More than 236,000 homes were lost to foreclosure in California last year, topping the previous nine years combined, data released Tuesday show. And the number of borrowers who defaulted on their payments hit a record high of more than 404,000.
The wave of foreclosures, which began in early 2007, was initially triggered by falling home values and resets on adjustable-rate loans. But lenders and industry analysts say the trend is now being exacerbated by rising unemployment, which has shot up to 9.3% in California.
"The people who are defaulting now are not really people who recklessly got into loans they never could have afforded," said Evan Wagner, the communications director for IndyMac Federal Bank, a big mortgage lender that, having collapsed last year, is being bought by private investors. "These are people who have lost their jobs or who have had their hours cut back at work."
Wagner said that up to 80% of the borrowers seeking an easing of their loan terms are doing so because of the loss of a job or income.
More evidence of that trend can be found in the default rate on "prime" loans, those made to borrowers with good credit. Defaults on these loans rose 340% in the three months ended Sept. 30 over the same period in 2007, according to the latest data from the Mortgage Bankers Assn.
California was last hit by massive foreclosures in the early 1990s, when the state was also struggling with an economic downturn and rising unemployment. At that time, there were about 10 foreclosures for every 100 layoffs, said John Burns, an Irvine real estate consultant.
In this cycle, he said, there will be about 15 for every 100.
"The price declines have been more severe this time, and the job losses are looking worse," Burns said. "Consumers are more likely to give the keys back to the bank because they don't have anywhere to turn."
In California, the number of homes lost to foreclosure rose 180% last year compared with 2007, according to MDA DataQuick, a real estate data firm. It was the largest number of foreclosures since DataQuick began tracking them in 1988.
The number of foreclosures actually dropped this fall, to about 14,000 in November from about 25,000 in September. But that decline was probably a temporary blip due to a new state law that forced lenders to make more efforts to contact borrowers before foreclosing, and doesn't signal a reversal of the trend, said DataQuick analyst Andrew LePage.
Indeed, foreclosures rose 14% in December from November. And notices of default, the first step in the foreclosure process, also dropped this fall but had rebounded sharply by December.
"We know the new law has impacted the filings, and there is some catch-up going on now," LePage said. "And there are all of these other avenues that lenders can steer borrowers into now that aren't going to show up as foreclosures. It could be that we're holding steady, and it could be that the distress out there is climbing and not showing up in the numbers."
An analysis by investment bank Credit Suisse suggests that foreclosures will start to taper off this year because the number of subprime loans resetting to higher interest rates has peaked. But there is another potential time bomb: Resets on prime loans will peak at more than $40 billion in mid-2010.
Many of those loans could go into default if the borrowers cannot refinance because they've lost their jobs or their homes have plunged in value, analysts say.
"I think that we're in some ways uncharted waters in terms of the magnitude of the situation that we're facing today," said Peter Tatian, a senior research analyst at the Urban Institute in Washington. "That's why we need some very radical steps to pull us out of the nose dive that we're in."
On the positive side, lenders have come under pressure to work out new payment terms to prevent foreclosure.
"We are working out two troubled loans for every one on which we foreclose, nearly double the ratio of a year ago," said Jumana Bauwens, spokeswoman for Bank of America's Countrywide division, the nation's largest mortgage lender.
But modifications work only if people can show they have the income to make the lower payments.
"You can't work with the bank to modify your loan if you have no income," said Ralph R. Roberts, a coauthor of "Foreclosure Self-Defense for Dummies." "And usually when people lose their jobs and reenter the market they end up with a lower income. That means they will be trying to cover the payments they missed and the new payments with less money."
In California, the areas that have been hardest hit by foreclosures include the Inland Empire, the Antelope Valley and the Central Valley, where many first-time homeowners flocked to buy new homes.
In some San Bernardino County ZIP Codes, there were more than 20 foreclosures for every 1,000 homes. Foreclosures have tended to be less common in more established communities.