Foreclosure "third wave" coming, economists say

As job losses rise, growing numbers of U.S. homeowners with once-solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation's real-estate disaster, the locus of trouble has shifted from subprime loans — those extended to home buyers with troubled credit — to the far more numerous prime loans issued to those with decent histories.

With many economists expecting unemployment rates to rise into the double digits from the current 8.9 percent, foreclosures are expected to accelerate. "We're about to have a big problem," said Morris Davis, a real-estate expert at the University of Wisconsin. "Foreclosures were bad last year? It's going to get worse."

Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real-estate prices, and the secondary shock, when borrowers' introductory interest rates expired and were reset higher.

"We're right in the middle of this third wave, and it's intensifying," said Mark Zandi, chief economist at Moody's Economy.com. "That loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults."

Those sliding into foreclosure today are more likely to be modest borrowers whose loans fit their income than the consumers of exotically lenient mortgages that formerly typified the crisis.

Economy.com expects that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.

From November to February, the number of prime mortgages that were delinquent at least 90 days, were in foreclosure or had deteriorated to the point that the lender took possession increased more than 473,000, exceeding 1.5 million, according to a New York Times analysis of data provided by First American CoreLogic, a real-estate research group. Those loans totaled more than $224 billion.

During the same period, subprime mortgages in those three categories increased by fewer than 14,000, reaching 1.65 million. The number of similarly troubled Alt-A loans — those given to people with slightly tainted credit — rose 159,000, to 836,000.

Overall, more than 4 million loans worth $717 billion were in the three distressed categories in February, a jump of more than 60 percent in dollar terms compared with a year earlier.

Under a program announced in February by the Obama administration, the government is to spend $75 billion on incentives for mortgage-servicing companies that reduce payments for troubled homeowners. The Treasury Department says the program will spare as many as 4 million homeowners from foreclosure.

But three months after the program was announced, a Treasury spokeswoman, Jenni Engebretsen, estimated the number of loans that have been modified at "more than 10,000 but fewer than 55,000."

In the first two months of the year alone, an additional 313,000 mortgages landed in foreclosure or became delinquent at least 90 days, according to First American CoreLogic.

"I don't think there's any chance of government measures making more than a small dent," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.