Foreclosures Jump 87%

I mentioned yesterday in a post on the subprime meltdown that I thought the next round of foreclosure data would be particularly brutal. Well it is. But before we dive into the numbers please check out this "foreclosure heat map" courtesy of Barry Ritholtz. I think its safe to say things are going to be getting a lot hotter as the summer goes on.

Okay, now on to the numbers. This morning Bloomberg reported that US foreclosures increased 87% in June:

There were 164,644 loan default notices, scheduled auctions and bank repossessions in June, led by filings in California and Florida, where home prices have plummeted, and Ohio and Michigan, where automotive-related businesses have fired workers. Those four states accounted for half the national total, RealtyTrac, a seller of foreclosure data, said today in a statement.

Foreclosures are soaring amid a glut of properties and as interest rates close to an 11-month high make it more difficult for borrowers to refinance. Defaults may rise further as owners with adjustable rates see their payments soar. The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to Freddie Mac data.

RealtyTrac also said that 58% of the foreclosures are from subprime borrowers. What does this mean? It means that the lower end of the real estate market will be hit the hardest. Which states are the worst? You guessed it, the two states with perhaps more subprime lending than any other:

Nevada had the highest foreclosure rate in June with one filing for every 175 households, more than four times the national average of one per 704, RealtyTrac said. Nevada had 4,722 foreclosure filings, more than three times its total a year ago.

California had the second-highest rate, with one filing per 315 households, and the most filings overall, 38,801, for the sixth month in a row. Foreclosures in California, the most populous state, increased almost three-fold over a year ago.

Why am I so sure that foreclosures will continue to pick up? I hate to beat a dead horse, but if you look at the chart below we are just now entering a huge wave of resetting subprime loans. There really won't be much relief for the next 16 months. (Click to Enlarge)

This alone wouldn't be a huge deal if it weren't for the following three things that will lead many of these borrowers into foreclosure:

1. Tighter Lending Standards - There is virtually no subprime lending going on right now.
   
2. Lower Home Prices - Many if not most of these borrowers are underwater.
3. Higher mortgage rates - See graph below - We are at a 5 year high!