Loans entered the foreclosure process at a record rate during the fourth quarter, and things are likely to get worse before they get better, the chief economist for the Mortgage Bankers Association said today.

Although reductions in short-term interest rates have lessened the shock of interest-rate resets for many borrowers with adjustable-rate mortgage (ARM) loans, falling home prices are leaving more homeowners with little or no equity in their homes — and less incentive to keep up on their mortgage payments, said MBA Chief Economist Doug Duncan.

That’s particularly the case in states such as California, Florida, Nevada and Arizona, where overbuilding created surplus inventories that will take some time to work through, Duncan said.

The rate of foreclosure starts in Florida more than tripled between the fourth quarter of 2006 and the fourth quarter of 2007, and more than doubled in California.

Nationwide, the rate of loans entering the foreclosure process hit a never-before-seen 0.83 percent during the fourth quarter, up from 0.54 percent a year ago and 0.78 percent in the third quarter.

That pushed the total percentage of loans in the foreclosure process, which stood at 1.19 percent at the end of 2006, to 2.04 percent in the fourth quarter 2007 — also a new record.

The delinquency rate rose to 5.82 percent during the fourth quarter — the highest the MBA has seen in its quarterly survey of lenders since 1985. The delinquency rate stood at 4.95 percent during the same quarter a year ago, and at 5.59 percent in the previous quarter.

"Our general outlook is as long as house prices are declining, we expect to see some continued increase in delinquencies and foreclosures," Duncan said. With the continued seizure of credit markets and tightened underwriting standards, "we don’t expect to see the peak (in foreclosures) until mid- to late-2008."

If there’s any good news in the latest numbers, it’s that there’s been little growth in the rate of foreclosure starts in Midwestern rust-belt states such as Michigan, Ohio and Indiana, where different factors are in play. Job losses and outmigration, rather than overbuilding, have contributed to the decline in demand in those states, Duncan said.

Duncan said the nationwide increase in foreclosure starts was due to increases in both prime and subprime loans, with adjustable-rate mortgages (ARMs) of both types accounting for 62 percent of foreclosure starts.

Since the fourth quarter of 2006, the foreclosure start rate for prime ARMs increased from 0.41 percent to 1.06 percent, while the rate for subprime ARMs increased from 2.7 percent to 5.29 percent.

Subprime ARMs represented just 7 percent of loans outstanding, but accounted for 42 percent of foreclosures starts during the fourth quarter. Prime ARMs represented 15 percent of outstanding loans, and 20 percent of the foreclosures started.

While millions of ARM borrowers still face interest-rate resets, Duncan said the impact of those payment adjustments will be less than feared because cuts in short-term interest rates made by the Federal Reserve have also brought down the six-month LIBOR rate, the index used for many subprime ARM loans, by 2.5 percent since last September.

Duncan said the MBA forecasts at least one more cut in the federal funds rate this month.

"The reduction in LIBOR will mean that the resets of those loans will bring them very close to current contract rates," Duncan said. The problem of payment shock "will be much less than thought, although it won’t be ameliorated."

If rising delinquencies and foreclosures were once believed to be largely confined to subprime loans, those days are past. The MBA survey showed prime loans accounted for 38 percent of foreclosure starts, compared with 50 percent for subprime loans. Prime loans made up a much larger percentage of outstanding loans, however — about eight in 10.


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