The number of Californians entering foreclosure slid dramatically in the second quarter to a three-year low as the fallout from the worst of the housing crisis continued to abate.
Default notices, the first stage of the foreclosure process initiated by banks on troubled homeowners, plummeted 43.8% in the second quarter over the same period last year to 70,051, and 13.6% from the first three months of the year, research firm MDA DataQuick of San Diego said Wednesday.
Banks are pushing alternatives such as loan modification programs and short sales — in which a property is sold for less than the value of the mortgage — helping to reduce the number of people entering foreclosure. A modest recovery in home prices also means that fewer homeowners are likely to sink "underwater," a situation in which a property is worth less than its mortgage, considered to be a predictor of whether a homeowner will walk away.
"The most important thing is the housing market has stabilized, that house prices are up and not down anymore," said Kenneth Rosen, a professor at the UC Berkeley Haas School of Business. "People are now able to do a short sale, and they may not be as underwater as they were, so improving markets are really a good part of this."
Banks stepped up their seizure of homes from people already ensnared in the repossession process in the second quarter, reflecting an effort by economically resurgent financial institutions to clear troubled loans off their books after having survived the depths of the banking crisis. Many of those loans went into default months ago, taking an average of 9.1 months to get through the process, DataQuick said.
The plunge in default notices was experienced throughout California, including places such as the troubled Inland Empire and the state's Central Valley, resulting in the fewest new defaults since the second quarter of 2007. Default notices peaked statewide in the first quarter of 2009, when 135,431 households received filings, contributing to a steep slide in prices as bank-owned houses sold at extreme discounts.
The least expensive regions of the state continued to be the places where people were most likely to receive notices of default. An analysis of the state's most affordable ZIP Codes by DataQuick, representing about 25% of the existing housing stock, found that these areas accounted for about 40.1% of all defaults in the second quarter.
Neighborhoods with a median sales price of less than $300,000 saw 10.6 default notices for every 1,000 homes compared with 2.9 for every 1,000 homes in areas with a median price above $800,000.
Lenders that originated loans receiving some of the highest number of default notices in the second quarter include many institutions that had been acquired during the banking crisis, including World Savings, with 2,982 loans, Washington Mutual, with 2,547, and Countrywide, with 2,532. Wells Fargo, which still exists, had 2,117 loans with default notices filed on them.
In Southern California, the number of default notices dropped 46.9% in the second quarter from the year-earlier period, and 15.23% from the first quarter. The county with the biggest decline in the second quarter was Riverside, with a 49.2% drop in default notices from the same quarter last year, and the county with the smallest decline was Ventura, with a 44.6% decline, underscoring the broad drop in default activity.
"We are now three-plus years into the housing crisis, and at this point of time we are seeing stabilization across the board," said Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. "The stabilization is in fits and spurts … but it is evidenced in a variety of indicators."
The mortgage meltdown made most subprime and nontraditional loans unavailable, and the bulk of mortgages in the intervening three years have been fixed-rate loans made to solid borrowers. These loans are generally performing better than the poorer-quality ones being flushed out of the system.
The Southland's housing recovery has held its ground for more than a year, even though sales in recent months have been fueled by federal and state tax incentives. Buyers have included first-time purchasers as well as investors packing courthouse steps to scoop up foreclosures and bidding up prices by tens of thousands of dollars in minutes.
Furthermore, some researchers are beginning to conclude that fewer homeowners may walk away from their properties than previously thought, said Richard Green, director of USC's Lusk Center for Real Estate.
"There are incentives to avoid default even if you are underwater," Green said, adding that people struggling to pay their mortgages may not be as ruthless in their financial decision-making as some experts had presumed they would be.
With banks booking big profits these days, they are facing increasing pressure from federal regulators to clean up their problem loans. Banks stepped up their repossession of homes statewide and in the Southland during the second quarter.
The number of trustee's deeds — the last stage of foreclosure — filed on California properties increased 4.4% from the same quarter a year earlier, and 11.2% from the previous quarter, for a total of 47,669. In Southern California, the number of deeds filed jumped 4.5% from the same quarter a year earlier, and 9.6% from the previous quarter, to 24,367.
Experts and real estate professionals said the increase in foreclosure activity also has to do with the steadying housing market. Now that prices have bottomed, banks apparently feel comfortable putting more inventory on the market.
"It's a little bit busier, and everything is selling pretty fast because interest rates are so low," said Leo Nordine, a Los Angeles real estate agent who specializes in selling foreclosed homes on behalf of major lenders. "The high end is still really slow, and the banks are really pushing short sales hard."