Mortgage Defaults at 10 Year High

The California housing market is still taking a kicking; mortgage defaults are at a 10 year high, according to an article on Bizjournals.com. This is apparently the result of the combination of flat appreciation, slow sales, and mortgages that have "reset" after initial teaser rates. Think ARMs with initial incentives. In the first quarter of this year, lenders filed 46,760 Notices of Default (NoDs). An NoD is the first step in the foreclosure process.

Defaults tend to take a certain amount of time to occur, and these defaults can be traced back to mortgage loans initiated in the summer of 2005. Loans being made in 2005 were banking (pun intended) on the climate of rapid increases in home value and a more lax approach to subprime lending. In defaults for primary mortgages, homeowners were a median of 5 months behind in payments. If the default was related to a line of credit, homeowners were 6 months behind.

Unfortunately, we can't expect the situation to turn around quickly. As homes default, the foreclosure rates will tend to go up. As foreclosure rates go up, more homes come onto the market at generally lower prices. The glut of homes on the market will get bigger. This will continue to hold the overall California market stagnant at best, and dropping further at worst.

The Implode-O-Meter shows 58 lenders who have now closed shop.  

Michael Chantrel 

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