Lenders initiate foreclosures at record pace*

By Lynn Adler Tue Mar 13, 6:05 PM ET

NEW YORK (Reuters) - Lenders launched foreclosure actions against more
than one in every 200 U.S. mortgage borrowers in the fourth quarter of
2006, the biggest share of homes at the start of the repossession
process on record.

Driven by subprime borrowers having trouble making payments, the
proportion of mortgages in the initial stages of foreclosure was at the
highest in the 37-year history of the Mortgage Bankers Association's
National Delinquency Survey.

The share of mortgaged homes at the start of the foreclosure process
rose to a seasonally adjusted 0.54 percent last quarter, topping the
previous record of 0.50 percent touched in the second quarter of 2002,
when the economy was recovering from recession.

Late payments on U.S. mortgages also rose in the fourth quarter to their
highest level in three-and-a-half years.

Delinquency rates rose in 49 states, and foreclosure inventory grew in
44 states, according to the MBA.

After the MBA delinquency report the three main U.S. equity indexes
extended losses and sank by about 2 percent. U.S. Treasury debt prices
rose as investors sought a safe haven from the potential spread of woes
in the subprime mortgage market.

"Subprime borrowers are more likely to be susceptible to the cumulative
increases in interest rates that we have experienced and the resultant
nationwide slowing of home-price appreciation, including outright
declines in some markets," said MBA chief economist Doug Duncan.

Problems in the subprime mortgage sector, which involves loans to
riskier borrowers, have been a major factor roiling the U.S. financial
markets in recent weeks.

"Significant increases in delinquency rates have in some cases led to
unexpected increases in credit losses and the failure of some subprime
specialist firms," Duncan said. "Some lenders who have been exiting the
business stated that they didn't underwrite properly the risk in the loans."

Subprime mortgage lenders have been battered by defaults and demands
from their own lenders to take back soured loans at a loss. Lax
underwriting standards added to the problems. Over two dozen lenders
have quit the industry in the last year.

As risk premiums demanded on future business grow, lenders pass higher
costs on to borrowers, making it more difficult for people to take out
new home loans.

"We would expect possibly up to a 30 percent reduction in subprime
production in 2007 relative to 2006, as that pricing has already hit the
Street," Duncan said.

Rep. Barney Frank (news, bio, voting record) (D-Mass.), chairman of the
House Financial Services Committee, said on Tuesday that he plans to
introduce legislation to restrict overly risky mortgages.

DELAYED HOUSING STABILITY

The MBA also pushed back its prediction for when the U.S. housing sector
will regain its footing, saying this will be toward the end of this
year. In December, it forecast that a turnaround would happen in the
middle of 2007.

Delinquencies rose for all loan types but were largest for subprime
adjustable-rate loans that reset at higher interest rates, the industry
trade group said.

The overall mortgage delinquency rate increased to a seasonally adjusted
4.95 percent in the fourth quarter, up from 4.67 percent in the prior
quarter and from 4.70 percent in the fourth quarter of 2005.

Subprime adjustable-rate mortgage (ARM) delinquencies jumped to 14.44
percent in the fourth quarter from 13.22 the prior quarter.

In contrast, prime ARM delinquencies rose to a much lower 3.39 percent
from 3.06 percent.

"The gist is that the prime market delinquencies are still far from
troubling levels and the trends are also not worrisome, while the
subprime pace of deterioration remains broadly unaltered and
problematic," said Alan Ruskin, chief international strategist at RBS
Greenwich Capital in Greenwich, Connecticut.

Mounting troubles in subprime loans are unlikely to significantly taint
mortgages held by borrowers with higher credit quality, many strategists
contend.

"We think the spillover to other parts of the mortgage sector is going
to be limited. It's not something that we expect to have significant
macro implications," said Torsten Slok, senior economist at Deutsche Bank.

Anthony Ryan, U.S. Assistant Treasury Secretary for financial markets,
told Reuters that the subprime mortgage problems appeared to be "fairly
well contained."

Mississippi, Louisiana and Michigan had the highest overall delinquency
rates, well above the national average, at 10.64 percent, 9.10 percent
and 7.87 percent, respectively.

The states with the largest increases in overall delinquency rates from
the prior quarter were West Virginia, Maine and Florida.

The Northeast's overall seasonally adjusted delinquency rate of 4.58
percent and the West's 3.18 percent rate were below the 4.95 percent
national average. The North Central region's late payment rate of 5.68
percent and the South's 5.71 percent rate exceeded it.

(Additional reporting by John Poirier and Svea Herbst in Washington)