In financial news, the record-breaking stock market rally of last week pushed subprime markets and foreclosures off the front page. But while the Dow Jones Industrials nearly touched 14000 points for the first time in history, some are finding evidence that foreclosures will soon wipe those smiles off investors faces.

According to the latest monthly report from RealtyTrac, a foreclosure listing service, home foreclosures fell in June after jumping to a 30-month peak in May, but the company predicts that foreclosure rates will escalates when record numbers of hybrid and adjustable rate mortgages reset.

The Mortgage Bankers Association predicts that about two million subprime mortgages will reset this year, due to decades-low interest rates on mortgages offered in 2004 and 2005. According to chief economist Mark Zandi of Moody's Economy.com, more than $50 billion in ARMs will reset in October alone. Not only is that a record, but when those loans reset with payments predicted to be nearly 40 percent higher, the nation could be facing a record number of foreclosures, too. The MBA expects as many as 600,000 homeowners to run into trouble paying their mortgages, and about half of those will lose their homes.

Doug Duncan, chief economist for the MBA says that the areas that will be hardest hit are the ones that are experiencing high unemployment and rapid speculation. Unfortunately, that encompasses major sections of the country, Detroit to San Diego.

Many blame the same market that's so exuberant over record DOW gains -- the equities market, as those loans were purchased and packaged into equities to be sold to investors. Once the defaults began to occur, and the market anticipated a flood of defaults due to rising interest rates, mortgage backers began to crack down on balloon loans and laissez-faire underwriting. That step alone knocked many first-time homebuyers out of the market, which added to housing's other troubles -- overbuilding and inaffordability due to higher interest rates and housing prices.

And let's not leave out the real drivers -- greed and the strong sense of entitlement that put many into starter homes, McMansions and luxury properties they really couldn't afford with higher energy and food prices along with core inflation numbers.

Since interest rates began to rise since 2005 and lately at a steeper angle (interest rates have risen over half a point since May, adding more than $50 to the average floating mortgage payment) foreclosures have risen to levels not seen since the fraud-driven savings and loan debacle of the late 1980s and early 1990s.

The monthly U.S. Foreclosure Market Report tracks filings, not actually foreclosure closings. This includes default notices, auction sale notices and bank repossessions. In June, the report showed a total of 164,644 foreclosure filings, down 7 percent from a 30-month high set in May. But that's still up 87 percent from June 2006.

Nevada had the highest foreclosure filing rate for the sixth month in a row, one filing for every 175 households, nearly four times the national rate. Second was California with a rate of one filling for every 315 households. Also in the top ten state for highest number of foreclosures were Colorado, Florida, Arizona, Ohio, Michigan, Georgia, Connecticut and Indiana.

The 10 metros with the highest foreclosure rates for June were Stockton, Merced, Modesto, Riverside-San Bernadino, Valleho-Fairfield, Sacramento, Las Vegas, Greeley, Detroit and Miami.

Foreclosures by themselves are bad news, but what they could do to the already struggling housing market is fairly scary.

The MBA puts it all into perspective. "New and existing home sales declined in May. Year-to-date new home sales are down 20.9 percent from sales in the first five months of 2006.  Year-to-date sales of single-family homes were down 8.3 percent from those in the first five months of last year, compared with a decline of 7.1 percent for year-to-date sales of condos."

What that means is that there is higher inventory. "The months' supply for new homes edged up to 7.1 months from 7.0 months in April. Despite the slight increase, the months' supply has improved significantly from as high as 8.3 months in March. Inventory of total existing homes for sale increased strongly in May for the second consecutive month to a new record. Declining single-family home sales and rising inventories significantly pushed up the months' supply to 8.7 percent -- the highest reading since June 1992. The months' supply for condos fell to 9.7 months from 10.0 months. (The data are not seasonally adjusted.) Despite the decline, the months' supply of condos was still much higher than the May 2006 reading of 7.8 months.

If existing home sales average about 6 million annually and new homes sales average about 1 million, what is going to happen when a flood of 600,000 subprime-loan purchased homes reaches the market? The number of homes offered for sale could be even higher, if mortgagees attempt to sell their homes before their loans reset.

Further exacerbating the situation, let's think back and remember that in 2004 and 2005, nearly 40 percent of all homes purchased were for second homes or investment purposes. If those homes unaffordable due to resetting loans or lack of returns to investors, those homes could also flood the market, making local markets in coastal California, Florida and inland meccas such as Nevada and Arizona more vulnerable to price decreases.

And when prices decrease, buyers are unpredictable. As the recent market has proven -- despite decades-low interest rates, all-time high inventories to choose from, and softening prices, buyers can still sit stubbornly on the sidelines if they believe prices will drop further.

And some of them may be sidelined because they can't buy.

Freddie Mac and Fannie May, the two government-sponsored enterprises responsible for buying back loans from banking lenders and packaging the loans into securities, have announced new policies effective September 13, 2007 that will limit the risks lenders can take when making subprime loans by demanding greater scrutiny of borrowers' ability to repay the loans.

So not only will there be more homes on the market, there will be fewer qualified to buy them.

Published: July 16, 2007

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.