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Mortgage Foreclosures Reach All-Time High
New Worries Send Stocks Into Dive

By Renae Merle and Tomoeh Murakami Tse
Washington Post Staff Writers
Friday, March 7, 2008

Stocks on Wall Street fell sharply yesterday with fresh concerns over the health of financial firms that have invested heavily in mortgage-backed securities and a new report showing that more homeowners had fallen into foreclosure than ever before.

The crisis in home lending reached another milestone with the report from the Mortgage Bankers Association, which said that 2.04 percent of outstanding mortgages were in foreclosure in the fourth quarter of last year, an all-time high. A year earlier, 1.19 percent of loans were in foreclosure.

The data didn't surprise economists, who expect foreclosures to continue to rise through most of this year despite government and industry efforts to keep borrowers in their homes. The announcement came the same day as a Federal Reserve study showing that last year, owner equity in U.S. homes fell below 50 percent, meaning it is exceeded by mortgage debt, for the first time since 1945.

"Unfortunately, we're not close to bottoming out," said Guy D. Cecala, publisher of Inside Mortgage Finance.

Dragged down by bad news from the mortgage sector and fears of a worsening credit crisis, the Dow Jones industrial average of 30 blue-chips stocks plunged 214.60 points, or 1.8 percent, to 12,040.39. The broader Standard & Poor's 500-stock index fell 29.36, or 2.2 percent, to 1304.34. The Nasdaq composite index declined 52.31, or 2.3 percent, to 2220.50.

Financial shares fell furthest, dropping 3.7 percent.

Investors started the day with news that the residential lender Thornburg Mortgage and a bond fund managed by the D.C. private-equity firm Carlyle Group failed to meet margin calls. A margin call occurs when an investor buys a security with borrowed money and then the value of the security declines so far that the lender insists that its holder put up more money to cover it.

Thornburg Mortgage said late Wednesday that it had failed to meet a margin call of $28 million. The company's shares lost 51 percent yesterday. Then Carlyle Capital said yesterday morning that it failed to meet banks' margin calls on its $21.7 billion portfolio of AAA- rated mortgage-backed securities.

The worsening credit turmoil is infecting even the highest-rated securities and has spilled into areas long considered ultra-safe. Carlyle Capital was heavily leveraged, using about $670 million in cash equity to finance the $21.7 billion portfolio of top-rated mortgage-backed securities issued by Freddie Mac and Fannie Mae.

In the past year, home values have plummeted across much of the country, staggering those invested in mortgage-related securities and the homeowners themselves.

The spike in foreclosures reported yesterday was most pronounced in California and Florida, which together accounted for 30 percent of the foreclosures started during the quarter, according to the Mortgage Bankers Association, an industry group. Nationally, the default rate was markedly high among homeowners with adjustable-rate loans, particularly those with subprime loans. Of the foreclosures started during the quarter, 42 percent of homeowners had adjustable-rate subprime loans and 20 percent had adjustable-rate prime loans.

The proportion of homeowners delinquent on their mortgages but not yet in foreclosure reached 5.82 percent during the quarter, the highest level since 1985. That was up from 4.95 percent during the fourth quarter of 2006.

Some parts of the country could start seeing a market recovery by this summer, said Jay Brinkmann, vice president of research and economics at the association. "Recovery is going to differ in different parts of the country," he said.

In the Washington region, foreclosure rates were below the national level: In the District, 1 percent of loans were in foreclosure; in Virginia, 1.01 percent; and in Maryland, 1.22 percent.

The figures include the period when the industry began to promote efforts to help homeowners avoid foreclosure. But it is difficult to measure the impact of those efforts in the latest figures, Brinkmann said. Some of the delinquent homeowners included in the report may have caught up on their payments or sold their homes, he said.

Industry and government efforts, including a program to freeze mortgage rates for some subprime borrowers, have been called insufficient by some community groups and analysts. The initiatives are going to "help some people and stop some foreclosures," said Mike Larson, housing analyst for Weiss Research, "but as long as home prices are falling, you're swimming against the tide."

The rise in foreclosures is also tied to the number of people who find themselves in homes worth less than the balance of their mortgages, Larson said. "You might fight to pay your mortgage if you have a profit," he said. But given the number of people with high mortgages and "the magnitude of home price declines, a lot of them are underwater," meaning their homes are worth less than they owe. "They don't have an incentive to pay, and they don't."

Those borrowers are making a practical decision to walk away from their homes, said David Shulman, senior economist at UCLA Anderson Forecast. A San Diego firm, You Walk Away, is offering to help people arrange an orderly foreclosure of their home for $950, including filing a letter that would order the lender to stop calling about delinquency.

"Foreclosure is becoming a financial planning tool," Shulman said. "There is less of an emotional attachment. Homeowners are acting like a business would act in a similar circumstance by walking away."

Tse reported from New York.

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