Problem mortgages hit new high at 14 percent

By Renae Merle
Washington Post Staff Writer
Friday, November 20, 2009

More than 14 percent of borrowers were in trouble on their mortgage during the third quarter, a new record, according to an industry survey released Thursday, which also suggests that the foreclosure rate is likely not to peak until next year as unemployment rates continue to rise.

Unemployment remains a big driver of the problem, according to the Mortgage Bankers Association, which conducts the survey. Those with delinquent loans now include a growing portion of people traditionally considered creditworthy and people whose mortgages are insured by the Federal Housing Administration.

"The outlook is that delinquency rates and foreclosure rates will continue to worsen before they improve," said Jay Brinkmann, the group's chief economist.

About 9.6 percent of borrowers were delinquent on their mortgage during the third quarter, according to the survey, and another 4.5 percent more were somewhere in the foreclosure process. Overall, about 14 percent of mortgage loans or 7.4 million households were delinquent or in the foreclosure process during the quarter, according to the group.

That is the highest level recorded by the survey, which has been conducted since 1972, and is up from about 10 percent of borrowers who were in trouble during the same period last year.

If unemployment rates peak by the middle of next year, foreclosures could reach their highest levels by the end of the year, Brinkmann said. But even after peaking, foreclosure rates are likely to remain elevated as borrowers in regions that have had steep price declines and now owe more than their home is worth continue to struggle, he said.

The majority of the problem remains in the Sun Belt states, such as California and Florida, which accounted for about 43.4 percent of the foreclosures started during the third quarter. Delinquency rates also grew locally.

The number of borrowers delinquent or in foreclosure in the District, for example, rose to 10.3 percent during the third quarter, compared with 7.4 percent during the same period last year. In Virginia, 9.9 percent of borrowers were in trouble with their mortgage compared with 7 percent last year. Maryland has the highest proportion of borrowers in delinquency or foreclosure in the area, 13.9 percent during the third quarter. That is up from 9.2 percent last year.

The foreclosure problem is building despite a massive government program that pays lenders to lower borrowers' payments. The rising foreclosure rate is not surprising, said John Taylor, chief executive of the National Community Reinvestment Coalition, a nonprofit housing group. "It's still disappointing nonetheless. Everyone would like to see a slowdown in this," he said.

The report also weighed on Wall Street on Thursday, along with mixed economic data. The Dow Jones industrial average was down 0.9 percent, or 93.87 points, to close at 10,332.44, while the Standard & Poor's 500-stock index fell 1.3 percent, or 14.90 points, to 1094.90. The tech-heavy Nasdaq composite index had the heaviest losses after reports that Bank of America had downgraded the semiconductor sector. It fell 1.7 percent, or 36.32 points, to 2156.82.

The results overshadowed a Labor Department report showing that the number of workers filing for initial unemployment benefits stayed flat last week. Also, the Federal Reserve Bank of Philadelphia's general economic index, which measures manufacturing activity in the mid-Atlantic region, reached 16.7 in November, up from 11.5 in October.

"This is an easy opportunity for some of the weak hands to take some profits," said Phil Orlando, chief equity market strategist at Federated Investors in New York. "I am characterizing what is going on here as a speed bump. This turn in the economy is real. There is just a little bit of chop to the numbers."

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