A record one in ten home loans were delinquent or in foreclosure at the end of September, some 2.2 million homes are expected to enter the foreclosure process in 2008, and with the economy deteriorating the outlook for next year is worse, the Mortgage Bankers Association said today.

Until recently, excess inventory, speculation and lax underwriting by lenders have been the prime drivers of foreclosures in states like California and Florida, the MBA said. States like Michigan and Ohio were hardest hit by unemployment and population loss.

A record one in 10 home loans were delinquent or in foreclosure at the end of September, some 2.2 million homes are expected to enter the foreclosure process in 2008, and with the economy deteriorating the outlook for next year is worse, the Mortgage Bankers Association said today.

Until recently, excess inventory, speculation and lax underwriting by lenders have been the prime drivers of foreclosures in states like California and Florida, the MBA said. States like Michigan and Ohio were hardest hit by unemployment and population loss.

Now, economic fundamentals are deteriorating in California and Florida, with both states seeing massive layoffs. In the last year, Florida led the nation in job losses with 156,200, and California shed 101,300 jobs, the MBA said.

The Department of Labor reported today that employers laid off 533,000 workers in November alone — the most in 34 years — sending unemployment to a 15-year high at 6.7 percent.

Some past recessions have sparked housing downturns. This time, it’s the other way around. That means many housing markets are already weak going into what’s shaping up to be one of the worst recessions in decades — and that those who lose their jobs are likely to have a harder time holding onto their homes than in past recessions.

Homeowners left with negative equity because of falling home prices are at a higher risk of foreclosure because they are less likely to be able to sell or refinance their home if they lose their jobs.

"We have not gone into past recessions with the housing market as weak as it is now so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past," said MBA Chief Economist Jay Brinkmann.

The MBA’s third-quarter National Delinquency Survey reported 6.99 percent of all loans were delinquent but not yet in foreclosure at the end of the third quarter, compared with 5.59 percent a year ago. The percentage of loans in foreclosure climbed to 2.97 percent, up from 1.69 percent a year ago. Both figures were records dating back to the survey’s inception in 1953.

The percentage of loans in foreclosure was highest in Florida (7.32 percent), Nevada (5.58 percent), Ohio (3.93 percent), and California (3.9 percent). The three states with the highest overall delinquency rates were Mississippi (11.71 percent), Louisiana (10.04 percent), and Michigan (9.73 percent).

For those looking for bright spots, nationwide foreclosure starts remained essentially flat compared to the previous quarter, at 575,000. And at a seasonally adjusted 3.39 percent, the 30-day delinquency rate remained below levels seen as recently as 2002.

But Brinkmann said foreclosure starts may have leveled off for now because lenders are waiting longer to foreclose on delinquent loans. In some cases, they face state moratoriums that require them to slow down the foreclosure process.

Others may be holding off on foreclosing on loans that are 90 days or more past due because they are trying to engage in loan modifications and workouts with borrowers, Brinkmann said.

The percentage of loans delinquent by 90 days or more jumped by 45 basis points during the third quarter — about 10 times more than expected — which could have an impact on foreclosures down the road.

To the extent that lenders are holding loans in the "90-day bucket" rather than foreclosing on them in order to see what loan modification programs borrowers might qualify for, "that is good for foreclosure numbers" down the road, Brinkmann said. Lower interest rates are also making it easier for lenders and borrowers alike to rework loans on better terms, he said.

But in cases where lenders are slowing down the foreclosure process only because they are required to by the new, state-level moratoriums, that’s not likely to have a fundamental impact on foreclosure rates, Brinkmann said.

California, North Carolina, Maryland and New Jersey have passed laws that slow down the foreclosure process, and Massachusetts and Connecticut have strengthened some borrowers’ "right to cure" loans that are delinquent or in default.

The online property research site PropertyShark.com today released a report detailing November foreclosure activity in four major cities — Los Angeles, Seattle, Miami and New York City. New foreclosure auctions were down between 21 percent and 28 percent in three of the four cities, but rose 54 percent in Los Angeles from October, the company said.

PropertyShark.com CEO Bill Staniford said the numbers indicate that California’s new law — which took effect in September and requires that loan servicers contact borrowers at least 30 days before filing a notice of default — seems to only be delaying the foreclosure process rather than halting it.

"The problem needs reconstructive surgery, not aspirin," Staniford said.

Brinkmann said the "roll rate" of homeowners who get behind on their loan payments and ultimately end up in foreclosure has stood at about 30 percent for the last two years, compared with 12-15 percent in the preceding decade. In California, 75 percent of delinquent loans end up in foreclosure, and in Florida, the number is 65 percent, he said.

"In terms of attempting to predict when is the bottom, it’s clear that the mortgage market is being driven by fundamental issues like jobs and the economy, and until we see a turnaround in employment or that the job market has firmed, it’s hard to say" when a recovery will come, Brinkmann said.

Without a recession, the MBA would have expected "several hundred thousand" fewer foreclosure starts than the 2.2 million projected for 2008. But the effects of job losses and general economic deterioration make the 2009 outlook worse, particularly if mortgage problems become more widespread, Brinkmann said.

Several initiatives to help borrowers have been rolled out since the latest delinquency and foreclosure numbers were compiled, and more have been proposed.

If the programs "work as advertised," Brinkmann said they could lower foreclosure rates or at least bring them to a standstill. But in talking to loan servicers and Fannie Mae and Freddie Mac, Brinkmann said he understands that as many as 40 percent of homes with delinquent loans are vacant, and "nobody is in them to negotiate with."

Asked what he would say if President-elect Barack Obama called him for his advice, Brinkmann said the federal government should promote job growth and restore faith in financial institutions. The Bush administration, he said, has already undertaken "major steps" to accomplish the latter goal.

Obama says he will push for an economic stimulus bill that’s intended to generate 2.5 million jobs within two years of his Jan. 20 inauguration.

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