| The foreclosure tsunami in California continues | | | | months) when the lender started the default process. |
| unabated. More foreclosures were started in California | | | | The borrowers owed a median $11,126 in unpaid |
| during the second quarter of 2007 than any | | | | mortgage payments. In other words, once the |
| comparable period in over ten years. We need to go | | | | foreclosure starts, the borrower has the choice to |
| all the way back to 1997 to see such record volume | | | | either "reinstate" the loan by paying the $11,126 arrears, |
| of foreclosures within the state. What has caused this | | | | or "redeem" the loan (later in the foreclosure process) |
| tsumani? It has been caused by the "perfect storm" of | | | | by paying the loan balance (i.e. $342,000) and the |
| depreciating home prices, anemic sales, re-setting | | | | arrearage (i.e. $11,126). Obviously, reinstating is preferred |
| adjustable rate loans, and the mortgage meltdown in | | | | to redeeming. |
| the financing sector. | | | | The median age of these defaulted loans is 16 months, |
| When we analyze the statistics, we can see that the | | | | which corresponds to the peak of loan originations in |
| vast majority of the loans that went sour were | | | | August of 2005. And, as we all know, the primary loan |
| originated by lenders between the summers of 2005 | | | | utilized for purchasing home during that period was the |
| and 2006. If you remember those halcyon days, real | | | | 1. Notices of Default. |
| estate appreciation was still in double-digits and we | | | | The first step in the foreclosure process in California is |
| were experiencing the tail-end of historically low | | | | the recording of a Notice of Default ("NOD"). There |
| interest rates. As a result, lenders liberalized their | | | | were 53,943 Notices of Default recorded in the |
| guidelines to maintain high loan volumes. But because | | | | second quarter of 2007 (April to June). That is a |
| interest rates had risen, lender utilized adjustable rates | | | | shocking number in itself, but even more devastatinging |
| mortgages with artificially low "teaser rates" to qualify | | | | when you consider that it was 15.4% increase from |
| more borrowers. Property owners took advantage of | | | | the previous quarter, and up an earth-shattering 158% |
| those loosened guidelines and teaser rates to obtain | | | | compared with the same quarter of 2006. |
| loans in record numbers. Its those teaser rates, now | | | | This was the highest levels we have seen in California |
| adjusting up to higher market rates, that are causing | | | | since 1996, when foreclosures were at their worst. In |
| the tsunami of foreclosures we are experiencing | | | | 1996, for those of us that remember those dreadful |
| today. | | | | days, 61,541 foreclosures were started. The lowest |
| Keep in mind, there are 8.4 million houses and condos | | | | level recorded was in the third quarter of 2004, when |
| in California. The vast majority of those properties are | | | | only 12,417 NODs were filed. |
| financed by mortgages that are current and continue | | | | Although 53,943 default notices were recorded in |
| to be current. | | | | California last quarter, only 50,901 properties were |
| Nevertheless, the loans that did fall into default last | | | | affected. How is that possible? Many homes are |
| quarter were mostly originated between July 2005 and | | | | financed using more than one loan, what are called |
| August 2006, which was at the height of the | | | | "piggy-back" loans. Utilizing multiple loans on the same |
| mortgage frenzy. The median price paid for a | | | | property helps homeowners avoid mortgage |
| California home purchased during that period was | | | | insurance. That is up 162.8% from the second quarter |
| $460,000. In contrast, the median price paid for those | | | | of 2006. |
| properties where mortgages went into default last | | | | The default numbers reflect wide regional differences. |
| quarter was only $445,500. (This discrepancy is | | | | The second-quarter numbers were a record in |
| caused because there is a lower default rate with | | | | Riverside, San Bernardino, Contra Costa, Sacramento |
| higher valued properties.) | | | | and most Central Valley counties. However, in Los |
| The median mortgage for those properties is | | | | Angeles County, the state's largest, it was still less than |
| $342,000, and their mortgage payment is | | | | half the first-quarter 1996 peak. This reflects the depth |
| approximately $2,225 per month. Homeowners were | | | | of the recession in the mid-1990s, as well as the |
| five months behind on their payments (up from three | | | | relative strength of today's housing market. |