Real Estate

More Homeowners Going Into Default

A housing market slowdown combined with rising payments on adjustable-rate loans is leading to a sharp hike in notices from lenders.

By David Streitfeld and Martin Zimmerman, Times Staff WritersOctober 19, 2006

The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30, providing the latest evidence of trouble in the housing market, figures released Wednesday show.Lenders sent out 26,705 default notices — the first step toward a foreclosure — during the July-to-September period, up from 12,606 during the same quarter in 2005, according to DataQuick Information Systems.

Defaults are still well below their peak level of 59,897, which came in the first three months of 1996, as the state's last housing slowdown was ending. But the report shows that the slumping housing market is taking a toll on more homeowners especially those with mortgages that offer low initial payments at the cost of higher bills down the road."We were putting buyers in homes with loans they could not afford to sustain over the long haul," said Bob Casagrand, a San Diego real estate agent. "If you're a marginal buyer with an adjustable mortgage, you're rolling the dice on the future."Foreclosures are rare when the housing market is strong and prices are rising. In those conditions, borrowers can usually sell their homes quickly, or they have enough equity to allow them to refinance their loans. But in another disquieting sign, DataQuick reported that 19% of the owners who went into default earlier in the year actually lost their homes to foreclosure in the third quarter, more than triple the 6% in 2005.Mortgage payments are such a big part of the household budget for many Californians that it takes only a little trouble to fall behind.

For Stacey and Mike Broussard, all it took was an exceptionally rainy spring. That meant Mike Broussard was laid off from his job as a heavy equipment operator."I tried to juggle things around — we were eating a lot of peanut butter and a lot of beans — but it got out of control," said Stacey Broussard, 39.She was in charge of the bills and each month would pay what she could of the $1,300 the lender expected for the mortgage on their home northeast of San Francisco in Antioch. At the end of August, she said, she tried to make another partial payment, but the lender said anything less than a full payment would lead to a default.

One day her husband said she had a notice from the post office to pick up a special letter. She knew what it was, but he didn't. "I was trying to fix it before I told him," she said. "That was the worst moment."Mike Broussard is now employed again, and the couple — who are lucky enough to have equity in their home — are working with TerraCotta Group, a Manhattan Beach real estate and mortgage company that specializes in helping delinquent homeowners get out of default.

When she started TerraCotta 2 1/2 years ago, company President Tingting Zhang said two or three people would come through her door on the typical day looking for help. Now, it's 30 to 40. "And we haven't reached the peak yet," said Zhang, who believes that the combination of rising interest rates and high-risk mortgages could spell defeat for a rising number of borrowers.Just Wednesday morning, Zhang dealt with a Lancaster resident who had taken out a $310,000 adjustable-rate mortgage with a starter interest rate of 5.4% and a monthly payment of $1,050. In July, the interest rate climbed to 8.5% and the monthly payment jumped to $2,306. A year-end adjustment will send the monthly payment to $2,744."The borrower is totally unprepared for this rate adjustment," Zhang said.The fallout is starting to show up in the workload at credit counseling outfits.

Gary Aguilar, counseling manager for Springboard, a nonprofit credit counseling agency in Riverside, said the amount of mortgage-related work he and his staff were doing had "pretty much tripled this year."The softening of the housing market was the trigger, as new homeowners with little or no equity in their properties found themselves unable to sell at a high enough price to pay off the balance of the loan and still cover all of the sale expenses."Whereas a year ago, people could have put their house on the market and sold their way out of the problem, now they're stuck with the house," said Richard Pittman, housing services coordinator for credit counselor ByDesign Financial Solutions in Los Angeles

Provided by Los Angeles Times