Gloomy Foreclosure Outlook

There were 77,071 new foreclosure properties on the market in the second quarter, up 4,715 listings from the previous quarter, the Foreclosure Economic Advisory Council’s latest quarterly report showed. Compared to the second quarter 2005, new foreclosures were up 5 percent.

While national foreclosure rates have remained balanced, they “have not yet reflected what is happening in the current housing market,” the report said. Housing and economic indicators signal a significant increase in foreclosures will occur in the remainder of the year and into 2007 as a result of home price appreciation rates returning to single digits, the increasing inventory of available homes for sale and high interest rates.

The South, which led the nation with 35,382 new listings, and the Midwest continue to hold 83 percent of the nation’s new foreclosures because they have not had the abundance of buyers and record-breaking price appreciation experienced by the West and Northeast.

Georgia had the South’s highest quarterly increase — 24 percent to 7,539 — and had the highest rate in the nation, with households per foreclosure hitting a high point of 1,133 in June. Three factors that may have contributed to the increase in number of foreclosures are a higher than average population living below the poverty line, a higher than average percentage of Federal Housing Administration-insured loans, and appreciation rate of only 5.8 percent.

Texas’ number of foreclosures was higher, rising 13 percent to 10,814 in the second quarter, and its rate remains among the top 10 in the nation. While Florida and the Washington, D.C., ended the quarter in the bottom 10 states, the council said it expects these to show foreclosure increases in the coming months, as these areas have seen home prices drop more than 20 percent over the past few months and have a high number of available homes for sale.

Foreclosure rates held steady in the Midwest but were the highest in the nation, with an average of 2,645 households per foreclosure. Indiana, Michigan and Ohio continue to hold the highest rates in the region and are each among the top six nationally. The council anticipates the region’s rates will continue to hold steady because, unlike other regions affected by significant valuations in real estate, the Midwest is likely being mainly influenced by interest rate changes and pockets of slower than average economies.

The West had a 3 percent increase in number of foreclosures to 7,909, with Colorado accounting for almost half of them. While the increase was moderate, signs point to a forthcoming period of increased activity. Current overvaluation of home prices in California and Nevada — which hold about half of the 25 most overvalued areas in the country — have kept foreclosure numbers low, but their respective numbers rose 39 percent and 40 percent from the first quarter and are expected to sustain this quick pace as home prices are falling at a quick pace.

The Northeast had the lowest foreclosure rate in the nation and its number of new foreclosures fell about 7 percent form the first quarter to 5,669. But much like the West region, the Northeast is showing signs of home price drops, particularly in the Boston area and outreaching [portions of New England.

“Homeowners who will be most affected — those who used exotic mortgage products — are also those who are typically the most marginal borrowers,” the council stated. “We expect to see an increasing number of these borrowers default through 2008.”

One of the report’s contributors, Jim Gaines, a research economist for Texas A&M University, says factors indicating higher loan default and, or, foreclosure risks include, recent subprime borrowers and borrowers in loans with loan-to-value ratios in excess of 95 percent of value.

Another of the report’s contributors cited that homeowners at most risk of losing their home are those who opted for an option adjustable-rate mortgage or a loan with no money down anytime after fall 2004.

The council believes the number of ARM loans that will reset over the next two years will have their largest impact on foreclosures in 2007 and 2008. Nearly $1.2 trillion in first-lien ARMs is expected to reset in 2006 and, in the following year, the number is estimated to rise to almost $1.3 trillion, the report said.

“Unlike past experiences when high foreclosures levels were primarily driven by national, regional or local economic contractions, the recent phenomenon is more directly linked to unprecedented mortgage terms and aggressive lending practices,” Gaines said in the report.

“Resetting interest rates on adjustable rate loans and little or no equity in the property,” as well as substantial increases in property taxes and utility costs are causing strain on household monthly budgets, Gaines added. And “when a homeowner does get into financial difficulty and tries to sell the property to avoid default and foreclosure in areas where home prices have not increased substantially, are now declining, or where builders are still active and aggressively marketing new homes, he or she quickly learns that there is no “out.”