NEW YORK (Reuters) - Late mortgage payments and the rate of home loans in foreclosure rose to record highs in the third quarter, threatening to escalate as the recession erases jobs and further strains homeowners, the Mortgage Bankers Association said on Friday.
The number of loans entering the foreclosure process would have been even higher without various programs halting them in favor of loan modifications.
A spiking unemployment rate in the midst of what many economists fear to be a deep recession, however, points to rising mortgage delinquency and foreclosure rates next year, the trade group said.
“We haven’t gone into past recessions with a housing market in as bad of a shape,” Jay Brinkmann, chief economist and senior vice president for research and economics, told Reuters in an interview.
The Mortgage Bankers Association estimates 2.2 million home mortgages will start the foreclosure process this year, before sweeping national efforts to stem the tide take effect.
“The bigger issue is going to be the underlying economy,” Brinkmann said. “As much as any of the overbuilding issues, poor lending or speculative issues, as these job losses spread to some of the rest of the economy ... That certainly doesn’t speak to a foreclosure rate coming down.”
The share of loans in the foreclosure process rose to a record 2.97 percent from 2.75 percent the prior quarter and 1.69 percent a year earlier, the trade group said.
U.S. employers cut 533,000 jobs in November, the weakest performance in 34 years, according to the Labor Department on Friday. Unemployment rose to a 15-year high of 6.7 percent.
“The economy as a whole has been doing very poorly. The job market is equally dismal and home prices are falling,” said Millan Mulraine, economics strategist at TD Securities in Toronto. “We have an increasing number of homeowners whose homes are becoming under water and that clearly doesn’t offer much incentive to remain in the home.”
The rate of one-to-four-unit residential loans at least one payment past due rose to a seasonally adjusted 6.99 percent in the third quarter, up from 6.41 percent in the second quarter and 5.59 percent a year ago.
Mulraine said that he expected both delinquencies and foreclosures to rise in coming months, adding: “A number of initiatives are in motion that eventually will have a positive impact, but it will take time for those to take hold.”
Loans that were 90 days or more past due. but not in foreclosure, raced to a record in the quarter. This indicated that more companies were holding onto troubled mortgages longer in effort to alter terms and avert foreclosure.
While 20 states showed declines in the rate of foreclosure starts between the second and third quarters, every state but Alaska had an increase in the 90 days or more delinquent category, the MBA said in a release.
But the share of loans entering the foreclosure process was flat overall in the third quarter, with rates differing greatly depending on loan type and location.
Nine states had foreclosure start rates above the national average: Nevada, Florida, Arizona and California, Michigan, Rhode Island, Illinois, Indiana and Ohio. The others were below the average.
“Prime and subprime adjustable-rate mortgages continue to have the highest share of foreclosures and California and Florida have about 54 percent and 41 percent of the prime and subprime ARM foreclosure starts respectively,” Brinkmann said in the release. “Until those two markets turn around, they will continue to drive the national numbers.”
Policies to stimulate job growth and restore faith in financial institutions are key, he said on a conference call.
Stabilizing home prices would also lure buyers who are afraid of making a huge investment that swiftly loses value.
The Standard & Poor’s/Case-Shiller 20-city price index has slumped almost 22 percent from its summer 2006 peak and more declines are widely expected.
A new government plan to buy hundreds of billions of dollars in mortgage bonds has helped tug loan rates down to about 5-1/2 percent, causing a spike in applications. The rate last fell to this level briefly in January, but not on a sustained basis in more than three years.
The Treasury is considering added steps, including offering 30-year fixed mortgages at a 4-1/2 percent rate through major U.S. mortgage finance sources Fannie Mae and Freddie Mac, sources with knowledge of the matter said this week.
Such rates could boost demand, pare near-record unsold supply and put a floor under prices, Brinkmann said on the call. Many struggling homeowners might then be better able to make timely payments, sell or refinance their loans.
Editing by James Dalgleish