Another Drop in California Mortgage Defaults

January 27, 2010

La Jolla, CA.--The number of California homes entering the foreclosure process declined again during fourth quarter 2009 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: 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.

A total of 84,568 Notices of Default ("NODs") were recorded at county recorder offices during the October-to-December period. That was down 24.3 percent from 111,689 for the prior quarter, and up 12.4 percent from 75,230 in fourth-quarter 2008, according to San Diego-based MDA DataQuick.

NODs reached an all-time high in first-quarter 2009 of 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 housing market annual appreciation rates were around 20 percent.

"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 John Walsh, DataQuick president.

While many of the loans that went into default during fourth quarter 2009 were originated in early 2007, the median origination month for last 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. 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," Walsh said.

The state's most affordable sub-markets, which represent 25 percent of the state's housing stock, accounted for 52.0 percent of all default activity a year ago. In fourth-quarter 2009 that fell to 34.9 percent.

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.

On home equity loans and lines of credit in default, borrowers owed a median $3,939 on a median $62,965 credit line. However the amount of the credit line that was actually in use cannot be determined from public records.

San Diego-based MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. Notices of Default are recorded at county recorders offices and mark the first step of the formal foreclosure process.

Although 84,568 default notices were filed last 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, DataQuick reported.

Mortgages were least likely to go into default in San Francisco, Marin and San Mateo counties. The probability was highest in Merced, Stanislaus and Riverside counties.

The number of Trustees Deeds recorded, which reflect the number of house or condo units foreclosed on, totaled 51,060 during the fourth quarter. That was up 2.1 percent from 50,013 for the prior quarter, and up 10.6 percent from 46,183 for fourth-quarter 2008. The all-time peak was 79,511 in third-quarter 2008.

In the last real estate cycle, Trustees Deeds peaked at 15,418 in third-quarter 1996. The state's all-time low was 637 in the second quarter of 2005, MDA DataQuick reported.

Foreclosure resales continued to decline as a market factor, accounting for 40.7 percent of all California resale activity last quarter. It was 42.7 percent the prior quarter, and a year ago it was 54.4 percent. It peaked at 57.8 percent in the first quarter of 2008. Foreclosure resales varied significantly by county last quarter, from 9.3 percent in San Francisco to 69.5 percent in Merced.

Of the 328,310 homes foreclosed on statewide in the 18-month period ending last September, 84.8 percent had been re-sold by the end of 2009. A year prior, the comparable number was 66.0 percent.

There are 8.5 million houses and condos in California.

The lenders that originated the most loans that went into default last quarter were Countrywide (5,588), Wells Fargo (3,482) and Washington Mutual (3,460). Along with Bank of America (1,760) and World Savings (1,869), they were also the most active lenders in the second half of 2006. Last quarter's default rate on loans originated in the second half of 2006 ranged from 1.5 percent for Bank of America to 13.1 percent for World Savings.

Smaller subprime lenders had far higher default rates for that period: ResMAE Mortgage was at 74.8 percent, Ownit Mortgage 70.6 percent, Master Financial 69.9 percent, First NLC Financial Services 69.4 percent and Fieldstone Mortgage 65.7 percent. While these and most other subprime lenders are long gone, their loans were bundled, resold and now live on as "troubled assets".

Indeed many, if not most, of the loans made in 2006 are owned and/or serviced by institutions other than those that made the loans. The servicers pursuing the highest number of defaults last quarter were ReconTrust Co, Quality Loan Service Corp and Cal-Western Reconveyance, DataQuick reported.

Notices of Default (first step in foreclosure process)
houses and condos

* includes additional counties

Trustees Deeds Recorded (signal homes were lost to foreclosure)
houses and condos