Homeowner distress continued to spread beyond subprime mortgages in the first quarter, when prime, fixed-rate loans accounted for the largest share of foreclosure starts for the first time during the housing crisis, the Mortgage Bankers Association said Thursday.

And with unemployment on the rise, the trade group said mortgage performance might not begin to recover for another two years.

The MBA expects "signs of [economic] growth by the end of this year, but we will not see a turnaround in the employment situation until the middle of 2010," Jay Brinkmann, chief economist for the trade group, said on a conference call to discuss its quarterly delinquency survey. "And since mortgage performance lags an improvement in the jobs market, that would then put us through the end of 2010 and perhaps the first quarter of 2011."

The percentage of mortgages more than 30 days delinquent increased a record 124 basis points from the fourth quarter, to a record 9.12%.

Factors driving delinquencies and foreclosures have shifted away from the poor underwriting that characterized the subprime boom and toward the widespread weakening in economic conditions, the MBA said, but Arizona, California, Florida and Nevada remain epicenters of pain. The percentage of foreclosure starts in those states increased 3 points from the fourth quarter to 46%.

Brinkmann blamed the phenomenon on steep declines in home prices that have left borrowers unable to cover mortgage debt by selling their homes. "If you have a divorce, if you have a loss of income, you're much more likely to have an underwater mortgage in one of those states."

The percentage of foreclosure starts for prime fixed-rate loans increased 4.1 points from the fourth quarter and 10 points from a year earlier, to 28.9%. For subprime adjustable-rate mortgages, the percentage fell 3.6 points from the fourth quarter and 12.4 points from a year earlier, to 26.6%.

"It's clearly a case of the economy driving a number of these problems," Brinkmann said. "In many cases, these prime fixed mortgages are some of hardest things to work out, because it's usually the case that this follows the loss of income."

Overall, foreclosure starts as a percentage of mortgages increased 29 basis points from the fourth quarter and 36 basis points from a year earlier, to 1.37%. Loans more than 90 days past due or in foreclosure increased 94 basis points from the fourth quarter and 321 basis points from a year earlier, to 7.24%.

Brinkmann attributed some of the jump in foreclosure starts to the fact that last year they were "being held artificially low" by state and local bans and mortgage companies that were waiting to see the details of federal modification programs. And until prices increase in some areas, "we are still going to see a number of homeowners end up in foreclosure, because if they lose their jobs," they can't sell their home and cover the debt.

The MBA said its survey included about 45 million mortgages — or about 80% to 85% of the market — serviced by 120 companies.

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