California foreclosures, mortgage defaults soar
Tue Jan 22, 2008 8:05pm EST
By Jim Christie
SAN FRANCISCO, Jan 22 (Reuters) - Underscoring the impact of falling home prices in California, foreclosures in the state rose more than 400 percent in the fourth quarter from a year earlier and default notice filings against distressed mortgage borrowers more than doubled, a report issued on Tuesday said.
The DataQuick Information Systems report said the 31,676 foreclosures in the fourth quarter were more than double California's previous peak in 1996 and marked a 421.2 percent jump from a year earlier. The fourth-quarter default notices represented the highest number in more than 15 years, it said.
The report came as the U.S. Federal Reserve, in an unusual move between meetings, cut the benchmark overnight interest rate by three-quarters of a percentage point, the biggest reduction in more than 23 years.
The 75-basis-point cut brought the target for the federal funds rate down to 3.5 percent amid concerns about recession and tight credit available to businesses and consumers, including households facing the prospect of rising payments on adjustable-rate mortgages.
The cut may translate into smaller-than-expected upward adjustments to interest rates on their loans and monthly payments that are higher yet manageable, potentially reducing the number of households that default on mortgages and lose homes to foreclosure.
"The increase will be less. There certainly will be a pool of homeowners it might help," said Cynthia Kroll, a senior regional economist at the University of California, Berkeley's Fisher Center for Real Estate and Urban Economics.
Mortgage broker Kevin Clay, president of San Carlos, California-based REIGN Real Estate Services Inc, agreed, adding that households with home loans in addition to first mortgages should benefit as well. "It will calm down the reset market," Clay said, "For people who are teetering and tottering and have some equity in their house and want to stay, the rate cuts should translate into a lower payment immediately on home-equity lines."
TOO LITTLE, TOO LATE FOR MANY
In contrast, borrowers with mortgages for more than their homes are now worth will not be helped by lower interest rates -- and refinancing will not be an option amid sliding home prices, which are fueling California's foreclosure surge, according to DataQuick.
Lenders sent 81,550 default notices to mortgage borrowers in the most populous U.S. state from October through December, up 12.4 percent from the previous quarter and up 114.6 percent from the year-earlier period,, according to the La Jolla, California-based real estate information firm.
Home prices in California are in retreat, especially in local markets thick with mortgage borrowers who financed home purchases in recent years with adjustable-rate mortgages.
Interest rates on those loans have been resetting at higher levels after initial low rates expired, making monthly mortgage payments in many cases too expensive to afford, and new credit is unavailable in markets where property values are falling.
The median price paid for a California home fell to $402,000 by the end of 2007 from its March peak of $484,000, according to DataQuick.
"With today's depreciation, an increasing number of homeowners find themselves owing more on a property than its market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move," said Marshall Prentice, DataQuick's president.
The Fed's rate cut will have little effect on home prices but may help forestall or minimize a recession by helping to prevent job losses that would send foreclosures soaring even higher, said Stephen Cauley, director of research at the Ziman Center for Real Estate at the UCLA Anderson School.
"The one thing that could make this housing thing really explode is for unemployment to go up a lot," Cauley said.
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