By Francesca Levy, Forbes.com
Jul 12, 2010
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Many people who fall behind on their mortgages never catch up. In these markets, the problem is especially bad.

The foreclosure crisis is far from over, and new statistics show that in many cities it’s bound to get worse before it gets better. In cities like Las Vegas, Nev.–where 10% of all home loans are 90 or more days delinquent–a new wave of foreclosures is likely to occur in coming months.

In Depth: Riskiest Cities for Homeowners
Las Vegas ranks at the top of our list of Riskiest Cities for Homeowners, but it’s not alone in its troubles. In hard-hit housing markets like Orlando, Fla., Riverside, Calif., and Memphis, Tenn., thousands of homeowners are risking foreclosure. Overall, 7% of all loans are at least 90 days delinquent in the 10 riskiest cities in America–considerably more than the 4.4% average delinquency rate across the country’s 100 biggest metros.

In Depth: Riskiest Cities for Homeowners

To find the 10 riskiest cities for homeowners, we relied on Lender Processing Services (LPS), a Jacksonville, Fla.-based mortgage-industry service provider. They provided us with the percentage of borrowers who were three months or more late on their mortgage payments, as of May 31, in the 100 largest Metropolitan Statistical Areas in the U.S.

In all but two of the 10 riskiest cities for homeowners–Orlando and Miami, Fla.–the percentage of homes in foreclosure is lower than that of homes with severely overdue loans. In part, that’s because efforts by loan servicers and the federal government to modify loans have stemmed foreclosures for some homeowners. But the delinquency rate reveals just how many borrowers are in crisis, and signals more trouble to come.

“Just think of it as a cascading waterfall,” says Kyle Lundstedt, a senior managing director at LPS. “Just because there’s not as much water in the pool at the bottom doesn’t mean there’s not a lot of water in the buckets at the top.”

Some at-risk homeowners will receive help from the government’s Making Home Affordable program, or from lenders themselves, who will restructure the terms of their loans. A smaller percentage of those homes with mortgage modifications will avoid foreclosure altogether. But, according to LPS, more than half of the delinquent loans that are restructured end up in foreclosure a year later, meaning that many foreclosures are only getting pushed further into the future. Delinquency rates can offer another perspective on the shape of the foreclosure crisis.

Foreclosure capitals see trouble ahead

Many of the cities where the foreclosure risk is highest have familiar stories. In “sand state” cities–metros in Florida, California and Nevada–rising prices during the housing boom meant that when the bubble burst, homeowners were underwater, with little hope that home prices would ever return to their peak. In Las Vegas, Orlando and Miami, a combined 68,670 homeowners are behind on their loans by three months or more.

In California a housing-fueled recession has caused a state budget crisis, which is reflected in our list. Six out of 10 of our riskiest cities are in the Golden State. But it’s not just big cities where foreclosures are in danger of going up. Mid-sized metros like Riverside, Stockton, Modesto, Bakersfield and Vallejo saw dramatic run-ups in prices before the housing market peaked in 2006. Now those cities have severe delinquency rates between 9.7% and 8.6%.

As housing prices shot up in big cities like Los Angeles and San Francisco, a rising number of homeowners sought cheaper homes in cities as far as an hour or two outside the city. That put upward pricing pressure on these “exurbs,” but when the housing market collapsed, the cities couldn’t sustain that demand.

“A lot of these were extended commuter locations for the most expensive areas,” says Lundstedt. “When prices dropped, those places were hard hit.”

A bust with no bubble in Memphis

But it’s not only in boom cities where homeowners are at risk. In Memphis, Tenn., 7.1% of all loans are three months overdue or more. Memphis never had the rampant overbuilding and subsequent excess inventory that pushed prices down dramatically in many sand state metros. What it does have is a 10.2% unemployment rate.

“It’s not purely a house price story; there’s a second story going on,” says Lundstedt. “When you combine even moderate house price declines with significant unemployment, you get a double whammy that has significant consequences for the consumer.”

In most of our riskiest cities, the foreclosure rate is more modest than the delinquency rate. In part, that’s thanks to loan “cures” that have helped struggling homeowners avoid delinquency. But in many cases it’s a sign of a much more troubling reality. In some metros, foreclosures have slowed simply because a glut of foreclosures has clogged the system. That means inevitable foreclosures won’t get flushed out of the market, allowing it to recover, any time soon.

“There are lots of places where people are so deeply in trouble there’s nothing we can do about them, but their numbers are so significant in certain locales that the system can’t move them through,” says Lundstedt. “The government process has become overwhelmed.”

Top 5 Riskiest Cities For Homeowners

1. Las Vegas, Nev.
Number of loans 90 or more days delinquent: 33,985
Percent of loans 90 or more days delinquent: 9.86%
Number of homes in foreclosure: 29,991
Percent of homes in foreclosure: 8.70%

2. Riverside, Calif.
Number of loans 90 or more days delinquent: 62,158
Percent of loans 90 or more days delinquent: 9.71%
Number of homes in foreclosure: 30,816
Percent of homes in foreclosure: 4.81%

3. Stockton, Calif.
Number of loans 90 or more days delinquent: 8,853
Percent of loans 90 or more days delinquent: 9.40%
Number of homes in foreclosure: 4,459
Percent of homes in foreclosure: 4.73%

4. Modesto, Calif.
Number of loans 90 or more days delinquent: 6,529
Percent of loans 90 or more days delinquent: 8.83%
Number of homes in foreclosure: 3,224
Percent of homes in foreclosure: 4.36%

5. Bakersfield, Calif.
Number of loans 90 or more days delinquent: 9,011
Percent of loans 90 or more days delinquent: 8.55%
Number of homes in foreclosure: 3,987
Percent of homes in foreclosure: 3.78%