Foreclosure activity slows in California as banks hold back
Mortgage default notices - the first step in foreclosure - dropped by 10.3 percent in California last quarter. That's due to loan modifications and banks' unwillingness to dump more homes on the market, say experts.
Orange County sheriff's deputy Dan Mendoza views a foreclosed home he has arrived to enforce an eviction order on in Fullerton, California, in this June 23, 2009 file photograph. California was one of the places hardest hit by foreclosures, but has seen foreclosure rates slow in the past 3 months.
Lucy Nicholson/Reuters/File
Los Angeles
California, the state which has led the nation in home foreclosures, has finally seen a significant drop in the number of mortgage defaults and house repossessions. But many economists say the trend is less about improved economic conditions than about banks holding off on foreclosure or renegotiating loan agreements.
The number of mortgage default notices fell 10.3 percent in the past three months compared to the previous quarter, dropping to 111,689 in the July through September period, according to San Diego-based MDA DataQuick. Repossessions were down 37 percent over the previous year.
Lenders may have intentionally slowed down the pace of foreclosure proceedings, DataQuick says. Default notices are the first step in the foreclosure process.
鈥淚t鈥檚 not out of the goodness of their hearts,鈥� says Andrew LePage, DataQuick senior analyst. 鈥淔oreclosures are expensive and the more homes you dump on the market, the more you drive down prices and it becomes a vicious cycle.鈥� Mr. LePage says the industry is in the early stages of 鈥渢rying alternatives 鈥� such as short sales [selling for less than is owed on the mortgage] and loan modifications.鈥�
California is home to 1 in 9 Americans and has 8.5 million houses.
鈥淭here is no reason to believe this is a trend and that the worst has passed,鈥� agrees Ginna Green, spokesperson for the California office of Center for Responsible Lending. She points out that the state is still at 12.5 percent unemployment.
Also, a state moratorium on foreclosures was in effect through most of the last quarter, and has just been lifted.
The California Mortgage Foreclosure Prevention Act, which went into effect June 15 this year, placed a 90 day delay on some foreclosures, where the lenders were deemed to have less than comprehensive loan modification programs. Many lenders already have federal incentives to offer loan modifications, but the new law was intended to give California lenders further incentive to renegotiate mortgages instead of foreclosing.
鈥淣ow that the moratorium has been lifted, there should be a tsunami of them [foreclosures] coming shortly,鈥� says Chuck Cochran, a real estate assessor based in the San Fernando Valley. 鈥淎 lot of properties are due to hit the market, which could push prices down another notch.鈥�
There are other concerns for lenders and borrowers, says Perry Wong, senior managing economist for the Milken Institute in Santa Monica, Calif.. Most notably, adjustable rate mortgages are due to be reset from cycles in 2003 and 2005. Considering this additional instability, Mr. Wong says he thinks there鈥檚 a hopeful sign in the fact that that banks are not forging ahead with foreclosures.
鈥淲e must all look at the up side, which is that when a bank is not quick to do a foreclosure, that itself is a good sign,鈥� says Wong. 鈥淭hey may not be seeing that the market is going to go up quickly, but the fact that they don鈥檛 see as much of a downside in holding on to it, is a very important signal.鈥�
The DataQuick study released this week showed that while most foreclosure activity was still concentrated in affordable inland communities, the foreclosure problem has continued to slowly migrate into more expensive areas. Default notices are rising fastest in the affluent counties of the Bay Area 鈥� San Francisco (up 72 percent over a year ago), San Mateo (up 58.5 percent), and Marin (up 65.9 percent).
What is unknown now, say analysts, is how many borrowers will decide to modify their loans 鈥� an initiative promoted by the Obama administration 鈥� how many with adjustable rate mortgages will experience unfavorable rate resets, and the trend with other housing prices.
鈥淭here are lots of unknowns at the moment, especially in California,鈥� says Jed Kolko, real estate specialist for the California Public Policy Institute. 鈥淎mong them is that there is no way to know if what the government is doing to help people renegotiate more comfortable mortgages will have a permanent effect or only a delaying one.鈥�
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