Home foreclosures rate hits record in first quarter

By Julie Haviv

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.