Study: Rust Belt sees highest foreclosure risk

NEW YORK (CNNMoney.com) -- Home owners in the Rust Belt are in more danger of falling critically behind on mortgage payments than anywhere else in the United States, according to a recent study.

First American CoreLogic, which provides property information and analysis, monitors 379 locations around the nation. Nine of its top 10 risk spots were in former Midwestern industrial centers.

Detroit, where the Big Three automakers have slashed jobs and cut production, was number one among the nation's 100 biggest metro areas.

Once an area starts down the road to mass foreclosures, it's likely to spread as momentum picks up. "Foreclosures are contagious to the rest of the community, It's very hard for a market to scrub volatility out and become stable again," said Steve Schroeder, CoreLogic's chief executive.

To asses its risk profiles, the company looks at home-price trends, economic health, historic foreclosure numbers and the amount of fraud it finds in an area, according to Schroeder.

Foreclosure's impact falls on every member of a community, not just the owners who lose their homes. When properties sit vacant and unsold, entire neighborhoods suffer as property values decline.

Crime, such as drug dealing and arson, and other social problems are likely to increase. Many residents leave, and others would like to, but they can't find anyone to buy their homes. Owners are unable to take better jobs if they involve moving away.

Economic setbacks, including plant shutdowns and layoffs are the number one cause of foreclosure risk, according to CoreLogic. Detroit's top standing comes from the severe slump in the city's core automotive industry.

The third ranked metro area is centered around Warren, Michigan, home to the massive General Motors Technical Center. The largely white-collar, tech-center staff has not escaped the layoffs that afflicted the rest of the company.

Number four on the list, Youngstown, was once a thriving steel center and automobile making area and has also been battered by the auto-industry slump.

But the survey's second-ranked city, Memphis, has a different risk profile than the other top 10 communities. The problem there is higher-than-average unemployment and lower-than-average wages, according to Mark Fleming, CoreLogic's chief economist.

Another vulnerable area located outside the rust belt and the top 10 is Denver. Its own risk factors, according to the survey, include a slow recovery of the locally important telecom industry from its meltdown in early 2000. Qwest Communications is headquartered in Denver, and the former Worldcom had a large presence there.

Colorado's historical lack of lending industry supervision also added to Denver's risk, according to CoreLogic.

For years the state's mortgage brokerage industry faced little regulation, resulting in high incidences of appraisal fraud, which occurs when lenders are tricked into giving loans for greater than the property is worth.

Scammers get wildly high appraisals and have straw buyers purchase with, say 90 percent mortgages. Then they take the money and run.

That leaves empty houses that can sit for months. They're vulnerable to squatters, arsonists and drug dealers. Scavengers often move in and strip them of plumbing, wiring, fixtures and anything else of value.

CoreLogic, after studying 150,000 loan transactions, found that for every one percentage point increase in the foreclosure rate, the likelihood of fraud jumps 4 percent.

The news is not all dire, however, CoreLogic still judges the overwhelming majority of housing markets to have only moderate or low potential for mortgage delinquencies.

The top 10 judged with the lowest risk include Phoenix at number one, West Palm Beach, Florida, Ft. Lauderdale and Salt Lake City.