Major lenders are repossessing homes in Southern California much faster than they can sell them, a development that could set off a downward spiral of price cuts and more foreclosures.
At some point -- maybe this fall, maybe in 2008 -- the lenders’ inventories will grow so large that they will have no choice but to start aggressively cutting prices, many agents and analysts predict.
That, in turn, will put more pressure on individual sellers, who will have to reduce their own prices if they want to find a buyer.
As values fall, more people could lose their homes, which would swell the lenders’ inventories anew.
“We’re going to have a bear market in housing for a while,” said Christopher Cagan, director of research for First American CoreLogic in Santa Ana. “It’s going to be bad to be a seller or someone forced to refinance in the impact zone.”
Lenders’ inventories in the counties of Los Angeles, Riverside and San Bernardino grew by 5,829 during the second quarter, according to data compiled for The Times by First American, a real estate tracking firm.
Cagan said Southern California’s hardest-hit areas -- the impact zone -- will be the Inland Empire, the high desert and the northern reaches of L.A. County. These are where foreclosures are the greatest and, as a result, the market is weakest.
Foreclosures are not tracked by any U.S. or California government agency. Private firms collect data from counties, aggregate the information and then sell it. Each firm defines the complicated and lengthy process of foreclosure slightly differently.
The First American numbers, which are broken down by ZIP Code, provide a detailed picture of a housing scene that has gone from boom to slack or worse in the bottom half of the market. The figures include single-family houses, condominiums and town houses.
Even L.A. County, where the market has stayed the strongest, is losing some of its immunity in its more far-flung and poorer sections.
In the second quarter of 2006, only one ZIP Code in the county had more than 10 foreclosures. That was in Lancaster, where 93535 had 11. Many ZIP Codes in the county had one foreclosure or none.
In the same period of 2007, nearly a third of the 275 L.A. County ZIP Codes tracked by First American had more than 10 foreclosures. The Lancaster ZIP Code once again had the most, growing to 107.
But the problem is most acute in Riverside and San Bernardino counties, where the market has been enlarged by a building boom. Many recent buyers are first-time owners who made small down payments and have little equity in their homes.
Moreno Valley had 309 foreclosures in the second quarter of 2007; Murrieta, 290; Fontana, 156; Corona, 256.
Victorville, which was ravaged by the downturn of the early 1990s, looks to be starting the sequel: 184 owners lost their homes in the three-month span. Another 546 received warnings that they were in default, the first step toward foreclosure.
In an attempt to gauge the effect of foreclosures on the market, First American measured not only homes entering the process but also those leaving it. Leaving the process occurs when the home is sold and title passes to a new private owner.
The pace is glacial. While it normally takes a few weeks or even months to prepare a foreclosed house for resale, agents say homes are remaining in foreclosure longer than they would otherwise because their prices are too high and lenders have been unwilling to reduce them.
In Apple Valley, according to the First American data, lenders foreclosed on 95 homes in the second quarter but only sold eight. In Palmdale, they repossessed 228 and sold 31. Pomona had 66 foreclosures but only 10 sales.
To move their growing inventories, lenders solicit local agents to do what they call broker price opinions. These involve the agent’s physically examining the home, getting an estimate to clean up any damage, checking to see what similar homes in the neighborhood have recently sold for and suggesting a price.
Thanks to globalization, requests for BPOs can come from the other side of the world. Ocwen Financial Corp., a Florida mortgage company that is trying to sell 753 foreclosed homes in California, has outsourced its BPO review office to India.
Agents who work with Ocwen e-mail their reports to India, where they are processed and sent to the company’s headquarters in West Palm Beach. Asset managers there decide on the price.
“We’re here and they’re not, but they resist our expertise,” said Jason Bosch, president of Home Center Realty, an Inland Empire firm that works with Ocwen and other lenders. Home Center has put 42 lender-owned homes on the market since the beginning of the year. Only two have sold.
Bosch cited one house in Perris that a lender listed for $427,000. Home Center received an offer of $419,000, but the lender said it wouldn’t budge. The would-be buyer moved on to a more flexible seller.
Ten days later, the lender lowered the price to $417,000, where it still sits.
“This is not the result of a person evaluating these deals on a case-by-case basis,” Bosch said. “This is a computer working off a formula.”
The major lenders are reluctant to talk about their foreclosure strategies. Officials at Calabasas-based Countrywide Financial Corp., whose inventory in California exceeds 2,300 foreclosed homes, declined to be interviewed.
At Wells Fargo, spokesman Kevin Waetke said, “We price our properties in accordance with the local market and expect to sell at market value.” One of the lender’s explicit goals: maintaining the vitality of the neighborhood. Wells Fargo’s website lists 3,400 foreclosed properties for sale in California.
Other major lenders, including GMAC Mortgage and Washington Mutual, declined to release their foreclosure numbers.
Neil Gitnick at Value Home Loan, a small Woodland Hills lender, has a handful of foreclosures -- 27, nearly all in California. But the market’s troubles haven’t dented his faith in the state’s prospects.
“We price our foreclosed houses high, at full market value,” he said. “We don’t accept offers which come from speculators lowballing us. We’re not desperate, and I’m sure Countrywide is far from desperate.”
Gitnick is keeping a dozen of his foreclosed homes in his portfolio as rentals. He figures they’ll be worth more in a few years, and in the meantime will bring in income. Four others are on the market, with the rest to follow.
With the lenders pricing in line with the market, sales have stalled.
“Buyers are only interested in the lender-owned houses because that’s where they think the bargains are,” said Sylvia Tudor, a Victorville agent who sells foreclosed properties for Countrywide and others. Then they see the prices, she said, and back off.
Business might be bad, Tudor said -- she estimated there were 25 homes on the market in the high desert for every serious buyer -- but the agent had a certain sympathy for the lenders’ predicament.
“They’re trapped in a Catch-22,” she said. “If the market goes down too quick, there will be more foreclosures. People won’t be able to refinance or make their payments. Isn’t that how this all started?”
A wild card in this gloomy scenario is the liquidity worries that are gripping Wall Street.
When money becomes scarce, it gets more expensive. Interest rates on so-called jumbo mortgage loans -- those of more than $417,000 -- have risen steeply in recent weeks. At all levels, marginal buyers are being eliminated.
It’s got to get worse before it gets better, said Michael Davin, executive vice president of Catalist Homes in Hermosa Beach, echoing the new mantra of the real estate business.
“We need a shakeout to stabilize the market,” he said. “Lenders are going to have to start cutting prices big time.”