Why are California Foreclosures and NODs are Slowly Falling?

Mary Hanley and Dan Hamilton

The January 25, 2011 DataQuick press release shows that both foreclosures and notices of defaults have fallen almost everywhere in California. Statewide foreclosures have fallen 21.9% from last quarter and more than 30% from the fourth quarter of 2009. The large drop in foreclosures may indicate lenders’ hesitancy to take large losses. After the initial run on foreclosures, banks have been focused on obtaining the best possible price for the home at the lowest possible cost. As a result, the banks are cooperating in more short sale programs. In many cases, sellers are being asked to participate in the pain as they are released from their mortgages, particularly second mortgages, where the sellers may be asked to bring in cash and/or sign a note for a portion, if not all, of the outstanding debt.

According to DataQuick many of the homes foreclosed on had multiple loans out on the property. In other words the homes had the primary loan and additional lines of credit, i.e. home equity lines of credit. This is logical since many homeowners had refinanced their homes when interest rates were at all time lows using said loans to renovate their homes, go on expensive vacations, fund a more lavish lifestyle, and more generally, use their home as a credit card.

DataQuick indicated that foreclosures are still more frequent in zip codes with an average home price of $200,000 or less versus in zip codes where the average home price was $800,000. The less affluent zip codes also averaged more foreclosures per 1,000 homes than the state average. This market consists of lower income families and when the interest rates were lower a large number of low-income families entered the housing market. Traditionally these families had never owned homes because their credit scores acted as barriers to entry. Now, some of them are also losing their jobs, and in this case, default and foreclosure are almost inevitable.

NODs (Notices of Default) have also been falling. Last year at this same time the question of a “W” recession had come up. In reviewing 2008 and 2009 where NODs dropped off severely in the fourth quarter of 2008, and picked up again in 2009 we wondered if 2010 would repeat the pattern. That was not the case and 2011 is looking like it will continue the trend of fewer homes starting the foreclosure process. There are a number of reasons for this. Banks, through the encouragement of the government, have been working with homeowners to avoid the foreclosure process and seek alternatives such as short sale and loan modification. This is mutually beneficial for banks and homeowners. The banks take smaller losses when they go through the short sale process and the homeowner’s financial situation is much less disrupted.

The bottom line is that it looks like 2011 will be a better year in the real estate market but do not expect a rapid bounce back. While foreclosures and NODs will likely continue to decrease, they are still at a level that is abnormally high, too high for a healthy housing market.

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