California Mortgage Defaults Rise in Third Quarter

La Jolla, CA.--The number of foreclosure proceedings initiated by lenders between July and September edged higher on a quarter-to-quarter basis for the first time since early last year. But the number of home owners who went all the way through that process to foreclosure dipped from the previous quarter and a year ago, a real estate information service reported.

A total of 83,261 Notices of Default ("NODs") were recorded at county recorder offices during the July-through-September period. That was up 18.9 percent from 70,051 in the prior quarter, and down 25.5 percent from 111,689 in third-quarter 2009, according to San Diego-based MDA DataQuick.

The peak was in first-quarter 2009, when 135,431 notices of default were filed. Last quarter's NOD tally was 81.2 percent higher than the statewide quarterly average of 45,940 NODs filed over the past 15 years.

The effects of the current turbulence in the nation's foreclosure processes aren't yet apparent.

"Over the past year, with some minor ups and downs, financial institutions and their servicers have been processing a fairly steady number of defaults each quarter. That probably has more to do with their capacity to process defaults, than with higher or lower levels of incoming distress," said John Walsh, DataQuick president.

"Policies can vary on how to use the formal foreclosure process in taking homes back and reselling them. It would be nice to think that servicers are carefully following all the rules and regulations, but in the real world there are differences of interpretation, as we've seen in the news recently. It'll be interesting to see how this plays out in fourth-quarter trends," he said.

The spreading of mortgage defaults from lower-cost sub-markets up into more expensive neighborhoods has receded a bit. The most affordable zip codes in the state, representing 25 percent of the total housing stock, accounted for 41.2 percent of all default activity last quarter, up from 40.0 percent the prior quarter and down from 42.9 percent a year ago. Those lower-cost markets accounted for 53.3 percent of all default notices filed in fourth-quarter 2007.

California's high-end markets collectively saw mortgage defaults buck the market-wide trend and drop slightly quarter-to-quarter, and they fell a bit more on a year-over-year basis compared with the overall market. The state's 83 zip codes with median sale prices above $800,000 this year logged a 1.0 percent quarter-to-quarter decrease in default notices and a 28.3 percent annual decrease.

At the other end of the price spectrum, zips with sub-$200,000 median sale prices this year saw third-quarter defaults rise 24.5 percent from the second quarter and fall 21.1 percent from a year ago.

The concentration of defaults remains much higher in the less expensive areas: Zips with sub-$200,000 median sale prices collectively saw 14.4 default notices filed in the third quarter for every 1,000 homes in those communities. That compares with 2.7 default notices filed per 1,000 homes in zips with $800,000-plus medians and 9.5 NODs filed per 1,000 homes statewide.

Default notices filed statewide on $800,000-plus home loans represented 2.9 percent of all default notices recorded in the third quarter, down from 3.4 percent in the second quarter and 3.5 percent a year earlier.

On primary mortgages, California homeowners were a median five months behind on their payments when the lender filed the NOD. The borrowers owed a median $15,156 in back payments on a median $310,000 mortgage.

On home equity loans and lines of credit in default, borrowers owed a median $3,951 on a median $67,900 credit line. However the amount of the credit line that was actually in use cannot be determined from public records.

While many of the loans that went into default during third-quarter 2010 were originated in early 2007, the median origination month for last quarter's defaulted loans was August 2006. For third-quarter 2009 it was July 2006, and for third-quarter 2007 it was May 2006.

The lenders that originated the most loans that went into default last quarter were Countrywide (5,510), Bank of America (3,469), World Savings (3,186), Wells Fargo (1,980) and Washington Mutual (1,779). These were also the most active lenders in 2006.

Most of the loans made in 2006 are owned and/or serviced by institutions other than those that made the loans.

The most active "beneficiaries" in the formal foreclosure process last quarter were Bank of America (15,992), Wells Fargo (10,069), mortgage Electronic Registration Systems, also called MERS (5,292), and JP Morgan Chase (5,172), according to public records.

The "servicers" (or the "Trustees" in the formal foreclosure process) that pursued the highest number of defaults last quarter were ReconTrust Co (mostly for Bank of America and MERS), Quality Loan Service Corp (Bank of America and JP Morgan Chase), Cal-Western Reconveyance (Wells Fargo) and NDEx West (Wells Fargo).

San Diego-based MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. Notices of Default are recorded at county recorders offices and mark the first step of the formal foreclosure process.

Although 83,261 default notices were filed last quarter, they involved 81,652 homes because some borrowers were in default on multiple loans (e.g. a primary mortgage and a line of credit). Multiple default recordings on the same home are trending down, DataQuick reported.

Mortgages were least likely to go into default in San Francisco, Marin, and San Mateo counties, following the historic norm. The probability was highest in Merced, Madera and Sutter counties.

The number of Trustees Deeds ("TDs") recorded, which reflects the number of houses and condos foreclosed on, totaled 45,377 during the third quarter. That was down 4.8 percent from 47,669 for the prior quarter, and down 9.3 percent from 50,013 for third-quarter 2009. The all-time peak for TDs was 79,511 in third-quarter 2008.

In the last real estate cycle, TDs peaked at 15,418 in third-quarter 1996. The state's all-time low was 637 TDs recorded in the second quarter of 2005, MDA DataQuick reported.

There are 8.6 million houses and condos in California.

Collectively, California's most expensive zip codes - with medians above $800,000 - saw the number of homes foreclosed on in the third quarter fall 14.7 percent from the second quarter and rise 11.8 percent year-over-year. The concentration of foreclosures in those high-cost zips remained relatively low last quarter - 1.0 foreclosure per 1,000 homes. That compares with 5.4 foreclosures per 1,000 homes across all zip codes statewide last quarter, and 9.5 foreclosures per 1,000 homes in zips with median sale prices below $200,000. The latter areas - places hit hardest by foreclosures in recent years - collectively saw foreclosures fall 5.2 percent from the prior quarter and drop 9.7 percent from a year ago.

On average, homes foreclosed on last quarter took 8.7 months to wind their way through the formal foreclosure process, beginning with an NOD. That's down from 9.1 months for the prior quarter but up from 7.0 months a year earlier. The increase from last year could reflect, among other things, lender backlogs and extra time needed to pursue possible loan modifications and short sales.

Of all the homes foreclosed on statewide during a two-year period ending in June this year, 80.0 percent had been resold on the open market as of the end of last month. When the same analysis was run for the prior quarter, 85.7 percent of the foreclosures had been resold, while a year ago it was 83.5 percent. It cannot be determined from public records how many of the unsold foreclosed properties are currently for sale, not for sale or have been made rentals (and therefore should not be expected to sell anytime soon).

Foreclosure resales accounted for 35.5 percent of all California resale activity last quarter. That was down from a revised 35.8 percent the prior quarter, and down from 42.7 percent a year ago. The peak was 57.8 percent in first-quarter 2009. Foreclosure resales varied significantly by county last quarter, from 10.2 percent in San Francisco to 59.3 percent in Madera.

At formal foreclosure auctions held statewide last quarter, an estimated 22.7 percent of foreclosed properties were bought by investors or others who don't appear to be lender or government entities. That was down from 25.5 percent the previous quarter and 24.5 percent a year ago, DataQuick reported.

Notices of Default (first step in foreclosure process)
houses and condos

 includes additional counties

Trustees Deeds Recorded (signal homes were lost to foreclosure)
houses and condos

* includes additional counties

Source: DataQuick Information Systems