By Renae Merle
Washington Post Staff Writer
Saturday, February 20, 2010; A16

Borrowers fell behind on mortgages at a slightly slower rate late last year, but the overall number of homeowners in financial distress remained at record levels, according to industry data released Friday.

A survey by the Mortgage Bankers Association found a surprising decline in the number of borrowers who had missed just one mortgage payment, the initial stage of delinquency. Mortgage holders who were 30 days delinquent fell to 3.6 percent of all borrowers in the fourth quarter, down from 3.8 percent in the third quarter and 3.85 percent in the corresponding period in 2008. This was the first quarter-over-quarter decline in that category since 2004.

The improvement was remarkable because delinquencies usually rise during the last three months of the year as homeowners divert cash to cover higher heating bills and holiday expenses, said Jay Brinkmann, chief economist for the industry group. If seasonal patterns hold, the rate at which loans go bad will decline again during the first quarter, he said.

The data are a sign that the end of the foreclosure crisis may be in sight, Brinkmann said. "It also gives us growing confidence the size of the problem now is about as bad as it will get," he said.

But some economists and housing experts warned that the housing market is still deeply troubled. Despite the decline in initial delinquencies during the fourth quarter, there are still record levels of homeowners in trouble with mortgages across the country. Unemployment remains a big driver of the problem, with borrowers who have traditionally been considered creditworthy accounting for a larger portion of the problem.

"There is good news and bad news in this report," Brinkmann said.

About 9.47 percent of all borrowers were delinquent on mortgages during the fourth quarter, according to a survey. The number is down slightly from the previous quarter, the highest on record, but was the second-highest level ever seen. An additional 4.58 percent of homeowners were somewhere in the foreclosure process.

This means that about 15 percent, or 7.9 million mortgages, were in trouble during the quarter, according to the industry group. It is the highest level recorded by the survey, which has been conducted since 1972, and up from 11 percent, or 6.4 million loans, during the corresponding period in 2008.

The problem facing the industry now is the more than 2.6 million borrowers who have missed at least three payments, making them seriously delinquent. They account for half of all delinquencies, double the level of a year ago and the highest on record, according to the MBA. Those borrowers are harder to save from foreclosure through mortgage relief programs and present a looming problem for the housing market.

"That is the number that is going to produce foreclosures," said Guy Cecala, publisher of Inside Mortgage Finance. "It is continuing to go up, and what it really means is that 2010 is going to be a bad year, perhaps worse than 2009 in the number of foreclosures."

The foreclosure problem continues to build despite a massive government program that pays lenders to lower borrowers' payments. On Friday, President Obama announced an additional $1.5 billion for five state housing finance agencies to come up with new programs to address the problem locally. The funds will be directed to states such as California and Florida, which the MBA data show have the majority of the troubled loans.

But the foreclosure problem also got worse in the Washington region. The number of borrowers delinquent or in foreclosure in the District rose to 10.9 percent during the fourth quarter, compared with 8.78 percent during the same period in 2008. In Virginia, 10.21 percent of borrowers were in trouble with mortgages, compared with 8.34 percent the year before. Maryland has the highest proportion of borrowers in delinquency or foreclosure in the area, at 14.7 percent in the fourth quarter, up from 11 percent the year before.

Economists have said that if unemployment rates peak by the middle of this year, foreclosures could reach their highest levels by the end of 2010. But even after peaking, they have said, foreclosure rates are likely to remain elevated as borrowers in regions that have had steep price declines and who owe more than their home is worth continue to struggle.