A sagging real estate market and tighter lending standards are exacting a growing toll on Californians, forcing them from their homes in record numbers, figures released Tuesday show.
Foreclosures soared to 17,408 for the three months ended June 30, an increase of 799% from the same period last year. The current rate handily exceeds the previous foreclosure peak set in 1996, when the state was in the final throes of a six-year slump.
Separately, Countrywide Financial Corp. -- the nation’s largest mortgage lender -- reported a sharp rise in delinquencies, even among customers with good credit. That sent shivers down Wall Street, helping to trigger a 226-point plunge in the Dow Jones industrial average.
Although a relatively small fraction of homeowners face eviction, the concern is that a flood of foreclosures will further weaken housing prices -- and make people less willing to spend money.
“The economy will bend further under the weight of the mounting housing and mortgage problems, but it will not break,” said Mark Zandi, chief economist at Moody’s Economy.com.
That’s what passes for optimism these days. Others are more downbeat.
“All the artificial stimulus housing gave the economy is going to go away,” said Rich Toscano, a financial advisor with Pacific Capital Associates in San Diego who runs the popular Piggington.com real estate website. “There will be individual pain for people who made the wrong decisions. We all may end up in a recession.”
The good news, as seen by Toscano: “I don’t envision a ‘Grapes of Wrath’ scenario where we all have to pile in the family car and look for harvesting work.”
Paula Walton said the Carson house she bought in 2003 was due to be foreclosed today. She first asked her lender for leniency, pointing out that she has endured a series of personal setbacks that included ovarian cancer, her mother’s illness and her partner’s walking out.
“I was begging and pleading, ‘Please lower the payments so I can get back on my feet,’ ” said Walton, 43, a clerk on the Long Beach docks.
The lender didn’t budge, Walton said, so she filed for bankruptcy protection to keep, at least for the moment, her house.
Ester Cadavid of Los Angeles Neighborhood Housing Services, a not-for-profit lender and counselor that is trying to assist Walton, said the first-time home buyer was an example of how default woes were spreading.
“In the beginning, we were thinking the foreclosures were going to be limited to low-income, high-minority neighborhoods targeted by predatory lenders,” Cadavid said. “Now we’re seeing a shift to the middle class.”
That assessment was bolstered by Countrywide’s warning that a rising number of its mortgage customers were behind in their payments, including mainstream borrowers.
The Calabasas-based company said that 4.6% of its good-credit customers with lines of credit or home equity loans were at least 30 days delinquent, up sharply from 3.8% three months ago. A year ago, the rate was 1.8%.
Most analysts say the housing market won’t stabilize until 2008 or 2009. The so-called soft landing that was much talked about last year is rarely mentioned anymore.
The rising foreclosure rate is tied to stricter lending standards and weakening home values. With housing prices flat or falling, lenders are less willing to refinance loans -- especially to borrowers with shaky credit who are most likely to miss payments.
Southern California, buoyed by the relative strength of L.A. County, saw the number of foreclosures in the three-month period ended June 30 rise to 9,504. Although that’s up 725% from a year earlier, it’s still well below the previous peak of 11,494 in the third quarter of 1996.
Statewide, the previous peak for foreclosures was 15,418 in the third quarter of 1996. All the foreclosure and default numbers were compiled from county records by DataQuick Information Services, a La Jolla firm whose statistics go back to 1988.
When the increase in housing stock over the last decade is taken into account, foreclosures in the state are running roughly equal with the 1996 peak. But if the numbers are the same, the two periods are sharply different.
Back then, the primary culprit for the rise in foreclosures was massive defense cutbacks that led to high unemployment. Without a paycheck, people couldn’t pay the mortgage. As the housing market crashed, the pain spread affecting even those who still had jobs.
This time the economy is generally sound and unemployment relatively low, but many people have gotten trapped in adjustable-rate loans that are resetting to levels that exceed their ability to pay.
Among the hardest-hit areas are Riverside and San Bernardino counties. Their low prices drew first-time buyers who used adjustable loans. More than 1 out of 5 foreclosures in the state take place there.
Yet the number of those employed in the counties rose by 44,500 in the last year, said John Husing, an economist at Economics & Politics, a Redlands consulting firm.
Employers tell him they can’t get the workers they need. Aside from the home builders and car salespeople -- the price of gasoline gets the blame here -- business is generally fine.
“So far, the foreclosures haven’t affected the economy,” Husing said. “I absolutely don’t think this is in any way a repeat of the early 1990s.”
Whether that will continue is a more unsettled question.
“These are unprecedented circumstances,” Husing said. “Anyone who says they’re not guessing is a liar.”
Default notices, which are a precursor to foreclosure, also increased in the second quarter, but not as sharply as foreclosures. Lenders across the state issued 53,943 default warnings during the quarter, up 158% from the same period last year, DataQuick said.
Statewide, default notices peaked in the first quarter of 1996 at 61,541.
One reason foreclosures are rising faster than defaults is that strapped owners are having a harder time saving themselves.
As recently as a year ago, most homeowners who had slipped behind in their payments found a way to get current again. Nearly 9 out of 10 defaulting borrowers got out of trouble by selling their house or refinancing, according to DataQuick.
Fewer than 6 out of 10 are able to do so now. “People have stretched their finances to the breaking point,” said DataQuick analyst John Karevoll.
The most leveraged are the people who bought for the first time at the end of the boom, in late 2005 and early 2006. They brought little in the way of equity to the party and had little chance to accumulate any.
Michael Davin, executive vice president of CataList Homes, a brokerage in Hermosa Beach, underscored the different fates of the inland communities and coastal cities.
The first “saw housing appreciation due to smoke and mirrors, the other was built on true wealth growth,” Davin said. “Business is good on the upper end and bad [for homes] under $700,000, especially in the Inland Empire and Orange County. I expect to see a lot of homeowners in trouble soon.”
There’s already a year’s supply of houses on the market in San Bernardino and Riverside counties, up from a three-week supply at the height of the boom, said Ron Barnard, owner of Home Center Realty in Norco. Many are foreclosures that banks are trying to unload.
The strange thing is, things don’t seem as grim as the numbers would suggest.
“In the 1990s, it was really, really bad,” Barnard said. “Moreno Valley, Fontana, Perris had a tremendous number of boarded-up houses. You don’t see that now.”
Perhaps, the agent speculated, it was so easy to get into houses during the boom -- many lenders didn’t even require a down payment -- that it’s easy to give them up, too.
“You walk in with nothing in your pocket, it’s easier to walk away from it,” he said.
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The pain is spreading
Home foreclosures are near the 1996 peak in Southern California.
A county-by-county breakdown of foreclosures
*--* 2nd quarter 2nd quarter County/region 2006 2007 % change Los Angeles 287 2,581 799.3% Riverside 281 2,509 792.9 San Diego 292 1,714 487.0 San Bernardino 137 1,489 986.9 Orange 110 821 646.4 Ventura 37 316 754.1 So. California 1,152 9,504 725.0