Mortgage foreclosures set record as Bush plan unveiled

NEW YORK (Reuters) - U.S. home foreclosures as well as the rate of homes entering the foreclosure process rose to a record in the third quarter, as homeowners battled slumping house prices and spiking loan payments, the Mortgage Bankers Association said on Thursday.

President George W. Bush unveiled a plan on Thursday to stem foreclosures, which many analysts said was a good start but would be a minimal cure for the sickly housing market.

The program would freeze low teaser mortgage rates for five years for some of the 2 million home owners with adjustable-rate loans facing sharply higher payments, helping them avert default, according to the administration.

About 994,000 U.S. households are in the process of foreclosure, said MBA's chief economist Doug Duncan, adding that "not all of them will lose their house, but that's how many are currently at serious risk of losing their house."

The percentage of loans in the foreclosure process rose to 1.69 percent of loans outstanding, up 0.29 percentage point from the prior quarter and up 0.64 from a year earlier.

Problems with payments on all loan types drove up the pace of homes entering the foreclosure process, the trade group said in its delinquency and foreclosure survey,

"Over-easy monetary policy, a 'hands off' regulatory approach, reckless real estate speculation, and the complete abandonment of prudent lending practices by the mortgage industry created a housing bubble," said Mike Larson, real estate analyst at Weiss Research in Jupiter, Florida.

"Now that bubble has burst and we all have to deal with the consequences," he said.

Subprime adjustable-rate mortgages (ARMs) represented just 6.8 percent of all loans, but made up 43 percent of loans entering the foreclosure process in the third quarter.

The rate of foreclosures started rose to a seasonally adjusted 0.78 percent in the third quarter, up 0.13 percentage point from the prior quarter and up 0.32 from a year earlier.

This was the first quarter in which the effect of the credit crisis -- which effectively shut down the jumbo mortgage market -- economic weakness, broad-based home price drops and loan rate resets for adjustable mortgages all came together, Duncan said.

A massive supply of unsold homes is dragging prices lower, which in turn is raising the pressure on late payments and foreclosures. More foreclosures mean even more inventory of unsold homes, escalating the cycle.

Late payments on mortgages jumped to the highest level since 1986, according to the survey that the group started in 1972. The survey covers 85 percent of the mortgage market.

While the rate of homes entering the foreclosure process have risen to the highest levels on subprime mortgages, the pace is rising for higher-quality loans too.

The rate for prime ARMs rose to 1.02 percent in the third quarter from 0.30 percent a year earlier, as subprime ARMs rose to 4.72 percent from 2.19 percent. The start rate for prime fixed loans gained to 0.22 percent from 0.13 percent, while the rate for subprime fixed loans rose to 1.38 percent from 0.97 percent.

Florida and California are the main drivers of higher national foreclosure rates, the trade group said.

The two states have more than 36 percent of all prime ARMs, and represented more than 42 percent of the nation's prime ARMs entering into foreclosure. They also have about 28 percent of all subprime ARMs and 33.7 percent of the foreclosure starts on those products.

RELIEF?

"Lenders want to save all the borrowers that they can," Duncan said before the release of the specific details of Bush's mortgage relief plan.

However, Duncan said there are concerns: the potential for litigation, which could raise uncertainty and costs, and the moral hazards in choosing who qualifies and who does not.

Even with the possible relief, the MBA sees foreclosure rates staying high and possibly setting fresh records in coming quarters.

"We expect late third quarter to be the bottom at the earliest and any recovery will be slow," as the supply of unsold homes outweighs demand, Duncan said.

For all of 2007, the MBA expects 1.5 million loans to enter the foreclosure process, up from about 960,000 in 2006 and 704,000 in 2005. The vast majority -- 660,000 -- will be subprime ARMs, but prime loans are also significant at 275,000 for fixed and 264,000 for adjustable mortgages.

(Editing by Jonathan Oatis)