California’s mortgage defaults hit record level in Q3

Lenders initiated foreclosure proceedings against a record number of California homes in the third quarter ended Sept. 30, real estate research company DataQuick Information Systems reported today.

The company reported 72,571 notices of default from July through September, a 34.5 percent rise compared to the second quarter and a 166.6 rise compared to third-quarter 2006.

The previous record default level of 61,541 was set in first-quarter 1996, compared with a low of 12,417 in third-quarter 2004. An average of 34,781 notices of default have been filed quarterly since 1992.

Default notices, which are recorded at county offices, are the first step in a foreclosure process. The number of default notices set records for 39 of the state’s 58 counties, according to DataQuick.

Mortgages were least likely to go into default in San Francisco, Marin and San Mateo counties, on a loan-by-loan basis, the company reported, while the likelihood of default was reportedly highest in Merced, San Joaquin and Riverside counties.

“We know now, in emerging detail, that a lot of these loans shouldn’t have been made,” said Marshall Prentice, DataQuick president, in a statement. “The issue is whether the real estate market and the economy will digest these over the next year or two, or if housing market distress will bring the economy to its knees.

“Right now, most California neighborhoods do not have much of a foreclosure problem. But where there is a problem, it’s getting nasty,” he stated.

Half of the default activity in California is confined to 293 ZIP codes that are mostly in the Inland Empire and Central Valley, according to the report. Collectively, home prices for those ZIP codes had increased 34 percent year-over-year in first-quarter 2005, peaking in third-quarter 2006 at $399,000, the company reported.

The third-quarter 2007 median price of $352,250 represents an 11.7 percent drop from that peak.

For the other 1,172 ZIP codes tracked by DataQuick, year-over-year price appreciation peaked in second-quarter 2004 at 25 percent, and the third-quarter median of $575,000 was 2.5 percent below the prior quarter’s peak.

Most of the loans that went into default in the third quarter were originated from July 2005 to September 2006, DataQuick reported, with a median age of 18 months. Loan originations peaked in August 2005. The share of adjustable-rate mortgages for primary purchase home loans peaked at 77.8 percent in May 2005 and has since fallen, the company also reported.

The report noted that individual residences can be financed with multiple loans, and the 72,751 third-quarter default notices were recorded on 68,746 residences.

For primary mortgages statewide, homeowners were a median five months behind on payments when their homes entered the default process, and borrowers owed a median $10,914 on a median $344,000 mortgage, DataQuick reported.

Homeowners were a median eight months behind on their payments for lines of credit and borrowers owed a median $3,355 on a median $66,351 credit line, according to the report, though the company reported that it could not determine from public records the amount of the credit line actually in use.

DataQuick cited San Joaquin County’s 95330 ZIP code, Riverside County’s 92571 ZIP code and Sacramento’s 95832 ZIP code as those with the biggest foreclosure problem in the state, and also noted that ZIP code-level data can “fluctuate severely.”

An estimated 45.9 percent of homeowners in default avoid foreclosure by bringing payments current, refinancing or selling the home and paying what they owe, according to the report — that compares with 80.9 percent a year ago, DataQuick reported.

“The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes ‘work-outs’ difficult,” according to the report.

The total number of homes actually lost to foreclosure in the third quarter reached 24,209 in the third quarter, which is the highest level since DataQuick began keeping statistics in 1988. That number was up 38.7 percent from the previous quarter and up 604.8 percent compared to third-quarter 2006.

The peak of the prior foreclosure cycle was 15,418 in third-quarter 1996, with a low of 637 in second-quarter of 2005.

Foreclosure properties in the 293 hardest-hit ZIP codes resold for 11 percent less than nonforeclosure homes, DataQuick reported, and foreclosure resales in the rest of the state “were near or at the price levels of other sold properties.”

RealtyTrac, another company that provides foreclosure data, reported this month that California had the third-highest foreclosure rate in September among all states, with one foreclosure filing for every 253 households — up 246.2 percent compared to September 2006.

*includes additional counties
Source: DataQuick Information Systems