U.S. Home Foreclosures Are Still on the Rise

It does appear, however, that the increase in prime loans entering foreclosure has led to a decline in the share of subprime loans in foreclosure at the end of the quarter (as a share of total loans in foreclosure). In 43 of 51 states (Washington, DC included), the share of subprime loans in foreclosure declined between the second and third quarters by an average of 1.8 percentage points. Utah and Hawaii posted the largest increases in shares from quarter-to-quarter, 2.3 and 3.4 percentage points, respectively, which is not surprising since both were late to arrive to the market boom. California and Florida, both early leaders of the boom and among the first to slow down, each posted share declines of 4.4 percentage points. Utah and Hawaii were the only two states to see the share of prime loans decline quarter-to-quarter.

Subprime loans still account for a significant portion of inventory in foreclosure in nearly all states, and accounted for more than half of the inventory in 26 states during the third quarter. The degree of increase in the inventory of subprime loans varies from state to state. Some states have seen a rapid increase, while others have seen little movement, and others started out with higher rates and have remained at those levels. A look at changes from an early period of the boom (second-quarter 2002) shows that the states experiencing the most dramatic increases in prices and sales activity during the boom are the ones hit the hardest by the foreclosure crisis. Nevada has seen its share of subprime loans in foreclosure increase by more than 54 percentage points over the past five years, landing at 64.3% of all loans in foreclosure during the third quarter of 2007. This is the largest jump in share among all states and Washington, DC. The other states rounding out the top five are California, Arizona, Rhode Island, and New York.

When discussing foreclosures, one has to keep in mind the relative size of the mortgage market in each state compared to the nation. California and Florida have the largest market shares, accounting for one-fifth of the loans in the nation. They also have the largest shares of loans starting in foreclosure, for both prime and subprime loans. The volume in these two states is currently pushing the national numbers. Another item to keep in mind is the size of the subprime sector in each state, which is small compared with the prime sector. For example, in California—a state that saw a significant rise in subprime lending during the housing boom—the share of subprime loans was 13.9% in the third quarter, while the prime share was 84.2%. However, the share of subprime loans entering foreclosure during the quarter was 61%, versus 38.1% for prime loans. These numbers emphasize the extent to which subprime lending during the boom is now having a negative impact on states. Other states where this impact can be seen are Arizona, Florida, Nevada, and, to a lesser extent, Michigan, Ohio, and New York.

We expect foreclosure activity to slow over the next year, though, as the last group of subprime resets occurs and as mortgage terms are reworked by lenders and homeowners to avoid foreclosure. The data will be examined carefully for a turning point, as everyone is waiting for this crisis to come to an end.