Foreclosures Could Soar on Quake-Damaged Homes : Housing: Many borrowers may walk away from mortgages. Lenders try to devise ways to help owners.

Foreclosures in the San Fernando Valley, already at an all-time high, could surge in the coming months because the earthquake has left thousands of people with significant or irreparable damage to their homes.

Rather than taking on more debt to rebuild, many homeowners are considering walking away from their ravaged homes and the mortgages on them.

Although foreclosures could rise in several areas--such as Santa Monica--devastated by last week’s quake, the problem is seen as most acute in the Valley, where homeowners generally suffered the worst damage.

Foreclosures there threaten to further depress a Valley housing market that was in the dumps before last week’s earthquake. A record 3,650 residential foreclosures in the Valley last year--20 times more than in 1990--helped drive down housing prices to what they were in 1988. The recession has dwindled savings, and the earthquake has left many without jobs, so those with little or no equity in their homes will think twice before making expensive repairs.

“Foreclosures are going to go up astronomically,” said Dale Fay, owner of Century 21 Oak Tree in Valley Village and a 20-year sales agent in the Valley.

Ben Hunnicutt, an accountant in Woodland Hills, knows several families whose homes will have to be bulldozed. “I’d expect them to walk away. Wouldn’t you?” he asked. Even homeowners who have earthquake insurance face 10% deductibles. “It seems the number of foreclosures has to increase.”

Consider the plight of Newhall homeowner Seong Ho Kim. Less than two years ago, Kim put $90,000 toward a $360,000 four-bedroom house just north of the San Fernando Valley. But the quake cut a six-inch-wide crack from the driveway through Kim’s house to the back yard. Contractors say it will cost about $150,000 to put Kim’s house back together. But like many homeowners in Southern California, Kim does not have earthquake insurance.

After wiping away the tears, Kim packed up with his wife and 14-year-old son and moved into the living room of a friend’s home in the Valley. “I don’t have money to rebuild it, and I can’t take on another loan on top of my mortgage,” said Kim, 46, who operates a mini-market in Pacoima. “What else can I do?”

Like many other lenders, Kim’s mortgage-holder, Prudential Home Mortgage, has given him a two-month deferment on his $2,000 monthly mortgage payment. But when the grace period runs out, Kim says he may walk away from his $270,000 mortgage unless his lender helps pay for the repairs.

“We’ve had over 600 calls” from borrowers who sustained small and big damage in the quake, said Doug Rossbach, Prudential’s vice president of marketing in New Jersey. “If a house is totally destroyed, a month or two (grace period) isn’t going to help. So we’ll do much more.”

Indeed, mortgage lenders in general are discouraging homeowners from turning in their homes. Some lenders have made arrangements with earthquake victims for unusual deals such as “short payoffs,” in which a bank agrees to accept less than full repayment on a mortgage if the property is sold. It is a sort of partial debt forgiveness and allows owners to walk away with their credit rating intact.

State law gives lenders little legal recourse when people walk away from their homes. But financial institutions say they will foreclose on abandoned properties and report them as loan defaults to credit bureaus.

“If they do walk away--and unfortunately there will be some who do--it will affect the borrower’s credit record,” said Linda Mueller, a spokeswoman at Great Western Bank, the big savings and loan based in Chatsworth.

Besides a 90-day deferment on mortgage payments, Mueller said, Great Western customers affected by the earthquake can apply for another loan to pay for repairs. “We want to work with the borrowers,” she said.

Gregory Cochran, director of loan services at Glendale Federal Bank, said each customer’s case and needs will be reviewed. But in general, he said, “we loaned the individual the money in good faith, and it would be our intent to keep them in their houses, however possible.”

Lenders do not want to add to their stockpile of foreclosures because the properties are costly to maintain. It takes several months for lenders to foreclose on properties, and then they are sold at fire-sale prices for usually less than the mortgage.

Last year there were about 4,300 residential and commercial foreclosures in the Valley--about 85% residential properties--or double the number in 1992, according to TRW-REDI Property Data in Riverside.

Foreclosures also hurt the housing market because the cut-rate prices for such homes drive down other home values, and make it harder for trade-up sellers to unload their properties and move up in the market.

But even a short payoff may not be enough for homeowners like Jerry Stern.

A retired deputy sheriff, Stern owns a one-bedroom condo in Sherman Oaks. But the three-building, 122-unit condominium complex is riddled with deep fissures and has been condemned.

Stern bought the condo at the height of the market in 1988 for $96,000. He owes $75,000 on his mortgage. Contractors say they may have to demolish one of the three buildings, while the other two--including Stern’s building--may be repairable. Even with earthquake insurance, Stern faces huge repair bills, not only for his unit but for his share of the work on the condo’s exterior building and underground garage.

Even if the condos are repaired, Stern does not think it will be worth much because multistory buildings fared much worse in the earthquake. “Who will want to buy it?” he said this week as he took snapshots of the damaged building.

“We won’t know for another month. And then we have to wait and see what the lender will do. Everything is up in the air,” he said in disgust. “Whether I come out better financially by rebuilding or walking away, that’s going to be the real decision.”

Even homeowners with relatively little damage have been put in a bind by the earthquake.

Millie Fouse, a sales manager for a pet food company, lives in a two-bedroom townhouse in Sylmar. For nine months before the earthquake, Fouse tried to sell her home but got only one offer. Now she is looking at repair bills of $5,000 to put in a new water heater, replace the kitchen tiles and repair the dislodged fireplace, which were knocked out by the quake.

“I really don’t know what to do,” she said. She owes $90,000 on her mortgage, but the townhouse is probably worth $80,000, she said. Asked if she would walk away, Fouse said: “I don’t know. Gee, that’s a hard thing for me to do.”

Fouse hopes to get out of her mortgage through a short payoff. Though lenders are reluctant to agree to such arrangements, Valley real estate brokers say that is about to change.

Jay Belson, a sales agent and owner of a Remax franchise in Sherman Oaks, said one lender agreed this week to reduce by at least $100,000 the mortgage on a home in Sherman Oaks. The owners, both in their 70s, owed $380,000 on their mortgage, and Belson had listed the home for sale at $500,000 before the earthquake. But the 6.6 magnitude temblor knocked the home off its foundation and it must be demolished.

The land still has some value, so Belson went to the lender and it agreed to reduce the mortgage. Now the site has been listed for sale at $259,000. Belson believes that he can sell the land at that price, although the buyer must demolish the home.

“The banks right now want to hear solutions,” said Belson, who figures to make a 5% commission if that sale goes through. “They already had a lot of properties they didn’t want. With the earthquake they have a lot more. It’s like a double whammy. They’re all ears because they want out of it, too.”

“A lot of people will dump their houses and walk away,” said Sam Lee, a Pinnacle real estate agent. “But if the price is right, there’s always a buyer. I have to switch (the customers that I target) and contact banks and sellers who want to walk away.”