The housing slump, Midwestern economic woes and resetting ARMs send late
payments higher.

By Les Christie, CNNMoney.com staff writer
September 6 2007: 1:26 PM EDT

NEW YORK (CNNMoney.com) -- The delinquency rate for mortgage borrowers
spiked higher in the second quarter and the number of homes entering the
foreclosure process hit a record high, according to a report released
Thursday.

Deliquencies hit 5.12 percent of all outstanding mortgages, up from 4.39
percent a year ago, the Mortgage Bankers Association (MBA) said in a
quarterly survey.

Serious delinquencies, those 90 days or more late, jumped to 1.11
percent of all loans, from 0.98 percent in the first quarter.

The loans actually entering foreclosure proceedings stood at 0.65
percent, a rise from 0.58 percent in the first three months - and the
highest rate in the MBA's 55-year history. (Latest home prices - 149
markets)

More Americans are falling behind in their mortgage payments as stagnant
home prices, auto-industry weakness and climbing interest rates have
taken a toll on housing affordability.

The survey revealed steady increases in all categories of delinquencies
among mortgage borrowers, but problems in subprime adjustable rate loans
drove much of the increase.

"There is a clear divergence in performance between fixed rate and
adjustable rate mortgages due to the impact of rate resets," said Doug
Duncan, the MBA's chief economist.

Duncan called the delinquency trends "a story of seven states." There
are the three midwestern states - Michigan, Ohio and Indiana - where
defaults and foreclosures are linked to serious underlying economic and
job issues. Michigan alone has lost 300,000 jobs since 2000.

Then there are the once red-hot housing markets of the Sunbelt.
According to Duncan, homes entering the foreclosure process in Arizona,
California, Florida and Nevada drove the national increase - the
national foreclosure rate would have otherwise declined.

"The data shows dramatic effects of speculative investing in those four
states," said Duncan. High levels of non-occupied houses there coupled
with a high percentage of ARMs made markets particularly susceptible to
delinquencies.

Many investors simply do not have the same level of interest in
retaining their properties than do owner-occupiers who have,
historically, always strived to keep their properties.
Coping with foreclosure

Delinquencies are expected to continue a steady climb for the next year
or so. The number of adjustable rate mortgages (ARMs) that reset to
higher rates will peak this fall and many of those borrowers will likely
fall behind on payments.

Many borrowers in default work out their problems without undergoing
foreclosure. Some rework their loans in cooperation with their lenders,
often cleaning up arrears by making extra payments later. Others get
free of unaffordable ARMs by refinancing into fixed rates.

Many sell their homes before they lose them, especially if they still
retain some equity in the properties. Even if there is no home equity,
they may get their bank to agree to a short sale in which the bank will
forgive the debt not covered by the sale of their houses.

A minority of homeowners will actually go through the entire foreclosure
process and their numbers are not forecast to peak until 2008, as
homeowners scrambling to find a solution to their unaffordable loans
abandon the fight.

The ultimate foreclosure total may be influenced by several of the
initiatives being discussed in Washington. President Bush floated some
proposals last week that sought to help responsible borrowers stay in
their homes.

Bush's proposals, if followed through on, could make it easier for some
families to refinance from ARMs into fixed rates.

In addition, regulators recently informed mortgage servicers, which act
as liaisons between investors and borrowers, that rewriting the terms of
mortgages does not violate accepted accounting practices if it's done
for the benefit of the investors. That should remove one of the legal
stumbling blocks faced by servicing firms that want to help borrowers by
modifying or refinancing their mortgages.

Other proposals - such as increasing cap limits on HUD loans - that
offer some relief to troubled homeowners may also reduce the total of
loans that actually go into foreclosure.

If, however, the housing-market slump deepens, delinquencies and
foreclosures could worsen. And turmoil in the credit markets could
tighten the liquidity squeeze that has made it much tougher for many
potential home buyers - as well as owners looking to refinance - to
obtain loans.

That has caused demand for homes to plunge in many areas and the
national inventory of homes on the market has doubled over the past
three years. There is now about a nine-month supply of listings at the
current rate of sales.