Mortgage lenders in the Northeast may be saddled with abnormally high loan foreclosures through 1997, reflecting persistent weakness in the regional economy.

An analysis by Fitch Investors Service Inc. says the highest average foreclosure rates on residential mortgages will be in New Jersey, Connecticut, and the New York area.

For example, foreclosure rates will average 1.44% in Connecticut, nearly double the projected national average of 0.74%, according to Fitch.

"Although there are signs of economic improvement, Connecticut will continue to lag the nation in terms of job growth," the report says. One of the biggest problems: fewer manufacturing jobs because of cutbacks in defense spending.

Despite the weak outlook for the Northeast, the report contains some encouraging predictions. Fitch says foreclosures will return to about the national average in California, where they have skyrocketed this year.

Bright Spots

The best areas for mortgage credit quality will be the nation's capital, Delaware, and Baltimore. In the Midwest, mild default rates are likely to continue, Fitch says.

Overall, Fitch expects a national five-year average of about 74 foreclosures for each 10,000 mortgages - about three-quarters of 1%. The national rate has not been that low since 1974, when it was one-half of 1%.

"We are expecting some economic improvement, and the national average we're projecting is below what it's been recently," said James D. Nadler, a Fitch managing director and co-head of its residential mortgage group.

"The important thing is that the change isn't uniform across the country - and we are focusing on regions because of this."

Forecasting Model

New York-based Fitch derived its foreclosure forecast from a model it has just developed to help buyers of mortgage-backed securities anticipate defaults in specific regions of the country. But the findings have broad significance to mortgage lenders and servicers.

"A lender can look at regions and use expected defaults to raionally price a loan. If there's more risk in an area, you need to put that risk into your pricing," Mr. Nadler said. "Also, you can decide how to allocate resources. You need more attention to workouts and counseling in a higher-foreclosure area."

The Fitch model, developed with the WEFA Group of Bala Cynwyd, Pa., looks at employment, personal income, population trends, housing starts, industry diversification, and sales of existing homes in each region. It then projects foreclosure rates from these data.

"The interplay between the indicators, as well as the amount of change in each indicator, plays an important role in the outlook for each region," says Mr. Nadler.

Appreciation Projected

Home prices play a significant role in the Fitch analysis. The company's report includes projections of price appreciation by region through the fourth quarter of 1995.

Parts of the Northeast are expected to have the highest total appreciation in the period, with the Boston area leading the way, at about 27%. The rest of Massachusetts is expected to show a gain of just under 20%, as are Nassau and Suffolk counties in New York.

Such gains would constitute recovery from a flat housing market, but they would not be enough to restore default rates to normal if the economy remained sluggish.

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