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Home Foreclosures Almost Double in July as Rates Rise (Update3)

By Sharon L. Crenson and Bob Ivry

 

Aug. 21 (Bloomberg) -- U.S. homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise and were unable to refinance because of the subprime crisis, RealtyTrac Inc. said.

Lenders sent 179,599 notices of default, scheduled auctions or bank repossessions last month, a 93 percent increase from a year earlier, Irvine, California-based RealtyTrac said today in a statement. California, Florida, Michigan, Ohio and Georgia accounted for more than half of the country's total filings.

An increase in foreclosures will add more homes to the market and further erode values. U.S. home sales dropped to a four-year low in the second quarter and prices fell in a third of U.S. cities, according to the National Association of Realtors. In June, a nearly nine-month supply of houses was on the market, double that of two years ago.

``Home equity has been a major factor in consumer spending, and the major concern is we'll go into a recession as that equity dries up,'' said Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School in Philadelphia. ``Consumer spending drove us out of the last recession in 1991, and we might see a reversal of that now.''

`A Little Worse'

Forty-three states had year-over-year increases in foreclosure activity and the total rate rose 9 percent from the previous month, RealtyTrac said.

Foreclosures undermine the confidence of mortgage bond investors by revealing property values as lower than the loans they collateralize, said Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, Massachusetts.

``We are estimating that we will see about 2 million foreclosure filings this year,'' said Rick Sharga, RealtyTrac's executive vice president for marketing. ``We honestly don't see it getting much better before it gets a little bit worse.''

RealtyTrac's report includes properties in all three phases of foreclosure. The process begins when a borrower defaults on loan payments and the lender files a public default notice, called a notice of default or lis pendens. If the borrower doesn't make monthly payments after that time, the property goes to auction. The third phase begins when the lender takes ownership of the house, also called REO, or ``real estate owned.''

California, Florida

California foreclosure filings totaled 39,013 in July, about triple the previous year. The state led the nation in foreclosure for the seventh consecutive month, RealtyTrac, a seller of foreclosure data, said.

Florida ranked second with a 78 percent increase to 19,179 filings. Michigan replaced Ohio as the state with the third highest number: 13,979.

Foreclosures in Michigan and Ohio are driven by the decline of manufacturing in the so-called Rust Belt states, while California, Florida and Georgia have high numbers of ``exotic mortgages,'' such as those with balloon payments or teaser rates, Wachter said.

``Home prices rose so high in those states that homebuyers needed aggressive, exotic mortgages, such as subprime, to afford to buy,'' Wachter said. ``Those are the mortgages that default first.''

Subprime mortgages, which comprised 20 percent of the U.S. home-loan market last year, are given to borrowers with bad or incomplete credit histories.

Nevada ranked the worst with one filing for every 199 homes, about three times the national average. Georgia's rate jumped from eighth to second highest in the country with one filing for every 299 households.

Defaults on subprime mortgages will continue driving up foreclosures through 2008, Sharga said, citing pending interest changes on adjustable-rate loans homeowners took out in 2005 and 2006.

``If they default like the subprimes have been defaulting this year, we won't be out of the woods for another nine to 12 months,'' he said.

To contact the reporters on this story: Sharon L. Crenson in New York at screnson@bloomberg.net ; Bob Ivry in New York at bivry@bloomberg.net .

Last Updated: August 21, 2007 14:15 EDT
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