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The foreclosure crisis continues to worsen amidst predictions from economic gurus in April that the situation would work itself out. The Mortgage Bankers Association reported that 2.5% of mortgage loans being serviced by its members are in foreclosure – a historical record high. The numbers mean that 1.1 million homeowners have or are in the process of losing their homes, which has increased from 2% of loans – or 938,000 homes – at the end of 2007. Also hitting a record high are the 3 million homeowners at least one payment in arrears, and 737,000 mortgage holders are three months behind, though not in foreclosure yet.

There is little hope to expect the housing crisis to slow until 2009 and perhaps not until a couple of years down the road. “It’s the same story we’ve been seeing for a while now - we had too much reckless lending and buyers who got over-extended,” he said. “We’ve had an unprecedented decline in home prices on a nationwide basis, which is public enemy number one for mortgage loans. And now you’ve got an overall economy that has slowed adding to this toxic stew,” said Michael Larson, real estate analyst with Weiss Research.

Subprime loans with adjustable rates that were granted to borrowers with less than perfect credit scores are the biggest problem. Four out of ten (39%) ARM loans have been reported to be at least a month late, or already in foreclosure. But even the less risky prime fixed rate mortgages that were considered the least risky loan suffers at a foreclosure pace of 1.2%, double the rate just a year ago. About 1.2 million prime mortgages are more than a month in arrears.

According to Jay Brinkman, MBA’s vice president for research and economics, the prime loan segment was hurt by so-called Alt-A loans, which didn’t require income verification for buyers with good credit. May is the sixth straight quarter with record home loan foreclosures. The six states experiencing especially hard times are California, Florida, Arizona, and Nevada. Investors who grabbed up real estate using the riskiest mortgages available fueled rising home prices. Ohio comes in at a close second in foreclosures as the unemployment rate climbed to 5.7% due to businesses leaving the state for others with a more healthy economy.

Brinkman said that in markets like these, where home prices have fallen so far from the market’s peak, finding solutions to keep a home out of foreclosure are more difficult.
He also added that, given the large impact California and Florida are having on the national foreclosure numbers, and the fact that historically foreclosures peak about three years into the loan’s life, he expects the number of foreclosures will continue to rise.

There is a glimmer of good news. The rate of homes going into foreclosure in Ohio and Michigan was narrowly lower than it was in the fourth quarter, and 18 other states also saw a decline in that rate. Brinkman said he hoped that means the crisis is at or near a bottom in much of the country, and that foreclosure prevention efforts have started to have an effect. But he added that a slight improvement in one quarter doesn’t necessarily mean the end is near.

Indeed, the rate of homes going into foreclosure continued to climb sharply higher in California and Florida, as has the rate of loans in those states that are 90 days or more past due but not yet in foreclosure. Brinkman said that in markets like these, where home prices have fallen so far from the market’s peak, finding solutions to keep a home out of foreclosure are more difficult.

He also added that, given the large impact California and Florida are having on the national foreclosure numbers, and the fact that historically foreclosures peak about three years into the loan’s life, he expects the number of foreclosures will continue to rise.