More Homeowners Going Into Default
The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30, providing the latest evidence of trouble in the housing market, figures released Wednesday show.
Lenders sent out 26,705 default notices -- the first step toward a foreclosure -- during the July-to-September period, up from 12,606 during the same quarter in 2005, according to DataQuick Information Systems.
Defaults are still well below their peak level of 59,897, which came in the first three months of 1996, as the state’s last housing slowdown was ending. But the report shows that the slumping housing market is taking a toll on more homeowners -- especially those with mortgages that offer low initial payments at the cost of higher bills down the road.
“We were putting buyers in homes with loans they could not afford to sustain over the long haul,” said Bob Casagrand, a San Diego real estate agent. “If you’re a marginal buyer with an adjustable mortgage, you’re rolling the dice on the future.”
Foreclosures are rare when the housing market is strong and prices are rising. In those conditions, borrowers can usually sell their homes quickly, or they have enough equity to allow them to refinance their loans. But in another disquieting sign, DataQuick reported that 19% of the owners who went into default earlier in the year actually lost their homes to foreclosure in the third quarter, more than triple the 6% in 2005.
Mortgage payments are such a big part of the household budget for many Californians that it takes only a little trouble to fall behind. For Stacey and Mike Broussard, all it took was an exceptionally rainy spring.
That meant Mike Broussard was laid off from his job as a heavy equipment operator.
“I tried to juggle things around -- we were eating a lot of peanut butter and a lot of beans -- but it got out of control,” said Stacey Broussard, 39.
She was in charge of the bills and each month would pay what she could of the $1,300 the lender expected for the mortgage on their home northeast of San Francisco in Antioch.
At the end of August, she said, she tried to make another partial payment, but the lender said anything less than a full payment would lead to a default.
One day her husband said she had a notice from the post office to pick up a special letter. She knew what it was, but he didn’t. “I was trying to fix it before I told him,” she said. “That was the worst moment.”
Mike Broussard is now employed again, and the couple -- who are lucky enough to have equity in their home -- are working with TerraCotta Group, a Manhattan Beach real estate and mortgage company that specializes in helping delinquent homeowners get out of default.
When she started TerraCotta 2 1/2 years ago, company President Tingting Zhang said two or three people would come through her door on the typical day looking for help. Now, it’s 30 to 40. “And we haven’t reached the peak yet,” said Zhang, who believes that the combination of rising interest rates and high-risk mortgages could spell defeat for a rising number of borrowers.
Just Wednesday morning, Zhang dealt with a Lancaster resident who had taken out a $310,000 adjustable-rate mortgage with a starter interest rate of 5.4% and a monthly payment of $1,050.
In July, the interest rate climbed to 8.5% and the monthly payment jumped to $2,306. A year-end adjustment will send the monthly payment to $2,744.
“The borrower is totally unprepared for this rate adjustment,” Zhang said.
The fallout is starting to show up in the workload at credit counseling outfits.
Gary Aguilar, counseling manager for Springboard, a nonprofit credit counseling agency in Riverside, said the amount of mortgage-related work he and his staff were doing had “pretty much tripled this year.”
The softening of the housing market was the trigger, as new homeowners with little or no equity in their properties found themselves unable to sell at a high enough price to pay off the balance of the loan and still cover all of the sale expenses.
“Whereas a year ago, people could have put their house on the market and sold their way out of the problem, now they’re stuck with the house,” said Richard Pittman, housing services coordinator for credit counselor ByDesign Financial Solutions in Los Angeles.
“I’ve talked to two in the last week who thought they had a done deal, and when it came to putting the loan together, they came up short” and their house went to auction, he said.
More than half of the loans that went into default in the third quarter were made last year, DataQuick said. The homeowners were a median of five months behind on their payments when they entered the foreclosure process, meaning half were more than five months behind and half were less. The median delinquent debt was $9,829 on a $306,000 mortgage.
The housing market in San Diego County peaked earlier than the rest of California, so it’s not surprising that default notices rose particularly quickly there. They climbed 160% in the quarter, more than twice the pace in Los Angeles County.
“In the vast majority of cases, the default notices are falling disproportionately on the entry-level market,” said John Hokkanen, a San Diego agent. “These are people who don’t have any reserves in a time of crisis.”
Foreclosures also can weaken housing values further as lenders put the foreclosed homes on the market, often at reduced prices in hopes of a quick sale.
But although experts believe the default and foreclosure numbers will continue to grow, few see them accompanying a painful housing collapse as occurred in the early 1990s.
“I don’t think it’s time to panic,” said Christopher Cagan, an analyst with First American Real Estate Solutions in Santa Ana. “People have gotten so used to sellers able to command whatever they want on whatever terms they want. That’s no longer the case. This is a natural turning of the business cycle.”
DataQuick analyst John Karevoll concurred: “We’re still seeing foreclosure activity below an average of the last 19 years. I’m not convinced the numbers are going to continue going up at this rate, unless something major happens to the economy.”
One hopeful factor is that the state’s economy is much stronger and more diversified than it was 15 years ago, when the aerospace industry was downsizing with the end of the Cold War.
In addition, there hasn’t been a repeat of the 1980s building boom, which created an oversupply of homes and helped fuel the downward spiral in housing prices in the 1990s.
“Historically, we’re in a different place than we were then,” said economist Christopher Thornberg, who watched the ‘90s slump unfold as a graduate student at UCLA and now has a consulting firm. On the downside, he noted, “we have never seen a run-up in housing prices like this and we’ve never seen these kinds of mortgages.”
Zhang agreed: “Back then, you put 20% down and got a 30-year fixed-rate loan. Now, we have a lot of people who got mortgages when they really shouldn’t have qualified.”
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Number of mortgage default notices sent by lenders to California homeowners in the third quarters, by county and overall
*--* County 2005 2006 % change Ventura 222 578 +160.4% San Diego 906 2,355 +159.9 Riverside 1,266 3,040 +140.1 Orange 743 1,500 +101.9 San Bernardino 1,269 2,548 +100.8 Los Angeles 3,233 5,565 +72.1 Southern California* 7,654 15,676 +104.8% Statewide 12,606 26,705 +111.8
*Includes Imperial County
Source: DataQuick Information Systems