Record home losses in state

Times Staff Writers

The price tag for the nation’s housing crisis escalated again with reports Tuesday that a record number of Californians lost their homes to foreclosure in the last three months and that a potential bailout of mortgage giants Fannie Mae and Freddie Mac could reach $25 billion.

The figures were released as the House prepared to vote as early as today on legislation aimed at staving off foreclosures, stimulating the troubled housing market and providing a government backstop to Fannie Mae and Freddie Mac.

Rep. Loretta Sanchez (D-Garden Grove) said the new California foreclosure numbers were “alarming,” and point to the need for rapid approval of the legislation.


Foreclosures statewide jumped 33.5% in the three months ended June 30, compared with the same period last year, DataQuick Information Systems reported. The 63,061 homes taken back by lenders were the most for a three-month period since the firm began tracking this data in 1992.

The latest figures contained one surprise: defaults -- the first step toward foreclosure -- rose by just 6.6% in the second quarter, down from a 39% spike the previous period.

DataQuick President John Walsh said the reason was not immediately clear. Foreclosures may be “nearing a plateau,” he said, but it could also mean that lenders are “swamped and can’t handle processing any paperwork.”

Sean O’Toole, founder of the data tracking firm ForeclosureRadar, thinks the leveling off may mean that defaults on subprime mortgages -- loans made to poorly qualified buyers -- are nearing a peak.

But the housing market still could face a new wave of defaults from other loans that will adjust to higher rates, including pay-option adjustable-rate mortgages and so-called Alt-A loans, which are a step between subprime and high-quality prime loans.

“Most resets on those products are still in front of us,” O’Toole said.


UCLA economist Edward Leamer agreed that the default rate on Alt-A loans, a specialty of failed Pasadena lender IndyMac Bank, could be pivotal.

“The big uncertainty is what happens when all those Alt-A’s reset,” he said. Those mortgages were also more prevalent in higher-priced housing markets, he noted, where there have been fewer foreclosures.

O’Toole said that even if foreclosures do level off, it probably will take years for the market to absorb all the homes that are being resold by lenders at steep discounts.

So far, most foreclosures have been in outlying areas that attracted first-time home buyers. But repossessions are on the rise in more established neighborhoods, including affluent communities.

Malibu and Beverly Hills had one foreclosure each in the second quarter of 2007. This year, Malibu had eight and Beverly Hills had seven, according to DataQuick.

There were 26 foreclosures in Newport Beach and Newport Coast combined for the second quarter this year, up from 10 a year ago.

Although these numbers are relatively small, Leamer said, the slump hitting the broader market will drag down values just about everywhere, in part because depressed prices discourage homeowners from selling and trading up.

“Prices are not going to recover soon, that’s for sure,” Leamer said.

In Washington, meanwhile, lawmakers put the finishing touches on housing relief legislation that would give the Treasury Department the go-ahead to increase its line of credit to Freddie Mac and Fannie Mae and buy stock in the companies, if necessary.

The federally sponsored mortgage firms, which own or guarantee nearly half the nation’s mortgages, are reeling from loans gone sour.

In a report Tuesday, the Congressional Budget Office said Fannie Mae and Freddie Mac stand a “better than 50% chance” of weathering the housing and mortgage crisis without a government rescue. But the CBO also said there was a chance the firms could require as much as $25 billion in government aid.

“Many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate,” the CBO said. “Such continuing problems would increase the probability” that the bailout would be needed.

That prospect has made some conservatives wary. But after hearing the latest cost estimate, Sen. Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee, said the $25-billion figure will “pale in comparison to our long-term costs if we do not address this problem now.”

The House Democratic leadership defended the measure, saying it has taxpayer protections, including letting the Treasury secretary delay dividends to Fannie Mae and Freddie Mac shareholders if the government must rescue the companies and permitting a new regulator to restrict compensation for the firms’ executives.

The American Housing Rescue and Foreclosure Prevention Act also would include $4 billion in federal aid to help hard-hit communities buy and repair foreclosed properties, a provision that has drawn a White House veto threat and could complicate passage of the overall measure.

It would also give the Federal Housing Administration new authority to guarantee repayment of up to $300 billion in mortgages if a lender agrees to write down the loan principal below a home’s current appraised value.

Finally, it includes measures aimed at stimulating the housing market, including a tax credit for first-time home buyers and authority for states to issue an additional $11 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time home buyers and fund the construction of low- income rental housing.

And it would permanently raise to $625,000 the limit for mortgages that Fannie Mae and Freddie Mac could buy, less than the amount sought by officials in California, with its high housing costs, but more than the previous limit.

The legislation comes as the Democrats who control Congress have talked about a second economic stimulus measure costing $50 billion or more for consideration in September that could include increased spending for such things as infrastructure projects and energy assistance for low-income households. That would be on top of the two-year, $168-billion economic stimulus package approved in February.

Treasury Secretary Henry M. Paulson Jr. urged Congress to act quickly to shore up Fannie and Freddie, saying in a speech in New York that “their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions.”

UCLA’s Leamer, however, said home sales and prices won’t recover until buyers can get loans, but that banks won’t lend until prices start to rise.

The federal aid package, he said, “is too little to really matter.”


Hong reported from Los Angeles and Simon from Washington.