very solid in recent years. however, that statement is no longer true of subprime mortgages with adjustable interest rates, which currently account for about two - thirds of subprime first - lien mortgages or about 9 percent of all first - lien mortgages outstanding. for these mortgages, the rate of serious delinquencies – corresponding to mortgages in foreclosure or with payments ninety days or more overdue – rose sharply during 2006 and recently stood at about 11 percent, about double the recent low seen in mid - 2005. 3 the rate of serious delinquencies has also risen somewhat among some types of near - prime mortgages, although the rate in that category remains much lower than the rate in the subprime market. the rise in delinquencies has begun to show through to foreclosures. in the fourth quarter of 2006, about 310, 000 foreclosure proceedings were initiated, whereas for the preceding two years the quarterly average was roughly 230, 000. 4 subprime mortgages accounted for more than half of the foreclosures started in the fourth quarter. the sharp rise in serious delinquencies among subprime adjustable - rate mortgages ( arms ) has multiple causes. " seasoned " mortgages – mortgages that borrowers have paid on for several years – tend to have higher delinquency rates. that fact, together with the moderation in economic growth, would have been expected to produce some deterioration in credit quality from the exceptionally strong levels seen a few years ago. but other factors, too, have been at work. after rising at an annual rate of nearly 9 percent from 2000 through 2005, house prices have decelerated, even falling in some markets. at the same time, interest rates on both fixed - and adjustable - rate mortgage loans moved upward, reaching multi - year highs in mid - 2006. some subprime borrowers with arms, who may have counted on refinancing before their payments rose, may not have had enough home equity to qualify for a new loan given the sluggishness in house prices. in addition, some owners with little equity may have walked away from their properties, especially owner - investors who do not occupy the home and thus have little attachment to it beyond purely financial considerations. regional economic problems have played a role as well ; for example, some of the states with the highest delinquency and foreclosure rates

their mortgages. to some extent, the dispersed ownership of mortgages may combine with legal and accounting rules to make successful workouts more difficult to achieve. for example, the " pooling and servicing agreement " associated with a given securitized mortgage pool may restrict the share of accounts that can be modified. accounting rules that, in some cases, require substantially modified pools to be brought back on the originator ’ s balance sheet may dissuade lenders from undertaking workouts. and extensive modifications that reallocate expected cash flows across different securities associated with the pool could trigger a review of those securities by the ratings agencies. at the same time, if workouts are economically viable, then an incentive exists for third parties to purchase distressed pools at a discount and to undertake the workout process. we see these purchases taking place in the marketplace, a development that should help to increase the number of successful workouts. also, local community organizations that work to promote homeownership and prevent foreclosures have stepped up their efforts. for example, neighborworks america advises borrowers about restructuring their mortgages. a survey conducted by this group found that many homeowners do not understand that lenders also want to avoid foreclosure. thus, the simple step of encouraging borrowers in trouble to contact their lenders can be very productive. the federal reserve and the other supervisory agencies have encouraged financial institutions to identify and contact borrowers many mortgage brokers are subject to minimum licensing standards and bonding or net worth criteria, but these standards and criteria vary across states. who, with counseling and financial assistance, may be able to avoid entering delinquency or foreclosure. indeed, some lenders are being proactive in this regard – for example, by contacting borrowers to discuss possible options well before a scheduled interest - rate reset. possible regulatory responses looking forward, the federal reserve, other regulators, and the congress must evaluate what we have learned from the recent episode and decide what additional regulation or oversight may be needed to prevent a recurrence. in deciding what actions to take, regulators must walk a fine line ; we must do what we can to prevent abuses or bad practices, but at the same time we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers. broadly speaking, financial regulators have four types of tools to protect consumers and to promote safe and sound underwriting practices.