California, the state which has led the nation in home foreclosures, has finally seen a significant drop in the number of mortgage defaults and house repossessions. But many economists say the trend is less about improved economic conditions than about banks holding off on foreclosure or renegotiating loan agreements.
The number of mortgage default notices fell 10.3 percent in the past three months compared to the previous quarter, dropping to 111,689 in the July through September period, according to San Diego-based MDA DataQuick. Repossessions were down 37 percent over the previous year.
Lenders may have intentionally slowed down the pace of foreclosure proceedings, DataQuick says. Default notices are the first step in the foreclosure process.
“It’s not out of the goodness of their hearts,” says Andrew LePage, DataQuick senior analyst. “Foreclosures are expensive and the more homes you dump on the market, the more you drive down prices and it becomes a vicious cycle.” Mr. LePage says the industry is in the early stages of “trying alternatives … such as short sales [selling for less than is owed on the mortgage] and loan modifications.”
California is home to 1 in 9 Americans and has 8.5 million houses.
“There is no reason to believe this is a trend and that the worst has passed,” agrees Ginna Green, spokesperson for the California office of Center for Responsible Lending. She points out that the state is still at 12.5 percent unemployment.
Also, a state moratorium on foreclosures was in effect through most of the last quarter, and has just been lifted.
The California Mortgage Foreclosure Prevention Act, which went into effect June 15 this year, placed a 90 day delay on some foreclosures, where the lenders were deemed to have less than comprehensive loan modification programs. Many lenders already have federal incentives to offer loan modifications, but the new law was intended to give California lenders further incentive to renegotiate mortgages instead of foreclosing.
“Now that the moratorium has been lifted, there should be a tsunami of them [foreclosures] coming shortly,” says Chuck Cochran, a real estate assessor based in the San Fernando Valley. “A lot of properties are due to hit the market, which could push prices down another notch.”
There are other concerns for lenders and borrowers, says Perry Wong, senior managing economist for the Milken Institute in Santa Monica, Calif.. Most notably, adjustable rate mortgages are due to be reset from cycles in 2003 and 2005. Considering this additional instability, Mr. Wong says he thinks there’s a hopeful sign in the fact that that banks are not forging ahead with foreclosures.
“We must all look at the up side, which is that when a bank is not quick to do a foreclosure, that itself is a good sign,” says Wong. “They may not be seeing that the market is going to go up quickly, but the fact that they don’t see as much of a downside in holding on to it, is a very important signal.”
The DataQuick study released this week showed that while most foreclosure activity was still concentrated in affordable inland communities, the foreclosure problem has continued to slowly migrate into more expensive areas. Default notices are rising fastest in the affluent counties of the Bay Area – San Francisco (up 72 percent over a year ago), San Mateo (up 58.5 percent), and Marin (up 65.9 percent).
What is unknown now, say analysts, is how many borrowers will decide to modify their loans – an initiative promoted by the Obama administration – how many with adjustable rate mortgages will experience unfavorable rate resets, and the trend with other housing prices.
“There are lots of unknowns at the moment, especially in California,” says Jed Kolko, real estate specialist for the California Public Policy Institute. “Among them is that there is no way to know if what the government is doing to help people renegotiate more comfortable mortgages will have a permanent effect or only a delaying one.”
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