The foreclosure tsunami in California continues unabated.
More foreclosures were started in California during the
second quarter of 2007 than any comparable period in over
ten years. We need to go all the way back to 1997 to see
such record volume of foreclosures within the state. What
has caused this tsumani? It has been caused by the
"perfect storm" of depreciating home prices, anemic sales,
re-setting adjustable rate loans, and the mortgage meltdown
in the financing sector.
When we analyze the statistics, we can see that the vast
majority of the loans that went sour were originated by
lenders between the summers of 2005 and 2006. If you
remember those halcyon days, real estate appreciation was
still in double-digits and we were experiencing the
tail-end of historically low interest rates. As a result,
lenders liberalized their guidelines to maintain high loan
volumes. But because interest rates had risen, lender
utilized adjustable rates mortgages with artificially low
"teaser rates" to qualify more borrowers. Property owners
took advantage of those loosened guidelines and teaser
rates to obtain loans in record numbers. Its those teaser
rates, now adjusting up to higher market rates, that are
causing the tsunami of foreclosures we are experiencing
today.
Keep in mind, there are 8.4 million houses and condos in
California. The vast majority of those properties are
financed by mortgages that are current and continue to be
current.
Nevertheless, the loans that did fall into default last
quarter were mostly originated between July 2005 and August
2006, which was at the height of the mortgage frenzy. The
median price paid for a California home purchased during
that period was $460,000. In contrast, the median price
paid for those properties where mortgages went into default
last quarter was only $445,500. (This discrepancy is
caused because there is a lower default rate with higher
valued properties.)
The median mortgage for those properties is $342,000, and
their mortgage payment is approximately $2,225 per month.
Homeowners were five months behind on their payments (up
from three months) when the lender started the default
process. The borrowers owed a median $11,126 in unpaid
mortgage payments. In other words, once the foreclosure
starts, the borrower has the choice to either "reinstate"
the loan by paying the $11,126 arrears, or "redeem" the
loan (later in the foreclosure process) by paying the loan
balance (i.e. $342,000) and the arrearage (i.e. $11,126).
Obviously, reinstating is preferred to redeeming.
The median age of these defaulted loans is 16 months, which
corresponds to the peak of loan originations in August of
2005. And, as we all know, the primary loan utilized for
purchasing home during that period was the
1. Notices of Default.
The first step in the foreclosure process in California is
the recording of a Notice of Default ("NOD"). There were
53,943 Notices of Default recorded in the second quarter of
2007 (April to June). That is a shocking number in itself,
but even more devastatinging when you consider that it was
15.4% increase from the previous quarter, and up an
earth-shattering 158% compared with the same quarter of
2006.
This was the highest levels we have seen in California
since 1996, when foreclosures were at their worst. In
1996, for those of us that remember those dreadful days,
61,541 foreclosures were started. The lowest level
recorded was in the third quarter of 2004, when only 12,417
NODs were filed.
Although 53,943 default notices were recorded in California
last quarter, only 50,901 properties were affected. How is
that possible? Many homes are financed using more than one
loan, what are called "piggy-back" loans. Utilizing
multiple loans on the same property helps homeowners avoid
mortgage insurance. That is up 162.8% from the second
quarter of 2006.
The default numbers reflect wide regional differences. The
second-quarter numbers were a record in Riverside, San
Bernardino, Contra Costa, Sacramento and most Central
Valley counties. However, in Los Angeles County, the
state's largest, it was still less than half the
first-quarter 1996 peak. This reflects the depth of the
recession in the mid-1990s, as well as the relative
strength of today's housing market. At least so far…
On a loan-by-loan basis, mortgages were least likely to go
into default in Marin, San Francisco and San Mateo
counties. The likelihood was highest in San Joaquin, Merced
and Riverside counties.
Overall, Southern California counties saw 30,828 notices of
default recorded last quarter, a 151% increase over 2006!
If you enjoy hanging out at county recorder's offices like
me, you will quickly notice that Los Angeles County has the
largest volume of defaults in the state. While the
percentage, at 126% is still lower than other counties, the
sheer volume (10,393 NODs) during the second quarter is its
own mini-tsunami. The recorder's office had to open extra
windows just to handle the onslaught.
The worse foreclosure county in California in terms of
percentages continues to be Riverside where 6,648 NODs were
filed this quarter, a 190% increase over 2006. It was just
three years ago that Riverside County was the fastest
growing county in the United States. Now it has the
dubious distinction of having the highest percentage of
foreclosures in the country. Not far behind is San
Bernardino County, where 5,141 NODs were filed, a 179%
increase compared to 2006.
Fortunately, 54% of California homeowners in default
ultimately avoid losing their homes in foreclosure by
either bringing their payments current, refinancing, or
selling the home and paying off what they owe. But even
that is becoming dramatically more difficult as the real
estate market sinks. A year ago it was 92%. In other
words, last year only 8% of the homeowners that fell into
foreclosure, actually lost their properties. In contrast,
today over 46% of the homeowners in foreclosure loss their
homes at a trustee's sale! This dramatic increase reflects
the continuing slowdown in the real estate market.
2. Trustee's Deeds.
Those homeowners that don't bring their loans current (or
weren't able to refinance or sell their homes in time),
ultimately loss them at trustee's sales on the courthouse
steps. At that point, a Trustee's Deed Upon Sale ("Trustee
Deed") is recorded in the county recorder's office,
signifying the new owner. When we analyze Trustee's Deeds
recorded in the second quarter of 2007, the statistics are
disheartening. 17,408 homeowners lost their homes during
the second quarter! That is the highest number ever
recorded by the various companies that methodically keep
these statistics. By way of comparison, the number of
Trustee's Deeds was up 57% from the first quarter of 2007,
and a mind-boggling 799% from the second quarter of 2006.
The previous high watermark occurred in the third quarter
of 1996, when 15,418 Trustees Deeds were recorded. For
those of you keeping score, the lowest level was 637 in the
second quarter of 2005, when the real estate market was
still in full regalia.
In Southern California, where foreclosures are at their
worse, the volumes of Trustee's Deeds stand in stark
contrast to the boom years of 2000-2005. Of the 9,504
Trustee's Deeds recorded in Southern California counties
during the second quarter of 2007, the highest volume was
in Los Angeles County. 2,581 properties were lost in
foreclosure in LA County, a 799% increase compared to the
comparable time period in 2006. But that was not the
worse county in California. By far, San Bernardino County
holds that distinction with a 987% increase in 2007
compared to 2006.
What does all of this mean for the future? Well, so far
(and it is a big "so far") foreclosures have not tugged
down property values. However, if foreclosures continue to
rise unabated in the final quarter of 2007, it will
inevitably unleash more empty properties into the market
place. That, coupled with continued turmoil in the
mortgage markets, will inevitably lead to increase
inventories of unsold homes, and certainly lower real
estate values. Some of the worst-hit neighborhoods in the
Empire and Central Valley markets are already experiencing
an erosion of their property values. A harbinger of
things to come.
----------------------------------------------------
Lloyd Segal is a mortgage banker, attorney, author, and
speaker. He teaches monthly foreclosure and short sale
workshops to investors and realtors in Southern California.
You can signup at http://www.foreclosureworkshop.net .
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