Home foreclosures hit record

Mortgage lenders report shows problems with loan foreclosures, subprime lending are concentrated in Sunbelt, Midwest.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Home foreclosures hit record levels the first quarter, jumping sharply from a year ago level due to economic weakness in the Midwest and the battered housing market in the overbuilt Sunbelt.

The report is the latest look at the hit to the home loan market caused by the problems in the subprime mortgage sector that first started getting national attention early this year. Those problems have led to bankruptcies and tighter lending standards, which in turn have hit the sales of both new and existing homes.

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The Mortgage Bankers Association said that the rate of loans entering the foreclosure process was a record, 0.58 percent in the first three months of the year on a seasonally adjusted basis. That's up from 0.41 percent in the year-earlier period, and up from 0.54 percent in the fourth quarter, which was the previous record.

Meanwhile, the percentage of loans in the foreclosure process was 1.28 percent of all loans outstanding at the end of the first quarter, an increase from 0.98 percent a year earlier, and up from 1.19 percent in the fourth quarter.

And Doug Duncan, MBA's chief economist warned that further foreclosure records likely lay ahead, especially as mortgage rates rise and adjustable rate mortgages are reset higher, causing problems for already financially stretched home owners.

"I think it's reasonable to think we'll see a peak of delinquency rates this year, but not see a peak in foreclosure until 2008," he said on a conference call following the release of the report.

The group's data showed a slight decrease in loan delinquency rates in the first quarter, with 4.84 percent of all loans outstanding seeing late payments in the period, down from 4.95 percent in the fourth quarter, although up from 4.41 percent a year earlier. Duncan cautioned it was too soon to say that delinquencies won't go higher, particular on adjustable rate mortgages.

The run-up in bond yields in recent weeks has caused mortgage rates to spike. Mortgage lender Freddie Mac said Thursday that the the average rate for a 30-year fixed rate mortgage saw the biggest one-week jump since 2003 to 6.74 percent in the most recent reading, with the one-year arm up to 5.75 percent from 5.65 percent a week earlier.

Subprime adjustable rate loans, or ARMs, which are made to people with less than top credit, saw both delinquencies and foreclosures soar in the first quarter. That is the most troubled portion of the mortgage market by far.

The MBA said 15.75 percent of those loans were late making payments in the first quarter, up from 12.02 percent a year earlier and 14.44 percent in the fourth quarter.

Subprime ARMs saw 3.23 percent of those loans start the foreclosure process in the period, up from 1.9 percent a year earlier and 2.7 percent in the fourth quarter. That means that more than 1 in 10 subprime ARMs are now either in foreclosure or more than 90 days delinquent.

The situation was better for prime loans, made to people with strong credit ratings, as well as for fixed-rate subprime loans. But delinquencies and the rate of loans entering foreclosure for those two sectors also increased.

The group said the problem was not spread evenly across the country, with Ohio, Michigan and Indiana, along with California, Florida, Nevada and Arizona bearing the brunt of the problems.

"The percentage of loans in foreclosure would be well below the average of the last ten years were it not for Ohio, Michigan and Indiana, and the rate of foreclosures started nationwide would have fallen were it not for the big jumps in California, Florida, Nevada and Arizona," said Duncan. "Those states have special circumstances that do not reflect what is happening in the rest of the country."

Duncan said the problem in the Midwest states was a drop in employment, particularly in manufacturing, which cut the demand for housing and has prompted people to walk away from homes and home loans in search of work elsewhere.

"Those are demand-side destroyers for the housing market," he said about the job losses there.

For the Sunbelt states, he said the problem was caused by overbuilding in the market, and many people using loans to buy homes and condos as investment properties, rather than their primary residence, even if they told the lender they intended to live in the property. When property values in those overbuilt markets dropped, people walked away rather than continue to make payments.

Duncan said that investor speculation in real estate made predicting future foreclosure rates in those markets difficult to estimate.

"We don't know the degree to which the investors have already reacted," he said. "It's possible they moved rapidly." Top of page