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Mortgage Defaults on the Rise

California homeowners face a smaller margin for error in what some say is a peaking market.

October 28, 2005|Annette Haddad | Times Staff Writer

Mortgage defaults in California rose for the first time in more than three years during the third quarter, as slower price gains and riskier loans gave struggling homeowners less margin for error, data released Thursday showed.

A separate report released Thursday showed other signs of a cooling housing market, as inventories of unsold new homes nationwide rose to a record.

During the July-September quarter, lenders sent default notices to 12,568 California homeowners, a 3.5% increase from a year earlier, according to DataQuick Information Systems, a La Jolla-based research service.

The last time default notices increased on a year-over-year basis was during the first quarter of 2002.

Default notices can be precursors to foreclosure, when homeowners lose title to their homes because of missed or late payments.

A rise in defaults and foreclosures could drive down home prices, as properties sold because of foreclosures tend to be priced below prevailing market rates.

Rising prices in California's booming housing market have made it easy for financially distressed homeowners to avoid foreclosure by selling their properties instead.

Christopher Cagan, research director at title insurer First American Corp.'s property research unit, said in a report to be released today that foreclosure sales accounted for only 0.6% of total home sales in California during the first half of the year.

"Why abandon a property to foreclosure when it was so easy to sell and get a good price?" he said.

John Karevoll, DataQuick's chief analyst, said default activity was still well below normal levels and involved only a tiny fraction of the state's 17 million residential properties.

"Foreclosure activity has bottomed out and is starting to go back up," Karevoll said. "It's just that it has a long way to go before it regains its normal role in the market."

The bulk of the state's default notices were sent to addresses in Southern California, where the torrid rate of appreciation has calmed down slightly since the spring. The Southland saw a 20% jump in default activity on a year-over-year basis, to 7,625. In contrast, the Bay Area saw a 13% decline.

That's because home values in Northern California are currently rising at a faster pace than in the south, Karevoll said.

Last month, the median price of a Bay Area home rose 19%, to $616,000, while Southern California's median rose 16%, to $475,000.

"It's hard to call it a cooling market," Karevoll said. "What's cooling is the rate of hotness."

Residential building permits issued in California rose 21% in September from year-earlier levels, the Construction Industry Research Board reported Thursday. Housing starts this year are expected to come close to last year's 212,960, the most in 15 years.

Still, there's a growing raft of indicators pointing to a slowing housing market in California and elsewhere.

Commerce Department data released Thursday showed sales of new U.S. homes rose more slowly than expected in September, in part because sales in the West -- which includes California -- tumbled 12% last month. New single-family home sales rose 2.1% last month to a seasonally adjusted annual rate of 1.222 million units.

Inventories of unsold new homes nationwide increased to a record of 493,000, a supply that would take 4.9 months to sell.

The median new-home price fell 5.7%, the biggest decline since January 2003.

Meanwhile, rates on 30-year fixed-rate mortgages stayed above 6% for the third straight week, rising to 6.15% this week, the highest level in 15 months, mortgage giant Freddie Mac reported Thursday.

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