Another Drop in California Mortgage Defaults

LA JOLLA, CA-The number of California homes entering the foreclosure process declined again during fourth quarter amid signs that the worst may be over in hard-hit entry-level markets, while slowly spreading to more expensive neighborhoods.

There are mixed signals for 2010, according to MDA DataQuick here, a division of MDA Lending Solutions.

"It's unclear how much of the drop in mortgage defaults is due to shifting market conditions, and how much is the result of changing foreclosure policies among lenders and loan servicers, a real estate information service reported," said John Walsh, DataQuick president

A total of 84,568 notices of default were recorded at county recorder offices during the October-to-December period. That was down 24.3% from 111,689 for the prior quarter, and up 12.4% from 75,230 in the fourth quarter of 2008. NODs reached an all-time high in first quarter of 2009 with 135,431, a number that was inflated by activity put off from the prior four months. In the second quarter of last year, NODs totaled 124,562. The low of recent years was in the third quarter of 2004 at 12,417, when annual appreciation rates were around 20%.

"Clearly, many lenders and servicers have concluded that the traditional foreclosure process isn't necessarily the best way to process market distress, and that losses may be mitigated with so-called short sales or when loan terms are renegotiated with homeowners," said Mr. Walsh.

While many of the loans that went into default during fourth quarter were originated in early 2007, the median origination month for the quarter's defaulted loans was July 2006, the same month as during the prior three quarters. The median origination month during the last quarter of 2008 was June 2006. This means the foreclosure process has moved forward through one month of bad loans during the past 12 months.

"Mid-2006 was clearly the worst of the 'loans gone wild' period and it's taking a long time to work through them," Mr. Walsh said.

"We're also watching foreclosure activity start to move into more established mid-level and high-end neighborhoods. Homeowners there were able to make their payments longer than homeowners in entry-level neighborhoods, but because of the recession and job losses, that's changing. Foreclosure activity is a lagging indicator of distress."

The state's most affordable submarkets, which represent 25% of the state's housing stock, accounted for 52% of all default activity a year ago. In the fourth quarter it fell to 34.9%.

On primary mortgages, California homeowners were a median five months behind on their payments when the lender filed the NOD. The borrowers owed a median $13,510 on a median $325,818 mortgage.

Although 84,568 default notices were given during the fourth quarter, they involved 82,777 homes because some borrowers were in default on multiple loans (e.g., a primary mortgage and a line of credit). Multiple default recordings on the same home are trending down.

MDA DataQuick said mortgages were least likely to go into default in San Francisco, Marin and San Mateo counties.

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