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Foreclosures hitting more people with prime loans

By Staff | Nov 19, 2009

WASHINGTON (AP) — A rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure, adding to concerns about the strength of the economic recovery.

Driven by rising unemployment, such loans accounted for nearly one-third of new foreclosures last quarter. That compares with just 21 percent a year ago, when high-risk subprime loans made during the housing boom were the main reason for default.

At the same time, the proportion of homeowners with a mortgage who were either behind on their payments or in foreclosure hit a record high for the ninth straight quarter.

The Mortgage Bankers Association’s report Thursday suggests that the housing market and the broader recovery are under pressure from the surge in home-loan defaults, especially as unemployment keeps rising. Lost jobs are now the main reason homeowners fall behind on mortgages. By contrast, during the housing boom, dubious and risky loans were the leading cause.

After three years of plunging prices, the housing market started to rebound this summer. But analysts say there are too many foreclosed properties that have yet to be dumped on the market. That’s why they expect further price declines.

About 4 million homeowners were either in foreclosure or at least three months behind on their mortgage payments as of September, according to the mortgage bankers group. Even if a quarter of those borrowers are able to stay in their homes, “there’s a lot of potential inventory coming into the market next year,” said Jay Brinkmann, chief economist with the Mortgage Bankers Association.

Those foreclosures will push home prices downward, especially in the hardest-hit California and Florida cities that are also coping with soaring unemployment, he said.

With prime fixed-rate loans now accounting for nearly one-third of new foreclosures, subprime loans with adjustable rates have fallen to 16 percent of new foreclosures, down from 35 percent a year earlier.

Loans backed by the Federal Housing Administration also show increasing signs of trouble. More than 18 percent of FHA borrowers are at least one payment behind or in foreclosure.

Among states, the worst of the trouble is still concentrated in California, Nevada, Arizona and Florida, which accounted for 44 percent of new foreclosures in the country. Nearly 13 percent of all loans in Florida were in foreclosure, the highest in the U.S., followed by Nevada at more than 9 percent.