The number of California homeowners who fell behind on mortgage payments more than doubled during the last three months of 2006, pushing defaults higher than at any other time in the past eight years, according to a report issued Wednesday.
Despite the jump, the number of default notices is well below historic highs. Housing experts blame the increase in part on rising interest rates and adjustable-rate mortgages. It's unclear whether the increase portends a further weakening of the market.
Statewide, lenders sent 37,273 notices of default in the fourth quarter, up 145 percent from the same period a year earlier, according to DataQuick Information Systems. The trend was more pronounced in Southern California and the Central Valley.
The Bay Area has weathered the downturn better than other parts of the state, protected in part by a short supply, economists said. Default notices rose 134 percent in the area, below the 141 percent jump in Southern California and the 168 percent increase in the Central Valley.
The Bay Area had less new construction and a tighter housing supply, making the market less volatile, experts said.
"In some places, the builders got a little bit ahead of themselves and the speculators got a little bit ahead of themselves and now they're feeling the foreclosure pain," said Scott Anderson, senior economist for Wells Fargo. "The Bay Area's home values in terms of supply and demand are much better balanced and that's keeping the foreclosure rates more manageable."
The fourth quarter saw the most default notices in any three-month period since the third quarter of 1998. A notice of default is the first step in the foreclosure process. Many who receive such notices avoid having their homes repossessed. About one-third of homeowners who received a notice of default in the fourth quarter of 2005 had lost their homes a year later, above historical averages, DataQuick said.
California is experiencing a rise in defaults because so many people took out adjustable-rate mortgages, economists say. About 28 percent of loans in California are adjustable, more than in any other state, according to First American LoanPerformance, which tracks mortgage risk. Borrowers with such loans have seen their monthly payments increase at the same time that home price appreciation has slowed, making it more difficult to sell or refinance.
"The state of California has been tremendously dependent on adjustable-rate mortgage products," said Anderson.
Homeowners in Marin, San Francisco and Santa Clara counties were the least likely to go into default, the report found. In the Bay Area, some of the biggest increases in default notices came in Contra Costa and Solano counties, where the most new construction has occurred. Economists point out that the five-year housing boom pushed the number of defaults to record lows, making increases seem particularly dramatic.
"The ... percentage looks a bit more dramatic than it should because we are comparing it to such a low base," said Keitaro Matsuda, senior economist with Union Bank of California.
Although the number of default notices sent out last quarter is above the 33,615 average for the 14-year period in which DataQuick has tracked foreclosures, it's still below historic highs. The number of default notices peaked in the first quarter of 1996 at 61,541.
"For a long period of time, California had some of best credit quality in the country," said Anderson of Wells Fargo. "We're now starting to see some of that unwind."
The report also found that the number of homes sold in foreclosure sales rose to 6,078 during the quarter from 874 in the fourth quarter of 2005. That compares with a record high of 15,418 in 1996 and a low of 637 in 2005.
Anderson and Matsuda disagreed about whether the state will continue to see a dramatic climb in foreclosure and default rates.
Matsuda said that as long as interest rates remain where they are, the number of foreclosures is unlikely to continue its rapid rise.
"I believe that the fourth-quarter pop will be the worst quarter in terms of foreclosures," Matsuda said.
But Anderson said that, even with the improvement in the housing market, it will take some time before the number of default notices returns to low levels.
"We expect it to play out over a number of years," Anderson said. "It's not something that's going to go away next quarter, even if the housing market starts to stabilize."
Source : Marni Leff Kottle, Chronicle Staff Writer
E-mail Marni Leff Kottle at mkottle@sfchronicle.com.
This article appeared on page C - 1 of the San Francisco Chronicle
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