The rate of foreclosure starts and the percentage of loans in foreclosure hit record highs during the third quarter, suggesting 1.5 million homes will enter the foreclosure process in 2007, the Mortgage Bankers Association reported today.
Subprime adjustable-rate mortgages (ARM) saw the sharpest increase in the rate of foreclosure starts, and continue to account for a disproportionate share of bad loans. While only about 6.8 percent of outstanding loans are subprime ARMs, those loans accounted for 43 percent of third quarter foreclosure starts, the MBA reported.
The rate of foreclosure starts increased for all loan types, however — including prime fixed-rate and adjustable-rate loans — as falling house prices and a credit crunch in mortgage lending made it more difficult for homeowners to sell or refinance their way out of foreclosure.
Delinquency rates were also up across all loan types, suggesting that the foreclosure picture will continue to worsen before it gets better, MBA Chief Economist Doug Duncan said.
Duncan expects that on a nationwide basis, housing markets will bottom out no later than the third quarter of 2008, with “substantial inventories” creating full-year price declines for 2007 and 2008. Markets in states like California and Florida which have large inventories to work off may take longer to recover, he said.
A number of factors are driving the rise in delinquencies and foreclosures, Duncan said — some national, some regional.
On a national basis, the “seizure” in the market for securitized loans in August cut off a major source of funding for subprime and “jumbo” loans above the $417,000 conforming loan limit, Duncan said. The MBA’s third quarter National Delinquency Survey, which tracks more than 80 percent of outstanding first lien mortgage loans, is the first to reflect the impact of the collapse of the secondary market for subprime and nonconforming loans on delinquencies and defaults.
The survey revealed the delinquency rate on all loans was up 47 basis points from the previous quarter, to 5.59 percent, a level not seen since 1986, when falling oil prices wreaked economic havoc on southern “oil patch” states like Texas and Louisiana.
The delinquency rate on subprime loans increased 149 basis points in the third quarter, to 16.31 percent. But the delinquency rate on prime loans also rose 39 basis points, to 3.12 percent. Some 11.38 percent of subprime loans were “seriously delinquent” — 90 days or more behind — up 211 basis points. That compares to 1.31 percent of prime loans, up 33 basis points from the previous quarter.
The seasonally adjusted rate of loans entering the foreclosure process hit 0.78 percent during the third quarter, up 13 basis points from the previous quarter and 32 basis points from the same time a year ago. The percentage of loans in the foreclosure process at the end of the quarter was 1.69 percent, an increase of 29 basis points from the second quarter of 2007 and 64 basis points from a year ago. Those are both all-time records since the MBA began taking the survey in 1972.
“Since Aug. 1 there has been no issue of securities backed by subprime loans or jumbo loans,” Duncan said. While banks can still fund such loans using customer deposits, they are constrained by available capital and the need to keep their investments diversified. So while the subprime and jumbo loan markets have not entirely ground to a halt, there has been a “significant slowdown” in lending in those categories, Duncan said.
Although it was subprime loans that triggered the credit crunch, the effects of the housing downturn are starting to show up in other loans.
The delinquency survey revealed that foreclosure starts on prime, fixed-rate mortgages — which rose 10 basis points, to 0.37 percent — was the highest in 10 years. In most states, the MBA said the increase was because borrowers who will fall behind on payments for traditional reasons like the loss of a job, illness or divorce, can no longer sell their homes to avoid foreclosure because of the slowdown in home sales and falling prices.
On a regional basis, foreclosures in states in the upper Midwest including Michigan, Ohio and Indiana are largely a result of economic factors, such as job losses and out migration, reducing demand for housing, Duncan said.
In states with healthy economies like California, Florida, Arizona and Nevada, developers went on building sprees during the housing boom, to the point that supply outstripped demand.
In its last delinquency report, at the request of the Federal Reserve, the MBA looked into the effect speculators had on those markets. It found that about one in three loans 90 days past due or in foreclosure in Nevada were connected with non-owner occupied properties. One in four defaulted purchase loans in Florida and one in five in California were on investment properties or second homes, compared with 13 percent nationwide, the MBA said at the time. Duncan said today the MBA is working on updating those numbers.
The latest survey showed California and Florida had 28.1 percent of the subprime ARMs but 33.7 percent of foreclosure starts for subprime ARMs during the third quarter. The number of subprime ARM foreclosure starts in California alone equaled the combined number of foreclosure starts in that category in 35 states.
The trends revealed in the third quarter survey lead the MBA to project 1.5 million homes will enter the foreclosure process in 2007, up from 960,000 in 2006 and 704,000 in 2005.
Subprime ARM loans are expected to generate the largest share of foreclosure starts — 660,000 — followed by 275,000 foreclosure starts among prime, fixed-rate loans; 264,000 prime ARM loans; 186,000 subprime fixed-rate loans; 140,000 FHA-backed loans, and 21,000 VA loans.
Not all of the homes that enter the foreclosure process will actually complete it, Duncan noted. Depending on the cause of a foreclosure start, some may able to avoid it by arranging workouts with lenders or conducting short sale.
Duncan said that forecast assumes continued economic growth averts a recession, and does not take into account proposed foreclosure prevention measures, such as an agreement announced today by lenders to freeze interest rates on some subprime ARM loans.