A Light at the End of the Bad Credit Home Loan Tunnel?

The percentage of U.S. mortgages entering the foreclosure process set an all-time record in the second quarter of 2007, even before a late-summer meltdown.

The Mortgage Bankers Association announced on September 6 that the ongoing turmoil in the financial markets will delay the market’s eventual recovery by at least a few months.

On the bright side, the mortgage group said, the increase in foreclosures was concentrated in four states: California, Florida, Nevada, and Arizona.

Those states had big shares of adjustable-rate mortgages, high prices, and lots of home purchases by speculators. Excluding them, “we would have seen a drop in the rate of foreclosure filings,” Duncan said.

Problems are also severe in the Upper Midwest states of Michigan, Ohio, and Indiana, where manufacturing job losses have damaged the housing market.

Nationally, the core of the problem is subprime adjustable-rate mortgages that were originated in 2005 and 2006, when mortgage brokers and home loan lenders’ standards became extremely lax.

But default rates also ticked up for ARM loans issued to prime borrowers - that is, those borrowers considered most likely to repay.

Troubles in the bad credit home loan sector grew significantly worse in the months after the April-to-June period that the report covers.

Dozens of bad credit mortgage lenders went out of business and others saw the tightening of their lending standards significantly.

Making matters worse, home prices have fallen in many areas of the U.S., wiping out the equity of recent buyers. As a result, borrowers who ordinarily would have been able to refinance into a lower-interest-rate loan are stuck paying high rates that they may not be able to afford.

For people with ARM loans, those rates are resetting upward.

Continue reading this Business Week article on subprime lending …