Foreclosure bumper crop for California in 2008

California mortgage defaults and foreclosure sales shot up 131% in 2008 over the previous year, according to real estate data provider Default Research Inc. and reported by Bloomberg News on Tuesday.

The jump accompanied steep home price declines. The latest statistics from MDA DataQuick put the statewide median home price paid at $258,000 in November, a 37.7% nosedive from $414,000 for November a year ago.
   
From Bloomberg:

The three California counties with the highest number of foreclosures were Los Angeles, with 122,408 last year, followed by Riverside, with 82,072, and San Bernardino, with 64,144, Default Research said.

Once again, Southern California leads the way.

So will 2009 foreclosures top 2008's? Serdar Bankaci, founder of the Mt. Pleasant, Pa., foreclosure tracking firm, is quoted at Jon Lansner's O.C. Register blog as saying they "expect to see foreclosure activity continue through the first two quarters of 2009" but improving by the third quarter.

Seems optimistic to me. What about all those Alt-A and option ARMs that have yet to adjust?

-- Lauren Beale

Thoughts? Comments?

Photo: A home in the El Sereno area of Los Angeles. Credit: Francine Orr / Los Angeles Times

Comments

[Peter Basson]

The real problem won't be foreclosed homes, it will be the lack of mortgage funds available through the banks.

In 2009 another shoe drops -- the collapse of the commercial real estate market as a slew of variable rate mortgages adjust upward on property that can't be leased. This will put intense pressure on already under-capitalized banks, who'll augment their capital base by reducing the number of loans they make.

Add this to a residential real estate market already in free-fall, and you've got a recipe for further despair.

D2

[Todd in WeHo]

We're just in a calm before the real storm hits. Alt-A and option ARMs will be the next wave to crash upon SoCal and there will be widespread devastation--even on the west side where buyers have been smug.

[scared indio]

Don't waste your time here... To get the straight blog talk

visit www.doctorhousingbubble.com

[Joseph....The Real Estate Guy.]

We are in for a rough 10 years ahead of us!

Don't expect any appreciation for a while...

[AH]

Oddly enough the adjustment shock isn't going to be as severe as once thought -- that is, loans resetting in later 2008 and 2009 are benefitting from historically low interest rates. Since most adjustable mortgages track off the LIBOR or MTA, and those are all in the 2-2.5 range, no one's mortgage is resetting wildly. The subprime mess and the 3 year ARMs are nearly worked through the system, but I don't think you'll see the alt-a and prime ARMs hitting the fan quite yet. As interest rates moderate, we'll see the pain and recovery will be slow. But heck, anyone who has an ARM reset this month hit the jackpot.

[Cal]

"Seems optimistic to me. What about all those Alt-A and option ARMs that have yet to adjust? "

Most indexes those are tied to are at extremely low levels right now.

It isn't interest rates driving foreclosures, it is fundamental affordability. In the case of non or negative amortizing loans the ability for servicers to modify the loans into something that is affordable. In a modification the servicers usually re-underwrites requiring PITI to be paid and if impounds weren't taken before are taken in now (to assure they are being paid).

I do think the peak of foreclosures has passed. They will stay elevated for some time though. Some of the reasons I think the peak has passed:
1. Interest rates are falling not rising
2. Loan modifications are gaining traction. They are generally a bad deal for the borrowers but it keeps the borrower strung along paying the maximum until the inevitable default. This has the effect of spreading the foreclosures out a bit more.
3. Short sales are being approved more as the year moves on, this ends with the borrower still losing the sale but isn't counted as foreclosure.
4. Politically pressure is enormous on the servicers.

Now the economy could overwhelm the current level of foreclosures and exceed the peak of this last summer. But I think between all the above actions the absolute level of foreclosures won't be hit again in this cycle.

[Alan2]

To..AH

Low interest means little if your..
Underwater
Your income is insufficient. No longer stated income.
Your principle is higher. -Negam was added to the orig loan resulting in higher principle.
Now unemployed/underemployed. Employement/salary now verified .
Etc, etc

Buyers 2-3 years ago (no or little down) are certainly underwater. That goes for 20-30% down too.

No jackpot here...

Interest at 4.5% little help . Cant see new buyers with a down rushing to buy in a known falling market.

From all accounts we haven't seen the worst yet.

[Laker]

Cal,
i think there is another point that will create a brand new wave of foreclosures/short sales that does not have anything to do with the points you mentioned. In fact, interest rates going down will contribute to MORE foreclosures and short sales...
I have a very close family member that bought at the peak with 30 year fixed. He makes $250K a year and has 800 FICO. His place is now worth 30% less than he bought it. He put nothing down. Now he is going to try to short sale or bailout, and will try to buy another house in better hood larger house and lower price....
Lower interest rates will benefit him on his NEW purchase, but he can't enjoy them on his old place as he can't refi it as it under water....
So....Since prices are much lower than 1-2 years ago, and interest rates are low, those that can bail, will bail faster than you think. Price free fall is the number 1-2 reason for more defaults to come. And i didn't even mentioned sky rocketing unemployment....

[latesummer2009]

We have yet to see the worst. 2009 and 2010 will be years to remember. Just too many headwinds, fighting the market. Even the highest end neighborhoods (90402), are starting to feel the pinch.

www.santamonicameltdownthe90402.blogspot.com

www.westsideremeltdown.blogspot.com

[Cal]

Laker,

The condo blue buy n' bail has been effectively stopped by new underwriting criteria by FHA & Fannie/Freddie.

They require between 25-30% of equity in the house being left in order to give a loan on a new house. So the current low interest rates won't be spurring a wave of ruthless foreclosures. The people stuck in their underwater homes have to deal with their reality before thinking about moving on unless they do a rent & run (which is stupid, might as well get foreclosed on and save up some money).

[jo]

My understanding is that Alt-A's aren't so much of an issue, and that with lower rates only a portion of Option ARMs are going to be in trouble. However, the recession will carry the mantle of falling prices, where the subprime left off. Some estimates put a recovery at several years. To counter that argument, judging by the level of interest in bargains that are starting to creep onto the market, there may enough pent up demand to prevent very large declines, but I think this will be largely confined to select areas.

I think what is confusing people is the 'about face' we are experiencing. Bernanke said the pain would stop when the housing market recovers. With the recession threatening to make the housing market worse, we are in a Catch 22 situation.

[Laker]

Cal,
Not if the current (under water) house is under the wife's name, and he is going to buy the new place using his own name/credit....
You can call it ditch - buy - be happy.

[Cal]

Gosh, I just can't imagine how an underwriter would ever figure that one out.

/sarcasm

This may be your friends first time underwriting a loan but it isn't the underwriters. Both title and lender are going to have issues, especially because this is a community property state.

And while your lost in the noise of your friends attempted fraud as usual it is immaterial to the issue at hand. Buy N Bail has been effectively stopped by the new underwriting guidelines so foreclosures due to lower interest rates as you stated in your post aren't a significant issue.

[Laker]

Cal, we shell see my friend....
The idea of true prime borrowers will do the bail N' buy or short sell and buy is basically the whole point. You seem to discount the fact that better opportunities are reason to do that. Also, these people are feeling that they are suckers...something that they did not feel even 6 months ago.
I'm talking about Doctors (PhD) here...not gardeners or day laborers (with all due respect).

[el_guapo]

I have seen the theory that low interest rates will actually spur foreclosures. The reason being that a delusional home owner tries to refi and then realizes how far underwater they are. They decide to mail in the keys. Don''t know if that will happen or not, but it would definitely be an "unintended consequence."

Regardless, the Option ARM resets are going to be a big problem. Forget about rates, people will have to pay down principle. It's not the reset, it's the recast.

[Cal]

Laker:"The idea of true prime borrowers will do the bail N' buy or short sell and buy is basically the whole point. You seem to discount the fact that better opportunities are reason to do that. "

Im saying their ability to get it past the underwriters is gone for a buy and bail. They can bail and they can short sale. But they will be waiting to buy, on a foreclosure it will be 3-4 years before FHA or GSE will allow a loan again I cant remember the criteria on a SS. The buy WON'T be coming first (unless they have cash) and so they will HAVE to deal with the credit issues of their actions. The reason buy n' bail was so great was the borrower could be sitting in a cheaper home they own while waiting out the negative consequences of their actions.

el_guapo:"I have seen the theory that low interest rates will actually spur foreclosures. The reason being that a delusional home owner tries to refi and then realizes how far underwater they are. "

Now this I can see. The vast majoirty of people are in denial and a taste of reality could fundamentally change the market. But I think inertia will keep many in their homes to their own detriment.

I think a more likely turn of event is the homeowner will hear about them fancy schmancy loan mods and try for one of those. They then won't understand any of the paperwork and words like Capitalization and Reamortization and their eyes will glaze over, they then see the monthly payment is lower and sign the paperwork and send the check not realizing they've just committed themselves to overpaying for the house for another 40 yrs and refinanced their arrears over 40 yrs. These are the same people blindly signing the closing papers, they're going to do the same thing again because math is hard apparently.

[Ann D Devine]

Shall we just call this the Cal/Laker show?

(I'm not complaining. I like listening in.)

[D]

Cal and Laker

You can buy a second home while claiming the first home as a rental and then once the second home closes and records, short sell the first. Then you have all the time in the world to rebuild your credit...So I've heard ;)

[NoHo Dolphin]

I'm not a financial wiz, just someone trying to figure this all out, waiting to jump in so please excuse my naive question.
It's being said here that ALT-A and Option Arms now are NOT going to play a factor in a new wave of foreclosures, which confuses me. Weren't these loans originally at teaser rates of 1,2, & 3%? If so, adjusting up to 4.75 , 5 or 5.5% would have a major YIKES effect to people's monthly nut - yes? Please correct me if I'm totally off mark here.

[Cal]

D,

Again, the new underwriting guidelines have taken this into account. If you don't have significant equity in the property then qualifying to get another home is very difficult. They won't accept rental income and have to qualify you using payments for both homes. Many lenders have even more restrictive overlays on top of these guidelines for this situation.

Buy N' Bail was much easier 6 months ago than it is today. There are people who could still do it (small housing payments for both homes relative to income and large down payments) but the en masse buy n' bail threat is quite simply gone. They can bail but buying will be an issue.

[Cal]

NoHo Dolphin,

Teaser rates on subprime loans have mostly run out, they were anywhere from 1 to 24 months and they ended origination in early 2007. What is being said here is that interest rate adjustments moving forward won't be playing nearly as big of role as foreseen because the Fed is keeping rates ultra low. What will be affecting these mortgages are basic affordability (payment relative to income), how many jobs are lost, hitting the neg-am caps on Option arms, and both Alt-A IO arms and option arms requiring amortization (paying off on principle). These are all significant headwinds to the market but one less item will be thrown in and that is the upwarding adjusting interest rates.

[Pablo]

Foreclosures are not going to slow down. A weakening economy will make up for whatever real estate-related challenges you may think or improving, i.e. Alt-A won't be as bad, etc. The reality is that the economic avalanche that started with mortgages has moved on way beyond the real estate and finance industries. Everyone should reassess their personal finances by budgeting for a very long financial winter (http://preventingforeclosure.org/worksheets_guides_samples/Household_Budget.pdf).

Those facing foreclosures, here are some good tips to take into account provided by a non-profit resource center: http://preventingforeclosure.org/2008/11/options-when-facing-foreclosure/

[Laker]

"...have to qualify you using payments for both homes. ..large down payments..."
Cal, That is exactly what i said about my relative's situation. Just for you, I'll share the numbers:
He is prime borrower currently paying $4000 PITI per month on his upside down house. His income is about $250,000. He wants to buy another house for $250,000 with 20% cash down so the new mortgage on $200,000 will be about $1200 PITI. So their total housing debt on two houses will be $5200, their income is $250,000. Say they have another $1000 in monthly debt such as CC, auto loan. So front end $5200/250,000 is 25%, back end 6200/250,000 is 29%. I think this is LOWER than 28/38 by far and BINGO !!! They Buy, and Bail and the bank is left holding the bag .....
The sad thing that you would never expect (prime) people to do that...So if they are doing and do benefit from the low rates as i said, what will the poor do>? I know they would not buy and bail, but the bail part is sure guaranteed.

[Tim K.]

NoHo Dolphin -

The deal with Option ARMs/Alt-A loans is that fundamentally they are not different from the subprime loans that are failing now. The core problem for both classes of loans were that the underlying asset (the house) was too high even for the expectations of the buyer. Neither the subprime borrower nor the Option ARM/Alt-A borrower had any intention of paying for the entire balance - they expected to sell it within a few years for even more money.

That's fundamentally what's broken about both types of loans - housing prices are not going up. The minor mechanics of the loan, such as teaser rates, adjusting upwards/downwards is actually a small (but significant) part of the problem, but it is by no means the driving force. The reason the Option ARMs/Alt-As are generally lagging the subprime loans has more to do with where these home loans were made, not so much by the fact that they are larger amounts. It's not an obvious causality - you'd think the reason the higher end homes (which were bought with Alt-As by definition, because they are not within conforming limits) should hold up better. But they are not holding up better because the Alt-A buyer is somehow "better" than a subprime buyer - it's because the cheaper homes were in less expensive neighborhoods and those always fall first, because they *are* less desirable neighborhoods.

The fringe areas are going down first (San Bernardino, Fontana, Rancho Cucamonga) followed by the areas closer to the coast. Those areas are always more desirable, and hence the cost of the home is priced into that equation. So the direction of the home prices tumbling is always cheap areas first, followed by more expensive areas. Alt-As and Option ARMs just happen to be the only borrowing options once you get into the prices that were seeing in 2006. And so those are failing now too. The amount of speculation that was juicing all areas was basically the same, *relative to the local market* so I don't want to hear any stupid strawman posts about how I'm saying all areas are the same. They aren't. But they are all susceptible to the SAME FINANCING FORCES, i.e. the availability of loans was NOT localized.

So yes, there has been some talk that the adjusting of interest rates is not going to be as high as before. But that was never the core issue - the distressed housing inventory is not helped by adjusting the interest rates - that has already been done and as has been shown by the failed HOPE NOW initiatives, it's not working. Borrowers in trouble wish they weren't on hook for the PRINCIPAL nevermind the financing.

[Cal]

Laker,

Do I have to go through all the underwriting guidelines to explain why that loan is still not going to be made? The underwriter is going to see negative equity and no executed lease and no security deposit for the lease and kill the deal. It just won't happen. If the borrower is moving relatively close by (under 50 miles) it will be a huge red flag to the underwriter as well. The guidelines also require 6 mo PITI for both residences in reserves.

Again we see that buy and bail has become very difficult. It had the potential to be systemic but that potential has been removed. They can bail, but buying will be very difficult. Low interest rates won't be driving a new round of buy and bail as was your contention. People will be forced to bail and rent and deal with the credit consequences of their actions. For many the math works out very favorably in that regard but some people simple wont rent.