California Home Loan Problems Persist; Foreclosure Rates Soaring

No down payment, adjustable rates and no doc loans all sounded like a good idea two years ago when the housing market was still a seller’s playground.

But lenders say in today’s buyer’s market, these non-traditional mortgage programs are leading to more defaults and foreclosures, which last month reached a year-long total of 1 million U.S. homes.

According to the Lodi News-Sentinel, “pick-a-pay” loans represent the worst possible option on the market because they lure buyers who really can’t afford to purchase a home.

“They’re given an option to pay below interest and it sounds great to them at the time,” said Dennis Peck, a Lodi lender with All Valley Mortgage. “The problem is nobody explains to them those low payments won’t last.”

With adjustable-rate mortgages, buyers pay the interest or less for the first two years of the loan. After the initial 24-month period they are moved to the actual payment, including interest and principal, and find they can’t afford to make the payments.

Others blame the slowing California housing market, which in some cases has depleted home prices by up to 15 percent, for increased foreclosures.

No matter the reason, the fact remains that foreclosure rates are increasing drastically throughout the U.S., with a 42 percent jump last month from October 2005 numbers, according to reports.

In California, more than 16,000 homes entered some stage of foreclosure last month, the most of any state. The state’s rate of one filing for every 759 households rose to 1.3 times the national average. Lower initial interest rate and exotic products are a major cause.

“It’s a result of people getting loans who probably should be saving money instead. People don’t see down the road; they just want a low monthly payment,” Peck said.

He said people who received 100 percent California mortgage financing don’t have many options because the market has eroded what little equity they may have stored and now they owe more than their home can sell for, making it impossible to refinance or sell.

In San Joaquin County, 1,809 homes entered some stage of foreclosure last month. Modesto was third in the nation for increased foreclosure rates, with one in every 214 homes. The only good news is that an increase could mean lenders will work with homeowners rather than foreclosing immediately.

“It’s up to each lender. But it’s not profitable for lenders to foreclose on homes with no equity, so right now lenders seem to be more willing to work with borrowers,” said Duane Burg, manager of Guild Mortgage in Lodi.

Burg said in six years he has only helped two people through foreclosure — and both were last month. He said foreclosures will probably continue to increase for at least two years as the market stabilizes.