Mortgage Market Woes: Foreclosures and Defaults Up in Q2 of 2007

by Amy Lillard

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

In what's probably no surprise to anyone watching the housing industry and the general economy in the last months, foreclosures hit a record high in the second quarter of 2007.

According to the Mortgage Bankers Association of America, which represents the real estate finance industry, the rate of loans entering foreclosure process was 0.65 percent in the April-to-June quarter. This is compared to 0.43 percent in the same period a year ago.

"This quarter's foreclosure-starts rate is the highest in the history of the survey, with the previous high being last quarter's rate," the organization reported. The January-to-March quarter was 0.58 percent.

In addition, the delinquency rate is also rising. Those borrowers behind in their payments (but have not yet entered the foreclosure process) now account for 5.12 percent of all loans. From last year's rate, this represents an increase of nearly three-fourths of a percentage point.

Adjustable rate mortgages, for both prime and subprime borrowers, is directly contributing to this increasing foreclosure and delinquency rate, the MBA said. Approximately 2 million ARMs are due to reset to higher rates this year. This is resulting in monthly payments that are unaffordable for many.

There are several key states that account for this growing problem. About 1 percent of all of the mortgages in Michigan had foreclosure actions started during the last quarter. Indiana and Ohio, along with Michigan, have been hit with heavy job losses that have significantly impacted this foreclosure rate.

But the nation's largest states are feeling the biggest crunch, and driving this foreclosure-start rate. In fact, the MBA noted that were it not for rising foreclosures in California, Florida, Nevada and Arizona, the nationwide rate would actually have dropped.

These states have more than one-third of the nation's subprime ARMs. They also have one-third of the foreclosure starts on subprime ARMs. Also, the four states have a much higher share of investor loans than the rest of the nation. These loans are made to buyers who do not plan to live in the house. As of June 30, the non-owner occupied share of defaulted loans was 32 percent in Nevada, 25 percent in Florida, 26 percent in Arizona and 21 percent in California. That compares with 13 percent in the rest of the nation.

Important to remember with these recent figures is that much of the mortgage market turmoil this summer occurred after the second quarter. This means the situation is likely to worsen due to:

> Drop in home prices from the glut of new homes, making it difficult to refinance ARMs.

> Current FHA limits on mortgage insurance. Mortgage insurance from the Federal Housing Administration makes refinancing easier, especially if the alternative is no payment and foreclosure. But the FHA can only guarantee mortgages up to $362,790. That excludes a lot of homes in high-cost markets. Reform is currently under consideration.

> Nearly 2 million adjustable mortgages are going to reset over the rest of this year and next. This means many more troubles on the horizon as more homeowners face payments they can't afford.