U.S. Home Foreclosures Soar to a Record High

The survey highlights include:

• The mortgage delinquency rate rose 53 basis points, to 6.35%, in the first quarter of 2008—its highest reading ever.
• Mississippi (9.41%), Michigan (7.84%), and Georgia (7.36%) had the highest delinquency rates, while North Dakota (2.51%), Montana (2.59%), and Wyoming (2.69%) had the lowest.
• The delinquency rate on prime loans rose 47 basis points, to 3.71%—its highest reading ever.
• The delinquency rate for subprime loans shot up 148 basis points, to 18.79%—its highest reading ever.
• The foreclosure inventory rate increased 43 basis points, to a record 2.47%.
• Florida (4.61%), Nevada (4.12%), and Ohio (4.10%), had the highest foreclosure rates, while Montana (0.72%), Alaska (0.77%), and North Dakota (0.83%) had the lowest.
• California, Nevada, Florida, and Arizona accounted for 89% of the increase in new foreclosures. 
• Subprime adjustable-rate mortgages (ARMs), which represent only 6% of loans outstanding, accounted for 39% of foreclosures started.
• ARMs, which represent for 21% of loans outstanding, accounted for 62% of all loans entering foreclosure.

Below are survey's headline results for the first quarter. The asterisks on all nine numbers indicate record highs (data for most series start in 1979).

One piece of apparently good news turns out to be not so good when examined more closely. The MBA's press release says that "About 20 states had drops in their number of foreclosures started, including Michigan, Ohio, and Indiana, where problems have been the most severe in recent years." But the MBA's numbers are not seasonally adjusted. If one does so, foreclosures started actually increased in 40 states, including Michigan (Ohio's seasonally rate was unchanged). Indeed, according to our analysis, seasonally adjusted foreclosures started were at record highs in 20 states.

Extrapolating the first-quarter numbers, over 2 million homes could go into foreclosure this year. Congress is now working on a bill (the Dodd-Frank plan) that would have lenders reduce the principal on some loans in return for a government guarantee of the renegotiated lower principal. According to the Congressional Budget Office, the bill would reduce foreclosures by 500,000 over five years, at a cost of $1.7 billion.

Foreclosure rates for prime fixed-rate loans climbed seven basis points, to 0.29%. The worsening outlook for this category is ominous, because this category represents 65% of the mortgage pool, and until recently was generally considered low risk.

Delinquency and foreclosure rates continue to increase even though interest-rate resets are turning out to be less of a problem than once feared. Resets are benchmarked to interest rates—such as the London Inter-Bank Offer Rate (LIBOR) and the prime rate—that are closely linked to the federal funds rate, which has dropped 300 basis points in the past year. On a $100,000, a 100 basis points adds $60–65 to the monthly mortgage payment on a fixed-rate 28-year loan.

The MBA numbers shed some light on the dynamics of the housing market out West, where sales have started to pick up. According to the National Association of Realtors, the median home price in the West dropped 16% year-over-year (y/y) in April, or twice the national rate. This drop has spurred existing home sales, which are up 15% in the region since October, but not enough to keep inventories from climbing. Indeed, the homeowner vacancy rate out West (the proportion of owned homes that are vacant and for sale) climbed to a 50-year record high of 3.2% at the end of March.

According to anecdotal evidence, banks in some western states are selling foreclosed homes at fire-sale prices. This has spurred sales, but not by enough to bring inventories down. One worry, the "doomsday scenario," is that this behavior could initiate a vicious cycle in which falling house prices lead to more foreclosures, driving prices further down, ultimately inducing millions of homeowners with negative equity to walk away from their homes. So far, there is little evidence that these "underwater" homeowners are walking away in large numbers.