Record 1.2 million homes hit by foreclosure

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NEW YORK (CNNMoney.com) -- A record 1.2 million homes were in foreclosure during the second quarter of 2008.

That represents 2.8% of all outstanding loans, up from 1.4% of all loans during the same period a year ago, according to a report released Friday by the Mortgage Bankers Association (MBA).

And 490,000 of the 45 million home mortgages serviced by MBA members began new foreclosure proceedings. That's up 9% from the 448,000 starts recorded in the previous quarter, and marked the seventh straight quarter that foreclosure starts increased.

The delinquency rate, which measures mortgages that aren't in foreclosure but have missed least one payment, also hit a record high.

During the three months ended June 30, 2.9 million homeowners, or 6.4%, were behind on their payments, up more than 25% from last year.

The MBA has been tracking foreclosure and delinquency data since 1979.

"The national foreclosure numbers continue to be driven by the hardest hit states that are continuing to get much worse," said Jay Brinkmann, MBA's Chief Economist. "The increases in foreclosures in California and Florida overwhelmed improvements in states like Texas, Massachusetts and Maryland."

California and Florida accounted for 39% of all foreclosures started during the quarter. Those two states as well as six others - Nevada, Arizona, Michigan, Rhode Island, Indiana, and Ohio - all had foreclosure start rates higher than the national average.

Once again, subprime adjustable rate mortgages (ARMs) weighed heavily on the down side. Subprime ARMs, which represent only 6% of all loans outstanding, accounted for 36% of all foreclosures started during the quarter. In other words, 6.6% of all subprime ARMs went into foreclosure during the period - nearly 20 times the rate for fixed rate prime mortgages.

While the percentage of all subprime ARMs past due fell slightly to 21% from 22.1%, the proportion of these loans that are 90 or more past due rose to 26.8% from 24%, indicating that many of these borrowers are falling deeper into trouble.

"The big problem," said Mike Larson, a real estate analyst with Weiss Research, "is this mortgage crisis long since stopped being just about subprime." Indeed, the prime delinquency rate rose to 3.9% from 3.7% in the first quarter of 2008, and 2.7% a year earlier. "This is the highest reading yet."

"Even if subprime stabilizes," said Larson, "I would anticipate that prime loans would start to play catch-up. We're not just confronting a credit crisis any more, we're dealing with broad economic problems that are contributing to delinquency rates."

On the bright side, Larson says the deterioration in home prices has slowed in the last couple of months, which could help delinquencies level off as well.

"They'll continue to worsen," he said, "but not at the pace of the last year."

Nevertheless, Jay Brinkmann warned that it would be fruitless to try and call a bottom in this market any time soon.

"Real estate markets are local and some markets are already improving," he said in a statement. "For example, even Michigan, one of the worst hit markets in the country, has now gone three quarters with little to no increase in its rate of foreclosures. Likewise, Massachusetts showed a very large drop in foreclosure starts, perhaps signaling a bottom."

"Because of the sheer size of California and Florida, an improvement in the national numbers, whether delinquencies, home prices or any other measure, is unlikely until we see some turnaround in those two states."

Much of what's ahead depends on home prices, according to Brinkmann. "Home price declines have a bigger impact on foreclosure rates than foreclosures have on home prices."

Home price declines drive foreclosure rates higher by stripping value from homes and putting mortgage borrowers underwater, owing more than their homes are worth.

"So many of the loans are going from delinquency to foreclosure because they are so deeply underwater," said Patrick Newport, a real estate analyst with Global Insight.

Foreclosure prevention efforts could help stem this tide, said Faith Schwartz, Director of Hope Now, the coalition of lenders, servicers, mortgage investors and community groups. "The more people who get their mortgage loans stabilized, the more home prices will stabilize," she said.

But whether delinquencies worsen over the next few months is largely dependent on how the economy shakes out, according to Brinkmann, and right now, things don't look good. The unemployment rate jumped to 6.1%, the government reported on Friday, a five-year high.