Mortgage defaults rise but homeowners stay put

The drop in foreclosures follows moratoriums adopted by major banks and mortgage giants Fannie Mae and Freddie Mac. The increase in loan defaults, meanwhile, suggests that rising unemployment and the continuing recession are still claiming fresh victims.

But another factor in the soaring default rate could be that some struggling homeowners are purposely skipping their payments so that they can get their loans refinanced, industry experts say.

Lenders are so backlogged with requests to adjust loan terms that "they focus on the borrowers who already are circling the drain and ignore the people who are keeping up with their payments," said Jeff Lazerson, president of Mortgage Grader, a Laguna Niguel loan broker.

Lynne Neagle, 73, of Westminster may be a case in point.

Neagle said she and her husband had trouble paying their mortgage, but their loan servicer ignored their pleas to renegotiate terms -- until they quit paying, that is.

Suddenly, she said, they were presented with new ways to lower their payments and are currently negotiating new terms through the Hope Now program set up by the federal government and some of the country's largest mortgage lenders.

"Before we stopped making our payments, nobody wanted to deal with us," Neagle said. "We stopped paying, and that really got their attention."

A default notice is the first step in the foreclosure process, and California homeowners received 135,431 of them in the three months ended March 31, MDA DataQuick of San Diego said Wednesday.

That's an 80% increase over the previous three-month period and a 19% jump over the same period last year.

Meanwhile, the number of actual foreclosures, in which the home was repossessed by the lender, fell to 43,620 in the first quarter, a 6% drop from the last three months of 2008 and a 7.6% decline from the year-earlier quarter. Foreclosures peaked in the third quarter of 2008 at 79,511.

Much of the drop stems from a change in state law that made it more cumbersome for lenders to foreclose, DataQuick analysts said. That also led to procedural delays for banks and other lenders, which in many cases were not prepared to handle the additional paperwork.