Forex

11:53 03/06 (CEP News) Washington – Mortgage foreclosures in California and Florida may further aggravate the U.S. economic slowdown, and even hamper any recovery in the latter half of 2008 because of the impact those two states have on the nation’s broader economy.

California and Florida make up a fifth of the U.S. housing market while representing more than a third of foreclosure starts in the final quarter of last year. Both states are huge contributors to the overall U.S. gross domestic product, representing as much as 18.5% of GDP.

“That slowdown will have an impact on the broader market place,” said MBA chief economist Doug Duncan. “Those states had significant speculation excess in terms of building and funding and so they have a significant oversupply and it’s leading to large downturn in house prices.”

Mortgage delinquencies in the fourth quarter of 2007 jumped 23 basis points from the previous quarter to 5.82% of all loans outstanding, an 87 basis point rise from delinquency rates a year ago, according to the MBA’s National Delinquency Survey released Thursday.

The total delinquency rate in the U.S. is at the highest level in more than two decades, and the rate of foreclosure starts and the percentage of loans in foreclosure are also at the highest levels recorded.

"Declining home prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,” Duncan said.

In states like Ohio and Michigan, declines in the demand for homes due to job losses and population losses have meant fewer buyers, particularly as lending standards have tightened in the past nine months, further reducing the pool of potential buyers.

Duncan was quick to point out that 92% of mortgage borrowers are paying on time.

All regions of the country are experiencing some level of home price depreciation, with states like California seeing home prices drop by as much as 25%. The MBA expects home prices to continue to decline through 2008 in both California and Florida.

“The rest of the U.S. housing market will be in recovery while California and Florida are still in decline, Duncan said.

Prices will have to fall far enough that home affordability reaches borrowers who are at the margins in terms of credit qualifications. With tighter lending standards, that gap is expected to widen as people who previously would have qualified for loans face historically higher underwriting guidelines from lender.

The good news for subprime ARM borrowers, who make up a large percentage of loans in foreclosure, is that as the Federal Reserve has downwardly adjusted the federal funds rate while LIBOR, upon which many mortgage rates are based, has not increased. That means that borrowers with resetting subprime ARMS will face interest rates at or near their current contract rates.

Rising interest rates are a large driver of current subprime defaults and foreclosures, as borrowers at the margins — facing higher loan payments, higher energy costs, and in many cases job losses or wage cuts — allow lenders to take their homes.

The delinquency rate does not include loans in the process of foreclosure, which totalled 2.04% at the end of Q4 2007, an increase of 35 bps over the third quarter of last year and 85 bps more than the year ago period.

The rate of loans entering foreclosure was 0.83%, 5 basis points higher than the previous quarter and up 29 basis points from Q4 2006.

The trade group prime fixed rate loan foreclosure starts remain unchanged from the previous quarter at 0.22%, but prime ARM foreclosure starts rose 4 basis points to 1.06%.

Subprime foreclosure starts jumped 14 basis points to 1.52% and subprime ARM foreclosure starts jumped 57 basis points to 5.29%. FHA foreclosure starts fell 4 basis points to 0.91% and VA foreclosure starts were unchanged at 0.39%.

Compared to last year, foreclosure starts for prime ARMs increased to 1.06% from 0.41% and the rate for subprime ARMs increased to 5.29% from 2.70%.

While subprime loans represent 7% of loans outstanding, they comprise 42% of foreclosures started during the fourth quarter. Prime ARMs represent 15% of loans outstanding but 20% of foreclosures started.