More Californians at risk of losing homes
By David Streitfeld Times Staff Writer
January 24, 2007
The number of Californians defaulting on their mortgage loans is rising rapidly, according to figures released Tuesday, providing striking evidence that more people are at risk of losing their homes.
Default notices jumped 145% in the last three months of 2006, accelerating a trend that began in late 2005 as home sales started to cool.
It was the largest number of default notices in any three-month period since 1998.
Analysts said the increase was not worrisome yet. But if the number continues to escalate, it could drag down home values in certain communities, they warned.
"So far, this isn't alarming," said John Karevoll, chief analyst at DataQuick Information Systems, which compiled the data. But if default notices "keep going up at this rate, it could get nasty fast," he added.
Home markets that are most vulnerable include the Inland Empire and the Central Valley, both of which drew throngs of first-time buyers even as the housing boom was ending.
Such homeowners are the most at risk of losing their homes because they have relatively little equity in their properties, making it harder to refinance their mortgages.
Default notices are the initial step in the foreclosure process. In the fourth quarter of last year, lenders issued such notices to 37,273 borrowers across the state, warning them that they were at risk of foreclosure, compared with 15,196 during the same period a year earlier, DataQuick said.
Not every notice of default leads to a foreclosure, when a property is seized and sold to pay the mortgage. But foreclosures also are on the rise. There were 6,078 in the last quarter of 2006, up from 874 a year earlier.
Defaults and foreclosures fell steadily starting in the late 1990s as housing prices took off. In those heady days, practically anyone needing money to pay bills could refinance, cashing out equity from what seemed to be an endlessly refilling piggy bank.
In a stagnant or falling market, that option isn't available to recent buyers or those who have visited the pig once too often. Instead, many of those who are unable to make their payments must either sell the property or let the bank take it over.
During the mid-1990s, this process reached its peak as quarterly default statistics routinely exceeded 50,000 and foreclosures topped 15,000. (The housing stock has grown since then, making the 1990s numbers even worse by comparison.)
That era was one of the grimmest in modern California history, marred by the Los Angeles riots, the Northridge earthquake and an economic recession all of which contributed to the collapse in home values.
Today, the economy is healthy and unemployment has rarely been lower.
"I really don't see any distress out there," said Chris Comer, a mortgage broker at Pacific Capital in San Marcos, Calif. "Most people getting notices of default are figuring out ways to get those mortgages current by any means possible so they're not kicked out in the street."
Most people, but not everyone.
James Brown, a 66-year-old retired insurance agent in Salinas, Calif., has a history of heart trouble. When he had an operation in 2005, he said, "the doctor gave me a 50-50 chance I'd die on the table. So I did a stupid thing: I refinanced the house."
Brown's goal in tapping his equity was to give his wife, Monica, a $100,000 cushion after his death. But he didn't read the paperwork carefully, and didn't realize that his monthly loan payment would skyrocket.
There was also a problem with the operation: It worked.
A year or two earlier, that would have been nothing but good news. In the early part of the decade, Brown recalled, "property values went crazy."
"People pulled up in Silicon Valley and went to Salinas, and paid here what they had been paying there," he said.
But Brown awoke to a different world. With the new loan, his payments went to $4,500 a month from $2,900. The $100,000 in equity he pulled out of the house went to his medical expenses and other bills.
The property has dropped in value to $750,000 from $899,000, leaving him without enough equity to refinance. He arranged to sell the place, but the prospective buyers couldn't qualify for a mortgage.
In September he gave up and stopped paying the mortgage. He's now in default, speeding toward foreclosure.
"Three times a week, they call and say, 'Where's my money?' " he said. "If I hadn't survived, everything would have been fine."
Brown's situation illustrates a potential wild card in the housing market that barely existed a decade ago. Lenders have invented all sorts of newfangled loans, many of which are reset to higher interest rates after a fixed period. The ability of borrowers to repay such loans, particularly in a weak market, is untested.
"People are living on the edge, and they can't help it with the price of houses," said Barbara Swist, a Costa Mesa mortgage broker who is helping Brown sort through his options. "They have good jobs but they bought over their heads, buying into the American dream."
That's also the opinion of the Center for Responsible Lending, a nonprofit advocacy group based in Durham, N.C.
Last month, the center issued a lengthy analysis explaining how millions of so-called sub-prime loans would soon turn bad. Sub-prime loans are made at higher rates and include more onerous terms to borrowers who don't qualify for lower-cost "prime" mortgages.
Sub-prime foreclosures would increase the most, the authors concluded, in states that had seen strong price appreciation during the boom. That would include New York, Virginia, Maryland and particularly California.
The borrowers most at risk are naturally those who bought most recently. The center estimates that a quarter of the sub-prime loans made in the Central Valley city of Merced last year will result in foreclosure. That would be the highest rate in the country, based on the center's calculations.
Eight other California cities, including Vallejo, Bakersfield, Fresno and Stockton, were among the top 15 projected foreclosure rates.
That geographic focus is consistent with Tuesday's DataQuick numbers. The Central Valley, with about 6.5 million people, had 8,531 defaults and 1,646 foreclosures in the last three months of 2006. Los Angeles County, with 10 million people, had fewer of each.
For the state as a whole, the Center for Responsible Lending projects a failure rate of 21.4% for 2006 sub-prime loans, a level exceeded only by Nevada and Washington, D.C.
Foreclosed homes are typically sold at a discount, which can hurt property values of nearby houses.
Yet even a jump in foreclosures, said Ellen Schloemer, one of the report's authors, isn't by itself going to bring back the dark days of the early and mid-1990s.
"It won't crash the housing market," she said. "There's still a lot of people who will buy homes and keep them. As long as no life event comes along that pushes them over the edge, they'll probably be OK."
But, she added, they shouldn't get too confident.