinquencies are improving relative to the previous quarter, according to the latest MBA National Delinquency Survey.

The percentage of loans in foreclosure would be well below the average of the last 10 years were it not for Ohio, Michigan and Indiana, said MBA chief economist Doug Duncan during a conference call regarding the survey. And the rate of foreclosures started nationwide would have fallen were it not for the big jumps in California, Florida, Nevada and Arizona. "Those states have special circumstances that do not reflect what is happening in the rest of the country," he said.

"While foreclosure starts increased slightly from last quarter, thus setting another record, most of the increase was due to only four states, California, Florida, Nevada and Arizona."

Foreclosures are being influenced by the fact that investors and borrowers have started to walk away from the properties now that home prices have started to fall in areas of those states and they face resets in the adjustable-rate mortgages they took out on these homes. "In addition, speculators in Florida are also facing much higher insurance bills."

The rate of foreclosures started on subprime ARMs jumped from 2.7% in the fourth quarter of 2006 to 3.23% in the first quarter of 2007. Mr. Duncan said 26 states had decreases in the foreclosure rate on subprime ARMs, and the national foreclosure rate on these loans would have declined if not for the increase in California, Florida, Nevada and Arizona.

"If house prices, overbuilding and investor participation in those markets is greater rather than lesser, it will delay the pace of recovery and continue the pace of foreclosures. What we do not know yet is the degree to which those investors have reacted. It is possible in an attempt to cut their losses they have moved rapidly to drop the property. The bulge in new foreclosure starts is reflecting that. If there are fewer of those incidents, foreclosure starts could start to fall," said Mr. Duncan during the call.

While Ohio, Indiana, and Michigan account for 8.7% of the mortgage loans in the country, those three states account for 19.9% of the nation's loans in foreclosure and 15% of all of the foreclosures started in the country during the first quarter of 2007, the survey reported. According to Mr. Duncan, without these three states, the percent of loans in foreclosure would be below the average over the last 10 years, 1.12% vs. an average of 1.19%.

"The level of foreclosures and foreclosure starts for those three states exceed what occurred in Texas during the oil bust of the mid-1980s, and Ohio is the highest ever seen in the MBA survey for a large state."

The problems in these three states extend across all loan types, said Mr. Duncan. For example, the percent of subprime ARM loans seriously delinquent in Ohio, those loans 90 days or more past due or in foreclosure, is 19.9%, twice the national average of 10.1%. However, for fixed-rate loans, the Ohio seriously delinquent rate of 1.9% is almost three times the national average.

Mr. Duncan said all three states have suffered large declines in manufacturing employment. "While we have seen some pickup in service sector employment, that employment is not often in the areas where job losses occurred and the wages are often lower. For example, while we have seen increases in employment in places like Cincinnati, Columbus, Ann Arbor and Indianapolis, we have seen job losses in Detroit, Flint, Cleveland and Muncie."

The percentage of loans in the foreclosure process was 1.28% of all loans outstanding at the end of the first quarter, an increase of nine basis points from the fourth quarter of 2006 and 30 basis points for the year.

As a result of the increase in foreclosures, mortgage lenders and servicers are aggressively restructuring loans for delinquent borrowers who want to stay in their homes, said Mr. Duncan.

"The lender loses, the borrower loses and the investor loses if the loan goes into foreclosure. Each loss is in the $40,000-$50,000 range," said Mr. Duncan. "For borrowers who are having trouble making payments due to circumstances beyond their control, servicers are working with those folks to keep the property."

While delinquencies are up 43 basis points over last year they are down 11 bps from the fourth quarter of 2006, according to the MBA.

Relative to the previous quarter, delinquency rates increased 30 bps for prime ARM loans, from 3.39% to 3.69%, and increased 131 basis points for subprime ARMs, from 14.44% to 15.75%. The delinquency rate on prime fixed loans decreased eight basis points, from 2.27% to 2.19%, while the rate increased 16 basis points for subprime fixed loans, from 10.09% to 10.25%.

The foreclosure inventory rate increased for most loan types, according to the survey. The inventory rate increased four basis points for prime loans, from 0.5% to 0.54%, 57 basis points for subprime loans, from 4.53% to 5.1%, and four basis points for VA loans, from 1.01% to 1.05%. The foreclosure inventory rate remained unchanged for FHA loans at 2.19%.

Investors have become less risky and the real dimensions of the subprime slowdown will make their way into marketplace in the near future. Since late 2006, 80 lenders have left the subprime marketplace, he said.

Down the road, the industry will see economic growth in 2007 but slower than 2006, the MBA predicts. The unemployment rate should pick up a bit and the housing market won't see recovery until late 2007, he said. "There are significant inventories in California, Florida Arizona, and Nevada that support that. Inventory must be worked off in certain sections of the country before recovery takes place. Home prices will be flat over the next few years," said Mr. Duncan.

"It's not a trend, but we are seeing delinquencies move down in the first quarter. We believe there is likely to be a modest increase in delinquencies over the next few quarters before a slowdown dissipates."

One of the questions is to the degree of the resetting of the teaser and index in subprime adjustables. The teaser is likely to be the bigger of those two resets, which will put an upward pressure on delinquencies, he said. "A lot of borrowers are refinancing out of those loans, and there is a lot of work by servicers in restructuring loans, particularly in the subprime arena." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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