Economist's Commentary: February 22, 2008

Foreclosures Are Rising — Activity Varies By State

By George Ratiu, Research Economist

Foreclosures are rising, driven by mortgage delinquencies in states with high price appreciation and speculative investing. An analysis of Mortgage Bankers Association data showed that the number of foreclosure starts reached 354,254 in the third quarter of 2007, 36 percent higher than the previous quarter. Foreclosure inventories also moved up to 767,551 in the third quarter, from 619,472 in the second quarter of 2007. The numbers reflect eleven states that posted more than a 100 percent increase in foreclosure inventories, including Arizona, California, Nevada and Florida.

Foreclosure activity was not even across the country. Three states experienced decreases in year-over-year foreclosure starts — Vermont (down 26%), South Dakota (down 17%), and Utah (down 16%).

The moves come amidst an increase in the volume of mortgage loans. The number of mortgages increased by 2.6 percent in the third quarter of 2007; on a year-over year basis, the increase was 6.6 percent.

Subprime mortgages were the driving force behind the increase in foreclosure activity, although prime mortgages are also exhibiting some upward pressure. The number of foreclosure inventories for prime mortgages moved from 0.59 percent of all loans in the second quarter to 0.79 percent in the third quarter of 2007. For subprime mortgages during the same period, foreclosure inventories increased from 5.52 percent to 6.89 percent of all loans serviced.

On a positive note, the number of subprime mortgages serviced decreased in every state in the third quarter of 2007 compared with the second quarter. The decreases ranged from 0.9 percent lower in Alaska to 5.15 percent lower in Iowa. That is, fewer subprime loans are held by homeowners.

Based on quarterly activity, the numbers for the fourth quarter of 2007 are likely to continue the upward trend. Most of the sharp increases are likely attributed to investor/speculator property purchasers who have no emotional attachment to the home and are simply walking away. However, the passage of the national economic stimulus package along with various industry efforts on loan remodification is likely to mitigate some of the effects of rising foreclosures in the coming months.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.