Another Decline in California Foreclosure Activity

La Jolla, CA ( DQ News) -- The number of California homes going into foreclosure dropped again during the fourth quarter of 2010 to its lowest level in more than three years, the result of shifting market conditions as well as evolving lender and mortgage servicer policies, a real estate information service reported.

A total of 69,799 Notices of Default (NoDs) were recorded at county recorders offices during the October-to-December period. That was down 16.2% from 83,261 for the prior quarter, and down 17.5% from 84,568 in fourth quarter 2009, according to San Diego-based DataQuick Information Systems.

Last quarter's activity was the lowest since 53,943 NoDs were recorded in the second quarter of 2007. It was just over half the record 135,431 default notices recorded in the first quarter of 2009.

"We don't know how much of the decline is due to less household financial distress, and how much is due to shifts in lender and servicer foreclosure policies. The level of default activity would certainly be higher if it weren't for alternative strategies such as short sales, or even lengthening grace periods," said John Walsh, DataQuick president.

"The institutions that hold these loans in their portfolios will do whatever it takes to lessen their losses, including waiting. An additional factor is all the turbulence when it comes to the formalities of the foreclosure process," he said.

While most of the loans that went into default last quarter were originated during the 2005-2007 period, the median origination quarter for defaulted loans remained third-quarter 2006. That has been the case for over a year, indicating that weak underwriting standards peaked then.

Most of the loans made in 2006 are owned and/or serviced by institutions other than those that made the loans.

The most active "beneficiaries" in the formal foreclosure process last quarter were Bank of America ( BAC)(16,199), Wells Fargo ( WFC)(10,287), Mortgage Electronic Registration Systems, also called MERS (5,315) and JP Morgan Chase ( JPM)(5,258).

The "servicers" (or the Trustees in the formal foreclosure process) that pursued the highest number of defaults last quarter were ReconTrust Co (mostly for Bank of America and MERS), Quality Loan Service Corp (Bank of America and JP Morgan Chase), Cal-Western Reconveyance (Wells Fargo) and NDEx West (Wells Fargo).

California's priciest zip codes collectively saw mortgage defaults buck the market-wide trend and rise slightly quarter-to-quarter, while their defaults fell less on a year-over-year basis than in the overall market. The state's 82 zip codes with median sale prices of $800,000 or more in 2010 logged a 2.0% quarter-to-quarter increase in default notices and a 9.3% year-over-year decline.

At the other end of the price spectrum, zips with 2010 medians of $200,000 or less saw fourth-quarter defaults drop 22.2% from the prior quarter and drop 19.5% from a year ago.

But the concentration of defaults remains much higher in lower-cost areas: Last quarter, zips with medians of $200,000 or less collectively saw 11.3 default notices filed per 1,000 homes. That compares with just 2.8 default notices filed per 1,000 homes in zips with $800,000-plus medians, and 8.0 filed per 1,000 homes for all zips statewide.

On primary mortgages, California homeowners were a median six months behind on their payments when the lender filed the Notice of Default. The borrowers owed a median $16,368 on a median $325,775 mortgage.

On home equity loans and lines of credit in default, borrowers owed a median $3,759 on a median $66,653 credit line. However the amount of the credit line that was actually in use cannot be determined from public records.

San Diego-based DataQuick Information Systems monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. Notices of Default are recorded at county recorders offices and mark the first step of the formal foreclosure process.

Although 69,799 default notices were filed last quarter, they involved 68,338 homes because some borrowers were in default on multiple loans (e.g. a primary mortgage and a line of credit).

Mortgages were least likely to go into default in San Francisco, Marin and San Mateo counties. The probability was highest in Madera, San Joaquin and Stanislaus counties. Those patterns are consistent with the historical norm.

Over half of the homes statewide that received an NOD in a recent 18-month period have since been foreclosed on or sold (e.g. short sales).

Of the homes that received NODs between January 2009 and June 2010, 39% have been foreclosed on and about 13% avoided foreclosure but were sold. The status of the remaining 48% of those NOD recipients isn't clear, but would include those attempting short sales or who brought their loan payments current or got loan modifications, and those whose foreclosures are still in process.

At this point one year ago, looking back at the January 2008-through-June 2009 period, a higher percentage -- 46% -- of the homes that got NODs had been foreclosed on, and a lower percentage -- 9% -- had avoided foreclosure and been sold on the open market.

Trustees Deeds recorded (TDs), or the actual loss of a home to foreclosure, totaled 35,431 during the fourth quarter. That was down 21.9 % from 45,377 for the prior quarter, and down 30.6% from 51,060 for fourth-quarter 2009. Last quarter's total was the lowest since 31,676 TDs were recorded during fourth-quarter 2007. The all-time peak was 79,511 in third-quarter 2008.

In the last real estate cycle, Trustees Deeds peaked at 15,418 in third-quarter 1996. The state's all-time low was 637 in the second quarter of 2005, DataQuick reported.

There are 8.6 million houses and condos in the state.

As with mortgage defaults, the filing of Trustees Deeds tended to fall the most in the lower-cost areas, where foreclosures had soared in recent years. Collectively, zip codes with medians of $200,000 or less saw the number of homes foreclosed on drop 25.6% from the prior quarter and 33.8% from a year earlier. That compares with a 16.1% quarter-to-quarter drop and a 17.1 year-over-year drop for California zip codes with $800,000-plus medians.

But just as with mortgage defaults, foreclosure concentrations remain far greater in the lower-cost areas: Zips with $200,000-and-below median sale prices logged 9.5 foreclosures per 1,000 homes last quarter. That compares with 5.4 foreclosures per 1,000 homes across all zip codes statewide and 1.0 foreclosures per 1,000 homes for the group of zips with $800,000-plus medians.

Foreclosure resales accounted for 37.5% of all California resale activity last quarter. It was 35.5% the prior quarter, and a year ago it was 40.6%. It peaked at 57.8% in the first quarter of 2009. Foreclosure resales varied significantly by county last quarter, from 11.3% in San Francisco County to 57.4% in Merced County.

On average, homes foreclosed on last quarter took 8.8 months to wind their way through the formal foreclosure process, beginning with an NOD. That's up from 8.7 months for the prior quarter and 7.0 months a year earlier. The increase could reflect, among other things, lender backlogs and paperwork problems and extra time needed to pursue loan modifications and short sales.

Of the 282,643 homes foreclosed on statewide in an 18-month period ending September 2010, about 77.0% have been resold. At this point a year ago, the comparable number was about 85.0%. It cannot be determined from public records how many of the unsold foreclosed properties are currently for sale, not for sale or have been made rentals (and therefore shouldn't be expected to sell anytime soon).

At formal foreclosure auctions held statewide last quarter, an estimated 22.1% of the foreclosed properties were bought by investors or others who don't appear to be lender or government entities. That was down from 22.7% the previous quarter and 25.0% a year ago, DataQuick reported.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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