WASHINGTON – Foreclosure start rates in 34 states declined during the second quarter of 2007, but the national average rose again to record levels because of problems in Arizona, California, Florida and Nevada, the Mortgage Bankers Association reported Thursday.

The trade association released its latest national mortgage-delinquency numbers, which showed that 5.12 percent of mortgage loans nationwide were delinquent – at least 30 days past due on a payment – and 1.40 percent of all loans had started the foreclosure process.

While these percentages seem small, they reflect high-water marks for the lending industry. For the third consecutive quarter, the foreclosure start rate was the highest in the history of the national survey, which has been conducted since 1953.

The report also provided an important geographic snapshot. Rust Belt states, hampered by an exodus of jobs, are seeing the most foreclosures, while states that had rapid run-ups in home prices and heavy issuance of adjustable-rate loans top the delinquencies list.

A closer look at the numbers confirms a widening problem with adjustable-rate loans issued to subprime borrowers, those with the weakest credit histories. The survey of 44 million outstanding home loans showed that 18 states now have delinquency rates on adjustable-rate subprime loans of 19 percent or higher. Mississippi and West Virginia each had more than 26 percent of these loans delinquent.

Nationwide, 16.95 percent of subprime adjustable-rate loans were delinquent in the second quarter, up from 10.13 percent during the first three months this year. Helping to drive this rate were problems in Arizona, California, Florida and Nevada – large and once-hot housing markets that are cooling.

These four states account for more than a third of outstanding subprime adjustable-rate loans, according to the association’s statistics.


“I don’t think it is an accident that you’re seeing this where lending was over-exuberant a couple of years ago,” said Charles Webber, a lawyer with real estate expertise for the firm Faegre & Benson in Minneapolis.

As California goes, so the nation may go, however. California’s delinquency rate on subprime adjustable-rate loans was 14.20 percent in the second quarter, a stunning number considering that California has more than 486,000 of these loans outstanding, more than twice as many as any other state except Florida, which has almost 300,000 of them.

California has 17 percent of all subprime adjustable-rate mortgages. Home prices have fallen in much of the state, and delinquencies and foreclosures will grow unless that reverses.

That’s why Doug Duncan, chief economist for the Mortgage Bankers Association, expects the national slump to continue. “We won’t see the bottom … until about the third quarter of next year,” he said in an interview.


The worst is still ahead. At least 1.5 million households with adjustable-rate loans made in 2005 and 2006 – collectively valued at $353 billion – will jump to much higher rates this year and throughout next year.

As homeowners try to refinance out of adjustable-rate mortgages into fixed-rate products, they’re finding that lending standards have tightened in response to criticism that home lenders had lowered their standards in 2005 and 2006. And since home values are falling, many troubled homeowners can’t refinance because they now owe more than their houses are worth.


“The more people who owe more than the value of their house, the more incentive to go into delinquency or foreclosure,” Duncan said. “Both of those factors will drive delinquency and foreclosures higher than we had anticipated.”

Even adjustable-rate loans given to prime borrowers, those with the best credit, are experiencing unprecedented problems. The number of these loans considered seriously delinquent increased slightly in the second quarter to 2.02 percent nationwide.

It’s a different story for fixed-rate loans. Serious delinquency rates – more than 90 days past due – for fixed-rate home loans made to prime borrowers remain around historical norms and fell slightly for subprime borrowers during the second quarter of this year, to 5.84 percent. That contrasts sharply with the 12.40 percent of subprime adjustable-rate loans that are seriously delinquent.

Across a broad range of loan types, the highest overall delinquency rates were in Mississippi, at 9.33 percent, Michigan, at 7.55 percent, and Louisiana, at 7.29 percent. Delinquency rates in Mississippi and Louisiana are blamed on ongoing trouble two years after hurricanes ravaged the Gulf Coast.

Leading the list of states with foreclosed properties was Ohio, at 3.6 percent of all loans, followed by Indiana, at 3.01 percent, and Michigan, 2.77 percent. Michigan led the list of states with new foreclosure starts, at 1 percent of outstanding loans, followed by Ohio, at 0.98 percent, and Indiana, at 0.91 percent.

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(c) 2007, McClatchy-Tribune Information Services.

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GRAPHIC (from MCT Graphics, 202-383-6064):

AP-NY-09-06-07 1805EDT