California Home Loan Defaults Near Record Highs
The number of California mortgage default notices last quarter rose to its highest in nearly 10 years as the state’s home prices stagnated and rates on adjustable home loans pushed higher.
California mortgage lenders filed 46,760 notices of default from January through March, an increase of 23.1 percent from the previous quarter and 148 percent from the year-earlier period.
The first quarter’s default level was the highest for the most populous U.S. state since the second quarter of 1997. It came amid a sharp rise in defaults on mortgages held by subprime (bad credit home loan) borrowers.
The low initial interest rates on the their mortgages have been expiring, replaced by much higher rates that have made monthly mortgage payments too expensive for many households to maintain.
Additionally, their options for mortgage refinancing have been limited because home prices in many markets have been largely flat or slipping.
Many analysts say a surge of foreclosures is in the making and that it will weigh an already sluggish housing market and may slow the broader economy.
“Defaults happen after a certain length of time and today’s activity shows a peak in the number of home loans from the summer of 2005. Additionally, the home loans being made then were riskier because of the subprime activity, as well as higher appreciation rates. It’s easier to make a loan when the security for that loan is going up in value, than when values are flat,” said Marshall Prentice, president of DataQuick.
Most California home loan defaults in the first quarter were originated between April 2005 and May 2006 and their median age was 15 months.
Mortgages were least likely to go into default in Marin, San Francisco and San Mateo counties, three affluent coastal markets with a tight supply of housing that has helped prevent home prices from slipping.
The likelihood of default was highest in inland Sacramento, Riverside and San Joaquin counties, where prospective first-time home buyers rushed in during the housing boom in search of relatively affordable housing.
Squeezed from pricey coastal markets, many California residents moved to such interior areas and used adjustable-rate mortgages to purchase houses in scores of new-home developments.
They now are facing higher interest rates on their loans and rising mortgage payments while California housing prices in those markets decline.
“It’s hard for me to say whether or not the damage is done in those areas,” said economist Alan Gin of the University of San Diego’s Burnham-Moores Center for Real Estate.
“It probably won’t be until 2008 before we seen some improvement,” Gin said, referring to the California mortgage loan default trend. “I anticipate the Federal Reserve will cut interest rates in late 2007 and into 2008, and I expect that will help give some support to the housing market.”
SOURCE: Reuters