Default Lines : Valley Plagued by Post-Quake Foreclosures

Clipboard in hand, real estate agent Brett Howard moved slowly through a five-bedroom house in Mission Hills that had been emptied of everything except a wedding portrait, a pair of ragged sneakers and a few wine glasses.

It was easy to see why the two brothers who lived in the house packed up and fled to Arizona shortly after the Northridge earthquake. Cracks ran along many of the walls. The ceilings had lumps from water damage. The block wall was a pile of rubble in the back yard.

“They probably owe too much on it, so they probably just walked away,” said Howard, who was inspecting the property for the lender.

Four months after the Jan. 17 earthquake, many such abandoned houses are appearing, adding to a pile of foreclosures in the San Fernando Valley. The earthquake is a major setback to a Valley market already plagued by a record number of recession-related foreclosures--20 times more last year than in 1990--and falling prices. Real estate professionals fear prices will plunge further as lenders hold fire sales to get foreclosed properties off their books or homeowners are pressured into selling damaged properties at deep discounts to avoid defaults.

“The pipeline of foreclosures is beginning to fill up again,” said Ron Prechtl, a real estate agent at Century 21 Lamb Realtors in Northridge. He said lenders about to foreclose on quake-damaged properties are flooding him with requests for opinions on likely sales prices.

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.

Since foreclosure proceedings typically take four months, a slew of earthquake-damaged properties may hit the market in late summer.

A major worry is the impact on prices, which are already down to 1988 levels--in part because during the recession, lenders sold so many foreclosed properties at discounts.

The average resale price of an existing single-family home in the Valley for the first four months of this year was $230,000, down 11% from the same period last year and down from a peak of $296,675 in 1990.

Prices in the Valley keep falling even though sales are up.

Dale Fay, owner of Century 21 Oak Tree in Valley Village, said her 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 was down about $100,000 from April, 1990.

“What’s going to happen when we see another glut of foreclosures?” she asked.

To avoid foreclosures, some homeowners are selling quake-damaged homes “as is” at big discounts.

Across the street from the abandoned house in Mission Hills, for example, sits a quake-damaged three-bedroom, two-bath house that the owners sold for $125,000 rather than default. The house was listed in November for $154,000, said the house’s new owner, Los Angeles city employee Lance Brown.

“I know I got a good deal,” he said, adding that he’s already fixed most of the damage himself.

But reducing prices won’t help many homeowners with large mortgages, a big quake repair bill, no insurance and little equity.

Seong Ho Kim, whose uninsured Newhall home was cracked in half by the quake, says he’s told his lender to take back the house. Kim has a $250,000 mortgage on the property, and contractors have said it will cost at least $150,000 to repair it.

“As far as I’m concerned, the bank will take care of it,” he said.

Banks and other mortgage lenders don’t want to add to their stockpile of foreclosed properties, which are expensive to maintain and difficult to dispose of without taking a big loss.

Chatsworth-based Great Western Bank, the nation’s second-largest savings and loan, says that if it has to take back all 250 homes on which homeowners have asked for temporary deferments because of major quake damage, it will lose $32 million.

“We have no idea how many will be foreclosure cases,” spokeswoman Linda Mueller said.

Many lenders say they are trying to work with homeowners, for the good of both the institution and the borrowers whose credit records are damaged by defaults.

After the earthquake, brokers say, more financial institutions have been 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.

However, lenders are generally not extending the three-month payment moratorium, and they and lawyers trying to help clients avoid defaults are not optimistic that many foreclosures will be avoided.

“There will be more foreclosures on the horizon,” said Leonard L. Schapira, a Hermosa Beach lawyer who represents many Valley homeowners struggling with quake repair bills and renegotiation of their mortgages.

Valley Foreclosures

A record number of houses were foreclosed on in the Valley last year, and bank repossessions continue to climb because of the recession.

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