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The rate of mortgage loans entering the foreclosure process was the highest in history during the second quarter, the Mortgage Bankers Association said Thursday.

The foreclosures, which are tied to the resetting of trillions of dollars in adjustable rate mortgages, were the worst in California, Florida, Nevada. and Arizona, where the housing boom was hottest but has now turned to a bust.

These states have some of highest levels of ARMs, and as housing prices drop, many homeowners are facing negative equity when trying to refinance or sell the home.

Outside of these states, apparently the default and foreclosure story is not as bad.

"Were it not for the increases in foreclosure starts in those four states, we would have seen a nationwide drop in the rate of foreclosure filings," said Doug Duncan, chief economist with the Mortgage Bankers Association.

Ohio and Michigan, however, also continue to see high delinquency rates and foreclosures because of mortgage resets and tough economic conditions.

Loans in the foreclosure process accounted for 1.4% of all mortgage loans outstanding at the end of the second quarter, up 41 basis points from a year ago but still slightly lower than the recent high in 2002. Borrowers entering foreclosure represented 0.65% of all loans, up 22 basis points from a year ago and a record level.

Duncan said the recent turmoil in the global credit markets means the foreclosure rate could hit a new high over the next year.

Delinquency rates for mortgages stood at 5.12% of all loans outstanding in the second quarter, up 73 basis points from a year earlier. That was below the recent high delinquency rate of 6.1% that came at the end of the last recession in 2001, Duncan said.

Homebuilder stocks fell on the news, since it indicates that the number of homes on the market could swell.

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