Image: Foreclosures in California
Jim Wilson/the New York Times/re  /  Redux Pictures
Foreclosures have hit hard in the California real estate market, no harder than in Stockton, Calif., which had the highest foreclosure rate in the third quarter, according to data released Wednesday.
By John W. Schoen Senior producer
msnbc.com
updated 11/14/2007 10:24:15 AM ET 2007-11-14T15:24:15

Foreclosure rates continued to rise in the third quarter in most of the top 100 largest metropolitan areas of the country, according to the latest data from RealtyTrac, a Web site that logs foreclosure filings.

Stockton, Calif., saw the highest rate of foreclosures — with one filing for every 31 households — a rise of 32 percent from the second quarter and more than five times the rate of last year’s third quarter. Foreclosures in Detroit were up 92 percent from the second quarter of this year; the pace in California's Riverside-San Bernardino area rose 39 percent.

The adage that real estate is all about “location, location, location” seems to be playing out in the foreclosures now facing millions of American homeowners as foreclosure rates in the third quarter varied widely from one region to the next. Cities in California, Florida and Ohio accounted for 17 of the top 25 metro area foreclosure rates, according to RealtyTrac.

Other cities in the top 10 highest foreclosure rates were Fort Lauderdale, Fla.; Las Vegas; Sacramento, Calif.; Cleveland; Miami; Bakersfield, Calif.; and Oakland, Calif. California cities accounted for seven of the top 25 metro foreclosure rates, while Florida and Ohio each accounted for five of the top 25 spots.

The report found there were still parts of the country that have so far largely escaped the problem of surging foreclosures, including Virginia and North and South Carolina.

Much of the risky lending that helped fuel the housing boom dried up this summer when investors lost their appetite for these loans, after tens of billions of dollars worth of mortgage-backed paper all but evaporated. The credit scare has thrown a chill on all mortgage lending, threatening to proloing the ongoing housing slump.

Mortgage giant Countrywide Financial said Tuesday that it financed $22 billion worth of home loans last month — down 48 percent from a year ago. The lender, which was one of the biggest suppliers of subprime loans to borrowers with risky credit backgrounds, said it wrote just $42 million worth of subprime loans in October. That’s down from $3.3 billion a year ago.

Congress and the White House continue to look for ways to hold back the rising tide of foreclosures being created by a wave of “resets” on adjustable-rate mortgages. Many of these ARMs will jump over the next two years from low, initial teaser rates, resulting in high payments that many homeowners’ will be unable to afford.

Though lenders are now shunning stretched borrowers with risky credit, millions of existing loans with two- and three-year introductory rates will begin resetting next year.

Federal Reserve Chairman Ben Bernanke told lawmakers in Washington last week that nearly 2.3 million subprime mortgages will reset at higher rates through the end of next year. An estimated 1 million to 2 million borrowers will be unable to avoid foreclosure.

A lot depends on how much further and longer the housing slump continues to depress home prices. It’s also far from clear how many borrowers will be able to work out arrangements to modify loan terms to keep them from losing their homes.

When foreclosure can’t be avoided, the losses extend beyond the borrower losing a home. The foreclosure process typically costs lenders added legal fees, taxes due until the property is sold and lost equity in a house that must be priced to sell in a falling market. The added inventory of unsold homes further weakens local housing markets, depressing the value of other nearby homes.

Overall, the coming rise in home foreclosures is expected to drag down property values by some $223 billion, with the most severe impact in minority communities, according to a report released this week from the Center for Responsible Lending.

The group estimates that roughly one in three households will see their property values drop by $5,000 on average as mortgages written in 2005 and 2006 reset at higher interest rates.

Property values and tax revenues will decline most sharply, the center said, in neighborhoods with lots of minority residents, who received a disproportionate share of such mortgages. The report's authors said that properties that go unsold in the foreclosure process can also raise the risk of fire and vandalism.

"These foreclosures are wiping out wealth that people often took a lifetime to build," said Martin Eakes, the center's chief executive. "Many families will never achieve homeownership again."

Lenders are also posting huge losses as the easy money lending spree that fueled the housing boom continues to unwind. This month alone many major banking companies including Citigroup, Merrill Lynch, Morgan Stanley and Bank of America have reported billions in losses on investments backed by mortgages.

In his testimony last week, Bernanke told Congress that the losses from the current turmoil in the mortgage market could eventually approach those seen in the late 1980s, when the savings and loan industry collapsed under heavy wave of real estate defaults, some of them the result of fraudulent transactions.

This time around, bad mortgage debt may cost banks as much as $400 billion by the time the credit crisis is over, Deutsche Bank wrote in a research report Monday.

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