LAT: Mortgage Defaults Expected to Grow

latimes.com

Mortgage Defaults Expected to Grow
With home-price rises slowing, many Californians behind on payments
won't be able to avoid foreclosure, a research firm says.

By Annette Haddad
Times Staff Writer

August 13, 2005

In another sign that California's real estate boom may be peaking, the
state's foreclosure activity has bottomed and is expected to rise, new
data suggest.

After declining for nine straight years, the number of default notices
sent to delinquent homeowners continued to level off during the second
quarter, real estate research firm DataQuick Information Systems said
Friday.

The reason: The state's real estate cycle is maturing and price
increases are slowing.

"We're currently at a floor level," said John Karevoll, DataQuick's
chief analyst. "Any movement now is going to be up."

A default notice is sent to a homeowner as the first step in a formal
foreclosure process.

Over the last year, the level of default notices has "bounced along the
bottom," Karevoll said. It hit a low in the third quarter of 2004, when
defaults fell to 12,145. They started to tick up during the final
quarter of 2004 and the first quarter of 2005.

But foreclosure activity edged lower again during the April-to-June
quarter, when lenders sent default notices to 12,408 California
homeowners. The number of notices in the second quarter was virtually
flat with the year-ago period.

Default notices peaked in 1996's first quarter at 59,897.

Southern California saw a slight increase in foreclosure activity in
the second quarter, while the San Francisco Bay Area and the Central
Valley experienced small decreases.

Some foreclosure activity is expected even in the hottest real estate
markets, Karevoll said. But over the last 18 months, the level has been
"unnaturally low."

That's because rising home prices allowed distressed homeowners who
couldn't meet their mortgage payments to sell their properties without
taking a loss. As the rate of appreciation continues to slow, more
homeowners won't be able to get out from under their debt before their
lender forecloses on them, Karevoll said.

Since last year, home prices have continued to rise but at a slower
rate. California's median home price increased 16.7% in the second
quarter to $433,000, slower than the gain in the year-earlier quarter
of 22.8%, DataQuick said. The median price is the point at which half
of all homes sell for more, half for less.

Historically, only about 10% of homeowners who receive a default notice
actually lose their homes to foreclosure. But with wider use of
higher-risk mortgages, such as "interest-only" loans, analysts expect
foreclosure rates to creep higher.