Feb. 2 (Bloomberg) -- Defaults on mortgages to people with poor credit histories or large debt burdens rose in November above their worst levels during the last recession six years ago, according to Friedman Billings Ramsey Group Inc.

The percentage of subprime mortgages packaged into bonds and delinquent by 90 days or more, in foreclosure or already turned into seized properties climbed to 10.09 percent from 9.08 percent in October, analysts led by Michael D. Youngblood at the Arlington, Virginia-based firm said in a report today. The default rate fell to 5.37 percent in May 2005 from 10.05 percent in November 2001, when economic growth resumed.

Defaults on subprime loans have surged as rates on ones made in 2002, 2003 and 2004 adjust higher as their fixed-rate periods end following an increase in short-term interest rates from the lowest in 45 years. Subprime mortgages made in 2005 and 2006 are suffering from slumping home prices and looser lending standards.

``These borrowers are very leveraged and have little skin in the game'' because they took out loans with small, or no, down payments and many of them haven't seen their properties appreciate, Debashish Chatterjee, an analyst at Moody's Investors Service in New York, said in an interview Jan. 26.

Friedman Billings didn't say whether the default rate was the highest ever. Youngblood, who used data from San Francisco- based First American Corp.'s LoanPerformance unit, wasn't available for comment.

U.S. economic growth rose to a 3.5 percent pace in the fourth quarter, the Commerce Department said Jan. 31. The economy shrank at a 1.4 percent annual rate in the third quarter of 2001, amid the terrorist attacks of Sept. 11 and stock-price declines, the biggest contraction since the first quarter of 1991.

Falling Prices

U.S. home prices fell from the previous month in August, September, October and November, the first monthly declines since December 2001, according to the S&P/Case-Shiller Home Price index, which tracks prices in 20 major metropolitan areas. The price drops accelerated to 0.41 percent in November.

More than a dozen sub-prime mortgage lenders have closed in the past two months, including Middletown, Connecticut-based Mortgage Lenders Network USA Inc., Agoura Hills, California-based Ownit Mortgage Solutions, Charlotte, North Carolina-based Wachovia Corp.'s EquiBanc Mortgage and the Equity One unit of Puerto Rico's Popular Inc.

Fraud Factor

Fraud by borrowers is also contributing to higher defaults, according to lending executives including Originate Home Loans Inc. Chief Executive Officer James Marino. One type is the use of ``straw buyers'' who are in collusion with homebuilders or real estate speculators, he said. The buyers don't intend to pay back their loans after buying a house for more than it's worth.

At least a third of potential subprime loans that brokers discuss having Marino's Westmont, Illinois-based lender make appear to involve fraud, he said. He is cutting about half of his 80-person staff to reduce his company's business of lending through brokers, whom he calls often complicit.

``There's more of it out there than people are willing to admit,'' Marino said in an interview last month.

The contribution of the weak job markets and economies in Midwest, Northeast and Gulf Coast states to rising subprime delinquencies is also underestimated, Youngblood has said.

Subprime mortgages, home loans with rates generally at least 2 or 3 percentage points above safer prime loans, are given to people with low credit ratings or combinations of other attributes that make it more likely lenders will have to foreclose on their homes and sell them for losses. Such loans made up about a fifth of all new mortgages last year, according to the Washington-based Mortgage Bankers Association.

`Teaser' Rates

They typically come with ``teaser'' rates that are fixed for two or three years and then will adjust higher even without a rise in short-term interest rates; the adjustment will be greater with an increase. Rates on about $600 billion of subprime home loans will start adjusting this year, according to New York-based Bear Stearns Cos., the largest underwriter of mortgage bonds.

Foreclosures begun on subprime adjustable-rate mortgages, or ARMs, rose to a four-year high of 2.19 percent in the third quarter, according to the mortgage bankers' group.

Friedman Billings is an investment bank and money manager with a focus on mortgage companies and assets. It also owns First NLC Financial Services LLC, a non-prime mortgage lender.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: February 2, 2007 13:41 EST