Bay Area mortgage defaults on the rise

Bay Area mortgage defaults on the rise

By Sue McAllisterMercury News

The number of Bay Area homeowners facing foreclosure rose to the highest level in more than seven years in the third quarter, while foreclosure activity statewide was higher than anytime in more than four years, a real estate information firm reported Wednesday.

Despite the increases, foreclosure activity is still below average levels regionally and statewide, experts noted.

Owners who receive "default notices'' -- the first step in the foreclosure process -- are "still a small percentage of all mortgage loans, and foreclosures are a fraction of that,'' said Delores Conway, director of the Casden Forecast at the University of Southern California's Lusk Center for Real Estate. "So we have to keep that in perspective.''

Flattening home prices and slower sales are the primary forces behind steep increases, said the report from DataQuick Information Systems. No doubt some of those in default are borrowers with popular adjustable-rate loans whose rates have risen sharply lately, said DataQuick's Andrew LePage. But the data shows that those loans are no more likely than fixed-rate mortgages to be in default currently, he said.

Foreclosure activity has been extremely low in recent years, primarily because most homeowners unable to make their payments can sell their homes for more than they owe their lenders, pay off their loans, and avoid foreclosure.

When price appreciation slows, as it has throughout California this year, fewer owners can do that.

In Santa Clara County, where appreciation has remained stronger than in many other parts of the state, the increase in owners who received default notices from their lenders was second-smallest in the state last quarter -- up 56 percent compared with a year earlier -- and lowest in the Bay Area.

Statewide, Santa Cruz County experienced the smallest gain in such notices, at 34 percent.

Notices of default are the first step in the foreclosure process, and mortgage lenders typically send them when borrowers are at least a few months late in making their loan payments.

A total of 3,795 homeowners in the nine-county Bay Area received default notices from their mortgage lenders in the July-through-September period. That's up 89 percent compared with the same period in 2005, according to DataQuick, which compiled the data from public records. But the quarterly number is still below average, said DataQuick's Andrew LePage.

"We are coming back to more normal levels as appreciation recedes. And the less appreciation there is, the fewer options people have'' for avoiding foreclosure by selling or refinancing, he said.

The last time more Bay Area owners received the default notices was in the second quarter of 1999, when 3,802 such notices went out.

Statewide, 26,705 homeowners got default notices last quarter, more than double the 12,606 who received them a year earlier.

That's the highest level for the state since the first quarter of 2002.

"A slowing housing market is consistent with a higher level of foreclosures,'' said Greg McBride, an analyst with Bankrate.com. "The $64,000 question is how much does the market slow and how high do the foreclosures go?''

He said he expects defaults and foreclosures to keep rising toward average rates.

According to DataQuick's records, which go back to 1992, an average quarter in the Bay Area sees 4,038 notices of default sent.

Average for Santa Clara County is 825 per quarter. But last quarter, just 670 homeowners got notices of default. Only 51 homes in the county were actually foreclosed upon last quarter.

LePage said as home appreciation flattens and foreclosure rates get closer to average levels, "the question is, will the riskier, creative financing loans and resets on adjustable rate loans . . . keep pushing it into above-average territory?''

Nearly half the mortgages made to San Jose borrowers in the first quarter of 2005 had "interest-only'' payment options, according to a study last year by LoanPerformance, a San Francisco mortgage data company. These are among the ``risky'' loans that industry observers are concerned will be more likely to default than more traditional loans.

LePage said it's unlikely that mass job losses will come along and cause a wave of foreclosures. But observers of the housing market and economy are watching to see how many borrowers who took out adjustable-rate mortgages with super-low initial rates in recent years will default when their rates adjust upward.

"I think payment shock is a factor'' when it comes to foreclosure activity, McBride said.

But a few factors have made it so more homeowners will be able to avoid that shock, he said.

Long-term mortgage rates have fallen, giving some owners the ability to refinance and lower their payments. Gas and oil prices have come down, reducing strain on household budgets. And the stock market is performing well, adding to some owners' assets.

"All three of those things combined can take the sting out of payment shock,'' he said.