COVER STORY : Foreclosure Aftershock Predicted : A wave of mortgage defaults may be in the offing now that the moratorium on payments for quake-damaged homes has expired.

Standing in a quiet neighborhood in West Hills, real estate agent Brett Howard glances furtively at a house across the street.

The lender foreclosed on this house in January. But Howard doesn’t have to knock on the door to tell that people are still there. Trash containers on the side are full, and, through a slit in the drawn blinds, Howard can see that someone has just turned off a lamp.

“They’re living there for free now, so they’re in no hurry to get out,” Howard says, jotting the license plate number of the car parked in front of the house. Last week’s visit was Howard’s fourth in a month to this address. Pretty soon, he says, “We’ll be back with a marshal and a locksmith. The marshal will escort them out and we’ll change all the locks.”

Howard checks properties for Ron Prechtl, a real estate agent at Century 21 Lamb Realtors in Northridge who specializes in selling foreclosed properties for lenders. These days Howard is on the move a lot, and his workload is about to get heavier.

Back in Prechtl’s office, a team of four others is fielding a flood of price requests from banks on houses soon to be foreclosed--many of them properties damaged by the Jan. 17 earthquake. Most lenders gave homeowners with quake damage a three-month break on mortgage payments, but that moratorium has expired, and banks are starting to serve default notices, so other borrowers are walking away from their homes.

“The pipeline of foreclosures is beginning to fill up again,” Prechtl says. Prechtl, 33, had his best year ever in 1993, selling about 140 houses, more than half foreclosures. His office grossed $750,000 in commissions, from which Prechtl pays out big overhead expenses. Through April this year, he’s sold another 75 properties, and he expects the new wave of foreclosures from the earthquake to keep him busy until at least the end of next year.

“It’s absolutely going to come,” Prechtl says. “We’re bracing ourselves.”

Foreclosure proceedings typically take four months, so many quake-damaged properties repossessed by banks won’t hit the market until late summer. But when they do, they will add to an already-overabundant supply of recession-triggered foreclosures in the San Fernando Valley, which has helped drive down Valley housing prices to 1988 levels.

Last year lenders repossessed a record 3,650 single-family houses and condominiums in the Valley--20 times more than in 1990, according to TRW-REDI Property Data in Riverside. And Valley foreclosures were up 38% in the first quarter of this year, compared to the same period in 1993. Banks don’t want foreclosed properties on their books, so they often dump them at fire-sale prices, which keeps driving down prices.

Through April of this year, the resale price of an existing single-family house in the Valley averaged $230,080--down 9% for all of last year, and down from a peak of $296,675 in 1990, says the San Fernando Valley Assn. of Realtors.

The drop in the median price has been even more severe. In April, house buyers in the Valley paid a median price of $179,000, down 12% from $204,000 a year earlier. The median price is the point at which half the houses sold cost more than $179,000 and half cost less.

“We haven’t seen the bottom of prices fall out yet,” says Catherine McKinley, a real estate consultant in Newhall and a former vice president at Pasadena-based Countrywide Funding, the nation’s largest mortgage lender. McKinley, who has been helping homeowners hurt by the quake, doesn’t see Valley housing prices rebounding until the end of next year. And then, she says, “It’s going to be a slow and gradual ride back up the mountain.”

Prices fell even though single-family house sales in the Valley rose 12% last year, and through April sales were running 22% above last year’s pace. Meanwhile, the inventory of houses for sale last month dropped to a seven-year low of 6,280.

“This is the strangest market I’ve ever dealt with,” says Dale Fay, owner of Century 21 Oak Tree in Valley Village, who has been in real estate since 1961. Resurging demand for houses is supposed to push prices up, she says. “But this is defying all the curves, all the projections, just everything.”

Fay’s 20 sales agents sold 15 houses in April, a few more than a year earlier. But eight of them were foreclosures, Fay says, and the average price of those 15 houses sold was down about $100,000 from April, 1990. “What’s going to happen when we see another glut of foreclosures?” she asks worriedly.

Foreclosures aren’t the only reason for the sinking resale price of houses. Low mortgage interest rates in the past year have lured a lot of first-time buyers, who generally start out with smaller and cheaper houses, lowering the overall resale price. And after the earthquake, brokers say, many homeowners decided to sell damaged properties “as is” at a big discount.

Lance Brown, 24, fits both categories.

A Los Angeles city employee, Brown last month bought his first home, a three-bedroom, two-bathroom house in Mission Hills. The house went on the market in November at $154,000. But after the quake caused some cosmetic damage to the property, the owner re-listed it at $139,000, and Brown bought it for just $125,000. Brown got in with just a 3% down payment, the rest financed through a 30-year mortgage at a fixed rate of 8%.

Brown says he’s already fixed most of the quake damage himself. “I know I got a good deal,” he says.

But across the street from Brown’s house are two other properties that will probably soon be added to the stockpile of Valley foreclosures. One owner lost his business and was overcome by personal bills.

The second property, a five-bedroom, two-story house, was badly damaged by the quake. Cracks ran along many of the walls, lumps formed on water-damaged ceilings, and the block wall was a pile of rubble. Shortly after the quake, neighbors say, the brothers who lived there packed up and moved to Arizona. They apparently took the toilet in one of the bathrooms because it was ripped out.

“They take what they can get,” said Howard, the Century 21 agent who inspects properties. “Now some contractor will probably buy it, fix it up and sell it. This house you can probably get pretty cheap. The bank doesn’t want it.”

Mortgage lenders say borrowers can avoid a smear on their credit record by trying to work out a solution with the mortgage holder. More financial institutions today are willing to strike unusual deals with quake victims such as “short payoffs,” in which a lender agrees to accept less than full repayment on a mortgage if the property is sold. This enables the borrower in effect to walk away and keep his credit rating intact.

Some lenders are also offering secondary loans, or a restructuring of the mortgage, so borrowers can have lower monthly payments. Lenders, however, are generally not extending the three-month payment moratorium.

Karin Hopkins, manager of the loan department at Glendale Federal Bank, says the savings and loan has been aggressive in arranging short payoffs, once viewed by financial institutions as anathema. Glendale Federal expects a loss of about $15 million from short payoffs, foreclosures and other problems from borrowers affected by the earthquake. Glendale Federal’s current supply of repossessions are up 5% from a year earlier, but Hopkins says it’s unclear whether a big wave of foreclosures is coming. “From talking to borrowers, there are a lot of people rebuilding,” she says. “It’s anybody’s guess what’s going to happen.”

Chatsworth-based Great Western Bank, the nation’s second-largest savings and loan, says 2,000 borrowers asked for a temporary deferment on their loans. Of that number, about 250 reported they had major structural damage and did not have quake insurance. “We have no idea how many will be foreclosure cases,” said spokeswoman Linda Mueller. But if all 250 homes with major damage have to be taken back by Great Western, Mueller says that at an average loan amount of $130,000, it will cost the S&L; $32 million.

Banks and S&Ls; want to avoid foreclosures because the properties are costly to maintain and sell. Some lenders dispose of repossessed properties through auctions or through bulk sales to Wall Street firms, many of which then contract with people like Ken Westfall to sell the foreclosed real estate.

His firm, Westfall & Co. based in Denver, Colo., had an abundance of foreclosures in that state in the 1980s. But now much of Westfall’s work is in California. Currently he has about 1,000 properties on the market in California, of which 350 are in the San Fernando Valley.

Westfall often fixes up foreclosed properties that need repairs, and then he farms them out to local real estate brokers. Westfall says he tries not to dump the houses in the market, but he knows of clearinghouses like his that flood the market with foreclosed real estate at cut-rate prices.

“It’s just to get rid of the volume,” he says. Westfall thinks there’s a lot of pent-up demand in Southern California, but he says buyers lack confidence. “I don’t see the number of foreclosed properties diminishing until the middle of next year.”

Whether sold in auctions, through clearinghouses or brokers, the large volume of foreclosures overall drives down other home values, because appraisals are generally made by comparing the last three houses sold in that area. Foreclosures also make it harder for would-be trade-up sellers to compete, so they can’t unload their properties and move up in the market.

Leonard L. Schapira, a Hermosa Beach lawyer, has about 100 homeowners for clients, including many in the Valley, who are trying to renegotiate their mortgages. Many of them bought their homes at the height of the market in the late 1980s, now they’ve lost their equity or they owe more than the property is worth because of the housing slump. Some of his clients are struggling with big quake repairs bills.

Schapira says some lenders are agreeing to accept short payoffs and restructuring interest rates and monthly payments. Schapira says he’s arranged short payoffs for as much as $340,000 off the principal balance of a mortgage.

But he says some lenders are giving homeowners little choice but to walk away. One lender, he says, wanted a $35,000 contribution from a client of his in mitigation of a short payoff. The borrower balked, Schapira says.

“I’ve had clients who have thrown up their arms and walked away because the banks were completely unreasonable,” said Schapira, whose business has doubled this year.

Even excluding these cases, Schapira says lenders have told him that for “every borrower who attempts to work with the bank to save his credit, two or three don’t bother and they just walk away.”

Foreclosure Boom in the Valley Housing Market

Single-family house sales are up, and inventory is way down. So why are prices still falling? Because last year there was a record of foreclosed houses in the Valley, and bank repossessions continue to climb this year because of the long recession. But this summer more owners of earthquake-damaged properties are expected to also walk away from their houses. Often these foreclosed houses are sold at fire-sale prices, which keeps driving down prices for the overall market.

Sources: San Fernando Valley Association of Realtors, TRW REDI Property Data