Lenders launched foreclosure actions against more than one of every 200 U.S. mortgage borrowers in the fourth quarter of 2006, the biggest share of homes at the start of the repossession process on record.

Driven by subprime borrowers with trouble making payments, the proportion of mortgages in the initial stages of foreclosure was at the highest in the 37-year history of the Mortgage Bankers Association’s National Delinquency Survey.

The share of mortgaged homes at the start of the foreclosure process rose to a seasonally adjusted 0.54 percent last quarter, topping the previous record of 0.50 percent touched in the second quarter of 2002, when the economy was recovering from recession.

Late payments on U.S. mortgages also rose in the fourth quarter to their highest level in three-and-a-half years.

After the MBA delinquency report the three main U.S. equity indexes extended losses and fell more than 1.8 percent. U.S. Treasury debt prices rose as investors sought a safe haven from the potential spread of woes in the subprime mortgage market.

"Subprime borrowers are more likely to be susceptible to the cumulative increases in interest rates that we have experienced and the resultant nationwide slowing of home-price appreciation, including outright declines in some markets," said MBA chief economist Doug Duncan.

Problems in the subprime mortgage sector, which involves loans to riskier borrowers, have been a major factor roiling the U.S. financial markets in recent weeks.

"Significant increases in delinquency rates have in some cases led to unexpected increases in credit losses and the failure of some subprime specialist firms," Duncan said. "Some lenders who have been exiting the business stated that they didn’t underwrite properly the risk in the loans."

As risk premiums demanded on future business grow, lenders pass higher costs on to borrowers, making it more difficult for people to take out new home loans.

"We would expect possibly up to a 30 percent reduction in subprime production in 2007 relative to 2006, as that pricing has already hit the Street," Duncan said.

The MBA also pushed back its prediction for when the U.S. housing sector will regain its footing, saying this will be toward the end of this year. In December, it forecast that a turnaround would happen in the middle of 2007.

Delinquencies rose for all loan types but were largest for subprime adjustable-rate loans that reset at higher interest rates, the industry trade group said.

The overall mortgage delinquency rate increased to a seasonally adjusted 4.95 percent in the fourth quarter, up from 4.67 percent in the prior quarter and from 4.70 percent in the fourth quarter of 2005.

Subprime adjustable-rate mortgage (ARM) delinquencies jumped to 14.44 percent in the fourth quarter from 13.22 the prior quarter.

In contrast, prime ARM delinquencies rose to a much lower 3.39 percent from 3.06 percent.

"The gist is that the prime market delinquencies are still far from troubling levels and the trends are also not worrisome, while the subprime pace of deterioration remains broadly unaltered and problematic," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Mounting troubles in subprime loans are unlikely to significantly taint mortgages held by borrowers with higher credit quality, many strategists contend.

"We think the spillover to other parts of the mortgage sector is going to be limited. It’s not something that we expect to have significant macro implications," said Torsten Slok, senior economist at Deutsche Bank.

Mississippi, Louisiana and Michigan had the highest overall delinquency rates, well above the national average, at 10.64 percent, 9.10 percent and 7.87 percent, respectively.

The states with the largest increases in overall delinquency rates from the prior quarter were West Virginia, Maine and Florida.

At the regional level, the Northeast’s overall seasonally adjusted delinquency rate of 4.58 percent and the West’s 3.18 percent rate were below the 4.95 percent national average. The North Central region’s late payment rate of 5.68 percent and the South’s 5.71 percent rate exceeded it.

Via Yahoo