U.S. home foreclosures hit record level, due in part to California woes

The percentage of home loans entering foreclosure nationwide rose to a record level in the second quarter of this year, driven by the one-two punch of sharp home price declines and resetting adjustable-rate loans in California and Florida, the Mortgage Bankers Assn. said today.

“The worst states are continuing to get much worse,” Jay Brinkmann, the MBA’s chief economist, said during a conference call discussing the trade group’s second-quarter report on mortgage delinquencies.

With a combined 18% of the population, “California and Florida accounted for 39% of all the foreclosures started in the country,” Brinkmann said.

The national average for foreclosure starts – the time a lender turns a delinquent loan over to lawyers – was 1.09% during the quarter, up from 0.99% in the first quarter and 0.65% in the second quarter of 2007, the association said.

The latest figure was 1.82% in California, which has 12% of the nation’s population, and 2.21% in Florida, which has another 6% of the population.

Another way to look at the problem: Only eight states were above the national average in foreclosure starts. The others were Arizona, Nevada, Michigan, Rhode Island, Indiana and Ohio

“The problems are not spread equally,” Brinkmann said.

Nationally, the percentage of loans at some stage in the foreclosure process rose to 2.75% from 2.47% in the first quarter – nearly doubling from 1.4% a year earlier. In California, number was 3.86% and Florida was at an even 6%.

The figures are the highest since the MBA began publishing its survey 29 years ago, Brinkmann said.

One key driver for the trend is an unusually high number of mortgages that move from early delinquencies into foreclosure. The percentage of California borrowers with at least one payment past due was 5.78%, less than the national average of 6.41%.

Brinkmann said Californians who fall behind on payments are more likely to have their homes go into foreclosure in part because falling home prices, which have lopped 30% off peak prices in many areas of the state, have reduced the value of their homes to far less than what they owe.

Combined with that is the prevalence in California and Florida of pay-option adjustable rate mortgages. These tricky loans, made to borrowers with decent credit scores, allowed the borrowers to pay less than the interest due each month, adding the difference to their loan balance.

When those loans “recast” to require full payments, typically three to five years after they are made, many borrowers find themselves owing 10%, 15% or even 25% more than they started with at a time when their home value is much lower.

Nationally, new foreclosures on sub-prime loans – those made to the riskiest borrowers, which typically become adjustable after two years – rose to 4.7% from 4.06% in the first quarter, the mortgage trade group said. Sub-prime loans in the foreclosure process increased to 11.81% from 10.74% and seriously delinquent loans – those 90 days or more overdue or in foreclosure – rose to 17.85% 16.42%.

 scott.reckard@latimes.com