Foreclosures Hit Record

The number of homes entering foreclosure is at a record high, according to data released today by the Mortgage Bankers Association.

"While subprime ARM delinquencies and foreclosures are climbing in all states, in most states the actual number of loans involved is fairly modest," says Doug Duncan, the MBA's chief economist and senior VP of research and business development.

That means the phenomenon is concentrated into a few states: The number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.

Florida and California are the two largest states in terms of mortgages outstanding and are the key drivers of the increase in the national foreclosure rates. While California and Florida together have 36.4% of all of the prime ARM loans in the country, they had 42.4% of the nation's foreclosure starts for those loans. Similarly, California and Florida together have 28.1% of the subprime ARMs and 33.7% of foreclosure starts for subprime ARMs.

On a year-over-year basis, the delinquency rate increased 0.92 percentage point from 4.67% at the end of the third quarter of 2006 and is at the highest point since 1986, according to MBA data.

"The rising foreclosure and housing for-sale inventory data continues to point to a declining housing market for 2008," says Los Angeles-based Ronald Greenspan, a senior managing director at the global business advisory firm FTI Consulting. "These two factors are leading indicators of price effects -- the filing of a default or foreclosure notice precedes the house coming onto the market by three to six months, so what we are seeing here will affect prices, and in a negative way, for much of next year."

The acceleration in foreclosure and delinquency rates in the third quarter also will lead to further mortgage standard tightening. This will mean fewer potential homebuyers will be able to obtain a mortgage, keeping housing demand at low levels, say experts.

"Interestingly, mortgage applications have not fallen as much as housing sales," says Scott Anderson, a vice president and senior economist in the Minneapolis office of Wells Fargo. "We believe this is because homebuyers are filling out multiple applications in the hopes that at least one will be accepted." Wells Fargo expects further increases in mortgage foreclosures and delinquencies through 2008.

With the foreclosure issue getting worse, lots of people are looking for quick fixes. There may not be any, but some suggest that the U.S. government should take on a leadership role and sway mortgage lenders and others in a way that would help home investors avoid further crisis. But bailouts and rate freezes are not the answer, says Bob Schultz, owner of New Home Specialist, a full-service management consulting and sales company in Boca Raton, Fla.

"Homeowners with subprime mortgages should be given a tax break for reducing the loan amount and be allowed to refinance using the government's FHA loan," says Schultz. "The government could reduce the costs of this refinancing through collective buying power for lower costs with loan originators, credit bureaus and title agencies, and provide a tax break by not requiring the homeowner to pay income taxes on the 'loan forgiveness.'"

In the end, he says, the mortgage companies avoid foreclosures, people keep their homes, and there would be no bailout using taxpayer money. "Its win-win for everyone involved." (Note: Bush announced his plan today in a press conference).

Mortgage Rates in Selected Cities
City	Term	Rate
Boston	30-year fixed	5.95%
New York	30-year fixed	6.03%
Miami	30-year fixed	6.28%
Chicago	30-year fixed	6.05%
Minneapolis	30-year fixed	6%
Source: BankingMyWay.com --no origination fee / 20% down payment / excludes Internet banks / excludes credit unions / loans under $417,000 For more rates, see BankingMyWay.com

The MBA's Duncan says that he believes the foreclosure rate will bottom out by third quarter 2008. These foreclosures do mean a decline in housing prices, "which lead to improved affordability and as long as interest rates remain stable."