Michael Brandy, Deseret News
Utah is not immune to the housing crisis, this home in Sandy is "bank owned," but its foreclosure rate is well below the national average.

WASHINGTON — More than 4 million American homeowners with a mortgage — a record 9 percent — were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis worsened, the Mortgage Bankers Association said Friday.

But the source of trouble in the mortgage market has shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.

"The problem that policymakers and Wall Street once assured us was 'contained' to subprime mortgages has proven to be anything but," Mike Larson, a real-estate analyst with Weiss Research, said in a research note.

The trouble is concentrated in a handful of states, the worst being California and Florida, which had some of the riskiest lending practices and rampant speculation.

"We are unlikely to see a national turnaround until we see a turnaround in the two largest states," with the most outstanding home loans, said Jay Brinkmann, the association's chief economist.

The latest quarterly figures broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure. The trade group's records go back to 1979.

The percentage of loans at least one month past due or in foreclosure was up from 8.1 percent in the January-March quarter, and up from 6.5 percent a year ago, using figures that were not adjusted for seasonal factors.

New foreclosures rose dramatically in eight states: Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio, but actually declined in Texas, Massachusetts and Maryland.

Almost 500,000 homeowners, or about 1 percent, entered the foreclosure process in the second quarter.

In Utah, 4.33 percent of home loans were delinquent, and 1.23 percent were in foreclosure at the end of the second quarter, the report said. Both figures were well below the national rate of 6.41 percent for past due loans and 2.75 for foreclosures.

But a recent report by market-analysis firm RealtyTrac indicated that foreclosures in Utah rose 22 percent in the second quarter of 2008, compared with the first three months of the year.

Nationally, for the first time since the mortgage crisis started, delinquencies on subprime adjustable-rate loans declined. While more than one out of every five homeowners with a subprime ARM is still in default, that portion dipped 1 percentage point from the first quarter to 21 percent.

What's driving the delinquency rate up now is the number of homeowners with risky, adjustable-rate prime loans made with little or no proof of the borrowers' income or assets.

More than one out of 10 borrowers with a prime adjustable-rate loan is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter and is expected to continue to rise as more homeowners see their monthly payments spike.

Many of these loans allowed the borrower to pay only the interest on the loan for a fixed period. Others gave the borrower the option to "pick-a-payment," adding any unpaid interest to the principal balance.

Defaults on these mortgages, which earned the nickname "liar loans," are costing Fannie Mae and Freddie Mac billions of dollars. The Treasury Department has even pledged to bailout the mortgage finance companies if necessary.

With home prices plummeting, particularly in California, Nevada, Arizona and Florida, many borrowers with these exotic loans now owe more on their home than it is worth.

Worse still, these loans reset to higher monthly payments when borrowers reach maximum debt limits — typically around 10 to 25 percent more than the original loan balance.

Those resets can increase the borrower's monthly payment by more than $1,000 a month on average, Fitch Ratings said in a report this week. And nearly half of these pay-option loans are expected to reset to higher monthly payments by the end of 2010, Fitch said. -->

Contributing: Jasen Lee, Deseret News.