Real Estate


Mortgage defaults up 67% in California
Notices filed on late loans highest in more than three years
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By Nick Godt, MarketWatch

Aug 3, 2006

NEW YORK (MarketWatch) -- The number of defaults on mortgage payments rose to a three-year high in the second quarter in California, a 67% increase from the year earlier period, according to DataQuick, a real estate data-compiling firm.

Lenders sent 20,752 default notices to homeowners across the Golden State, up 10.5% from 18,778 the previous quarter and up 67.2% from 12,408 in the second quarter of 2005. Notices of default are formal documents filed with the county recorder's office which mark the first step of the foreclosure process.


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The 20,752 defaults were the highest since 25,511 were filed in the first quarter of 2003.

"This is an important trend to watch but doesn't strike us as ominous," said Marshall Prentice, DataQuick's president. "We would have to see defaults roughly double from today's level before they would begin to impact home values much."
Because the number of defaults had fallen to extreme lows in recent years, it was widely expected that they would start spiking up as home-price appreciation slowed, he said.
"We hear a lot of talk about rising payments on adjustable-rate loans triggering borrower distress," Prentice said. "While there's no doubt some of that is going on, as far as we can tell the spike in defaults is mainly the result of slowing price appreciation."

Slowing prices make it harder for homeowners who fall behind on mortgage payments to sell their homes and pay off the lender. Price increases level off

Some parts of California, along with others in Florida and the northeast region, had seen some of the sharpest increases in home prices in the nation over the past few years, fueling what many observers described as a speculative bubble.
Historically low interest rates helped fuel the surge in home sales and prices, also encouraging homeowners to borrow on their home equity to finance their consumption.
But with the Federal Reserve gradually lifting short-term rates over the past two years, the housing market began to slow late last year.
California defaults had hit a low of 12,145 in the third quarter of 2004, a year during which home prices were on average rising by more than 20% annually. But so far this year, annual price gains have slipped into single digits in many of the state's key housing markets, DataQuick said.
In July, median home prices in San Diego and Sacramento counties dipped about 1% from the year earlier. As a result, second-quarter defaults rose by 99% in San Diego County and 109% in Sacramento County. Still, that represented just 1,778 default notices in San Diego and 1,352 in Sacramento. DataQuick said overall defaults remain about one-third their peak level reached in 1996 in the last housing recession in California.

Among the banks that have issued the largest amounts of mortgages in California, such as Wells Fargo & Co (WFC :
Wells Fargo & Company

Sponsored by:
WFC36.22, -0.06, -0.2%) , most said credit quality remained solid when they reported second-quarter earnings.
But a slowing housing market has still caused some trouble. Earnings at Golden West Financial (GDW :
Golden West Financial Corporation

GDW77.25, 0.00, 0.0%) , which is in the process of being acquired by Wachovia (WB :
Wachovia Corp
WB56.02, +0.19, +0.3%) , came in below expectations as mortgage demand slowed.

Golden West specializes in adjustable-rate mortgages, which have fallen out of favor as interest rates increased.
Countrywide Financial (CFC :

Countrywide Financial Corp. The largest mortgage lender in the U.S., saw a 26% improvement in earnings but lowered its outlook for new loan production, while its chief executive warned that expectations of a "soft landing" in housing is overly optimistic.

Many banks have been ditching lower-quality loans while some have gone further, selling entire slices of the business.
Washington Mutual (WM : Reported a 9% drop in second-quarter earnings on charges stemming from the sale of mortgage-servicing rights to Wells Fargo.

KeyCorp (KEY : It is exploring the sale of its subprime mortgage lending unit. Three weeks ago National City Corp

(NCC :
National City Corporation said it has similar intentions. Nick Godt is a MarketWatch reporter based in New York.