The fallout continues. The housing market is contracting. Pending sales dropped 12 percent last month to the lowest levels in 6 years. Although homes normally slow at the end of the summer, before kicking back into gear for the fall selling market, the turn of events here is dramatic.

Homeowners everywhere are feeling the pain. According to the latest numbers from the Mortgage Bankers Association of America (MBA), the number of homeowners starting the foreclosure process hit a record high this spring, with .65 percent of all homeowners receiving a foreclosure notice – the third consecutive record-breaking quarter.

The number of homeowners who were more than 30 days late in paying their mortgage rose sharply as well. Approximately 5.12 percent of all loans were delinquent, which is a three-quarter percent rise from a year ago.

If you look at a map of the U.S., and overlay those states with the highest number of delinquencies and foreclosures, two trends jump out, according to Doug Duncan, the MBA’s chief economist.

First, large job losses in states like Michigan, Ohio, and Indiana have translated into a large number of homeowners who can’t make their mortgage payments. If you lose your weekly paycheck, it’s tough to make ends meet.

Michigan, which has suffered through the trials and travails in Detroit, has also suffered from higher gas prices, which have cut somewhat into the state’s tourism revenues. The state was hit again recently, when Volkswagen, the world’s fourth largest manufacturer, announced it would fire a quarter of its staff, amounting to approximately 400 jobs and move its headquarters from Detroit.

The second trend that pops out on the map is that states with the highest levels of home value appreciation are now contracting nearly as quickly. The collapse of previously booming housing markets in California, Florida, Nevada and Arizona, have also contributed to the rise in delinquencies and foreclosures.

Underlying it all is the subprime mortgage mess, which may claim as many as 10,000 more jobs from Countrywide Financial, the nation’s largest independent lender. Already more than 100,000 people in the financial sector have lost their jobs this year, according to Chicago-based outplacement firm Challenger, Gray and Christmas, of which the vast majority are mortgage industry jobs.

According to the MBA, as many as 2 million adjustable rate mortgages will reset in the next year. It’s likely that some of these borrowers will find themselves unable to afford their new, higher interest rate. Many may be unable to refinance (because their credit scores aren’t good enough to qualify for a good rate) or find that their homes are worth less than the mortgage balance.

These, combined with next year’s presidential election, are the reasons some housing experts don’t see an end to the current cycle until 2009.

What can help? President Bush’s plan to loosen refinancing requirements at FHA might help some 80,000 homeowners. But what about those who don’t have FHA loans?

I received a letter recently from a reader whose monthly payments for his primary residence and a rental property gone bad total 100 percent of his take-home pay. His loan is a negative amortization mortgage, which means that the amount he is paying doesn’t even cover the amount that is actually due. The difference gets tacked onto the back end of the loan, which means that with each payment, his principal balance grows.

Right now, he’s living on some cash he has in the bank. But that will run out soon. Since the property is worth far less than the mortgage amount, his options aren’t good – and he likely won’t qualify for the help the President is touting.

All of this makes for plenty of housing pain going forward into 2008.

Sept. 17, 2007.