Home foreclosures rate hits record in first quarter

NEW YORK (Reuters) - U.S. homeowners began the foreclosure process at a record pace in the first quarter of 2007, largely due to a sharp rise in previously hot real estate markets such as California and Florida.

Nevada and Arizona round out the top four states driving the rate of foreclosures, according to data from the Mortgage Banker Association. These states were the hottest real estate markets and favorites among investors during the housing market's record five-year run that ended in 2005.

Speculative buyers are leaving those once-popular markets in droves now that home prices have started to fall in areas of those states. Many were subprime borrowers with adjustable-rate mortgages which are resetting at much higher interest rates.

The subprime mortgage market caters to borrowers with poor credit histories.

"Loose lending standards over the past few years led to a rise in risky loans, allowing many borrowers to purchase homes they otherwise could not have afforded," Lehman Brothers said in a research note. "As adjustable rates reset to higher rates, many borrowers will be forced to default and in some cases ultimately foreclose."

Seven states drove the rate of delinquencies, said the MBA's chief economist Douglas Duncan.

"The percentage of loans in foreclosure would be well below the average of the last 10 years were it not for Ohio, Michigan and Indiana, and the rate of foreclosures started nationwide would have fallen were it not for the big jumps in California, Florida, Nevada and Arizona," he said in a statement.

Foreclosure starts actually declined in 24 states while the rest of the country experienced negligible increases, he said.

The MBA said the rate of loans entering foreclosure was 0.58 percent on a seasonally adjusted basis, 4 basis points higher than the previous quarter. The rate rose 17 basis points from a year ago. Late payments, however, fell from the previous quarter.

The delinquency rate for mortgages on one- to four-unit residential properties stood at 4.84 percent of outstanding loans in the first quarter on a seasonally adjusted basis, down 11 basis points from the fourth quarter and up 43 from a year ago, according to the MBA's National Delinquency Survey.

The delinquency rate does not include loans in the process of foreclosure. The percentage of loans in that process was 1.28 percent of all loans outstanding at the end of the first quarter, up 9 basis points from the fourth quarter of 2006 and 30 basis points from one year ago.

HOUSING STRESS

Duncan said the U.S. housing market should regain its footing in late 2007 and expects foreclosures to peak in 2008.

"A great deal depends on those four states and what happens to house prices in those states," he said on a conference call. "If the degree of overbuilding and investor participation in those markets is greater rather than lesser, that will delay the pace of recovery and lead to some continued increase in foreclosures."

The subprime and prime ARM foreclosure starts were at records and that is what drove the overall record higher. The rate of foreclosures started on subprime ARMs jumping to 3.23 percent from 2.7 percent, said Duncan.

California, Florida, Nevada and Arizona were mainly responsible for this increase, while 26 states showed decreases in foreclosure rates on subprime ARMs. The national foreclosure rate on subprime ARMs would have slightly declined were it not for those four states, he said.

The fall in overall seasonally adjusted delinquencies comprised rises in delinquencies for prime and subprime loans and falls in those for Federal Housing Administration and Veterans Administration loans, the MBA said.