Foreclosure notices on the rise

By James Lanaras, Bay City News Service

August 3, 2006

Waning home price appreciation has recently caused the fastest rate of increase in foreclosure activity in California in the past 14 years, DataQuick Information Systems reported Wednesday.

The company compared foreclosure activity as measured by default notices between the second quarter of this year and the second quarter of 2005.

Despite the second quarter surge, defaults still remain below historically normal measures, according to DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. The company monitors and releases real estate activity nationwide.

"This is an important trend to watch but doesn't strike us as ominous. The increase was a statistical certainty because the number of defaults had fallen to such extreme lows.

We would have to see defaults roughly double from today's levels before they would begin to impact home values much,'' said Marshall Prentice, president of DataQuick.

Every Bay Area county except Marin experienced an increase in the notices of default on houses and condos during the one-year period ending June 30, according to DataQuick's figures. The increase in the Bay Area was 37 percent, the lowest of several regions monitored by DataQuick.

Default notices are filed with the county recorder's office and mark the first step in the foreclosure process. The increase in the default notice rate was highest in Northern California, 97 percent, and in the Central Valley, 85 percent.

Default notices declined 9.4 percent in Marin County. They increased 74 percent in Napa County; 65 percent in Solano County; 53 percent in Sonoma County and 51 percent in San Mateo County. All other Bay Area counties were below 43 percent. Santa Clara County default notices increased the least in the Bay Area, 14.5 percent.

Default notices increased 104 percent in Riverside County; 99 percent in San Diego County; 108 percent in Sacramento County; 110 percent in Stanislaus County and 126 percent in Placer County.

In Sutter County, the default rate increased 229 percent. There, second quarter default notices increased from 17 in 2005 to 56 in 2006.

There was no change in the default notice rate in Santa Cruz County.

Dennis Kelly, assistant manager of Coldwell Banker in San Rafael, said DataQuick's figures sound "extreme,'' but he said he has recently noticed anecdotal evidence of some people in Marin County falling behind their mortgage payments, especially those with 100 percent financing of their mortgage. He said the default notice rate in Marin County could increase.

Kelly said it takes lenders three to six months to file a notice of default and then another three months for lenders to issue a notice of sale.

It is possible Marin County's default notice rate declined in the past year because homeowners in Marin County are wealthier than homeowners in other areas of the state and Bay Area and better able to make their mortgage payments, Kelly said.

The median price of a home in Marin County was $971,500 last month.

DataQuick said lenders sent 20,752 default notices to homeowners statewide during the April-through-June 2006 period, a 10.5 percent increase over the first quarter of 2006 and 67.2 percent more than the second quarter of 2005.

Last quarter's year-over-year increase was the highest for any quarter since DataQuick began tracking results in 1992. On average, lenders filed 32,762 notices of default each quarter over the past 14 years. Last quarter's 20,752 total was the highest since 25,511 notices were filed in the first quarter of 2003.

DataQuick's Marshall Prentice said that while rising payments on adjustable rate mortgages can trigger "borrower distress,'' the spike in defaults is mainly due to slowing price appreciation.

"It makes it harder for people who fall behind on their mortgage to sell their homes and pay off the lender,'' Prentice said.

Other factors that contribute to higher defaults include the amount of equity owners have in their homes, the type of mortgage and how long the mortgage has been held, DataQuick said.

Homeowners with initial interest-only mortgages experience dramatically higher mortgage payments when payments later include the principal on the loan.

Foreclosure activity hit a low during the third quarter of 2004 when lenders filed 12,145 default notices, DataQuick said. California home prices that year rose at an annual rate of 20 percent. Annual price gains this year have slipped to single digits in many of the state's larger housing markets, DataQuick said.

The peak level of foreclosure activity was in the first quarter of 1996 when 59,897 defaults were filed and the state was in a housing slump with foreclosure activity lowering home values 10 percent in some areas, DataQuick said. Today's statewide foreclosure activity amounts to one-third of that 1996 level.

Today, only about 7 percent of homeowners who find themselves in default lose their homes to foreclosure. Most homeowners stop the process by bringing their mortgage payments current or by selling their homes to pay off the loan, DataQuick said.

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