Sept. 6 (Bloomberg) -- The number of Americans who may lose their homes to foreclosure reached a record in the second quarter as late payments by subprime borrowers surged to one out of every seven loans.

Lenders began the process of seizing properties on 0.65 percent of U.S. mortgages in the second quarter, an all-time high, the Mortgage Bankers Association said in a report today. In the first quarter, that figure was 0.58 percent. The percentage of subprime borrowers making late payments increased to 14.82 from 13.77.

Foreclosures are rising as real estate prices tumble in a third of U.S. real estate markets tracked by the National Association of Realtors and as state and federal lawmakers seek to stem delinquencies. Investors have abandoned the market for mortgage backed securities, spurring 100 home loan companies to halt operations or seek buyers. The ensuing scarcity of credit is making things worse, said Doug Duncan, MBA's chief economist.

``We will see delinquencies and foreclosures rise for another quarter or so,'' Duncan said on a conference call today. ``Home prices are falling as rates are resetting higher, making it difficult for people to refinance.''

Fed Action

President George W. Bush last week directed the Federal Housing Administration to guarantee loans for delinquent low-and middle-income borrowers. The Federal Reserve has cut the interest rate it charges banks by half a percentage point to 5.75 percent to help reduce the liquidity crisis and Chairman Ben Bernanke has said the central bank will do what's needed to prevent a credit rout.

Senate Banking Committee Chairman Christopher Dodd unveiled legislation yesterday to strengthen protection for mortgage borrowers, including banning lenders from steering borrowers into subprime loans when they qualify for prime loans.

``People are losing their homes because of the lending practices that are out there that are indefensible in my view,'' Dodd said today in a conference call with reporters.

About half of U.S. banks have raised their standards for subprime borrowers and 14 percent have made it more difficult for the most credit-worthy customers to get financing, the Federal Reserve said in July.

`Irrational Borrowing'

Almost half of the foreclosures started during the quarter were on subprime adjustable-rate mortgages, said Jay Brinkmann, vice president of research and economics for the Washington-based bankers trade group. Those types of loans represent just 7.3 percent of all outstanding mortgages, he said.

``We've got a history of irrational borrowing, irrational lending, irrational homebuilding, and we now are getting an irrational market response to these numbers,'' Brinkmann said in an interview. Investors and lawmakers have reacted to the jump in foreclosures without considering that most homeowners are paying their loans on time, he said.

Late payments of all types of mortgages rose to 5.12 percent, the highest since the second quarter of 2002, when it was 5.27 percent, the bankers group said. Delinquencies were at a 28-year low of 3.72 percent in the first quarter of 2000, the beginning of a five-year real estate boom.

Subprime borrowers with adjustable-rate loans made late payments at a rate of 16.95 percent in the recent quarter, up from 15.75 percent in 2007's first three months. The delinquent share of fixed-rate subprime loans was 10.99 percent, up from 10.25 percent.

Prime Loans

Prime borrowers accounted for 2.73 percent of overdue payments, up from 2.58 percent, the report said.

Half of the $1.2 trillion in subprime mortgage-backed securities sold in the last two years were bought by investors in Europe and Asia, said Brian Bethune, director of financial economics for Globe Insight Inc. in Waltham, Massachusetts. The bonds are held by hedge funds, pension funds, banks and private investors.

``The assumption was that home prices would go up forever, which of course is never a good bet to make,'' Bethune said.

The median price for a previously owned home in the U.S. likely will slip 1.2 percent in 2007 to $219,300, the first national decline on record, and the new-home median likely will drop 2.3 percent to $240,800, the first decrease in 16 years, according to an Aug. 8 forecast by the National Association of Realtors.

Sales of previously owned homes probably will fall 6.8 percent to 6.04 million in 2007, the lowest since 2002, the trade group said. Sales of new homes, which make up about 15 percent of the housing market, probably will tumble 19 percent to 852,000, a 10-year low, the Chicago-based trade group said.

The Mortgage Bankers report is based on a survey of 44.2 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: September 6, 2007 14:32 EDT