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Feared flood of foreclosures in California may be averted

Lenders are working with struggling borrowers to keep them in their homes in an effort to keep a glut of foreclosed properties from further depressing the housing market.

October 21, 2009|Peter Y. Hong

Signs are emerging that a much-feared escalation of California home foreclosures may not happen, as banks respond to government pressure and scale back their repossessions of troubled properties.

Statewide, the number of homes taken back by lenders dropped sharply in the three months ended Sept. 30, falling 37% over the same period a year earlier, when foreclosures were at an all-time high.

If the trend continues, it will give momentum to the fledgling recovery in the housing market. Although home prices appear to have bottomed out in much of the state, industry analysts have cautioned that a glut of foreclosed properties coming on the market could send values plunging again.

"I certainly don't think there's going to be a deluge, or second wave of foreclosures," said UC Berkeley economist Kenneth Rosen, who believes federal officials will do whatever it takes to see the backlog of foreclosures clear gradually. "There's now an appetite to make sure we get this right."

Hundreds of thousands of Californians remain at risk of foreclosure because they can't make the payments on their homes. Yet lenders are now more willing to give borrowers time to catch up with their payments, partly out of concern that more foreclosures will further depress the housing market -- and the value of their inventory.

"It's not out of the goodness of their hearts," John Walsh, president of MDA DataQuick, which provides real estate research, said of lenders' reluctance to foreclose. "It's because they've concluded that flooding the market with cheap foreclosures in this economic environment may not be in their best financial interest."

Bank of America Corp., one of the nation's biggest lenders, said the slowdown in foreclosures could be attributed to efforts to "exhaust every possible option" to keep borrowers in their homes.

"We do not hold foreclosed properties off the market," the bank said in a statement. "We have an obligation . . . to prepare foreclosed properties for market and sell them as efficiently as possible."

Others believe that big lenders and government officials are operating under a tacit agreement: Keep a lid on foreclosures.

"I don't think people are saying it to each other, but they're seeing it's in nobody's interest to have mass foreclosures," said Richard Green, director of USC's Lusk Center for Real Estate.

Banks pushed to the brink of collapse in 2007-08 by the explosion in loan defaults have been propped up by the government's $700-billion Troubled Asset Relief Program. In turn, the government has put pressure on lenders to find ways to keep struggling borrowers in their homes -- or face more aggressive action.

One possible club would be a law to allow borrowers to have loans adjusted or forgiven in Bankruptcy Court, a process known as "cramdowns."

"If there's so much as bad news on the foreclosure front, members of Congress will again start talking about bankruptcy cramdowns," said Sean O'Toole, chief executive of ForeclosureRadar, a firm that sells loan default data. "We're probably pretty close to the level of foreclosures we're likely to see going forward."

According to information released by MDA DataQuick on Tuesday, 50,013 homes were foreclosed upon in the three months ended Sept. 30, down from 79,511 for the same period in 2008.

Default notices -- the first step toward foreclosure -- jumped 19% to 111,689. But the fact that foreclosures are not rising at the same pace as defaults is evidence that banks are being more lenient.

What's more, default notices for the most recent quarter declined 10.3% from the previous three months, another sign that the tide of foreclosures is ebbing.

California has an estimated inventory of 90,000 foreclosed properties, according to ForeclosureRadar, along with more than 140,000 other properties scheduled to be auctioned.

With thousands more properties still slipping into default, it could take years to clear the backlog of foreclosures, but exactly how long will depend on how aggressive banks are at pushing homes into foreclosure and on the strength of the housing market.

Because relatively few homes in default are being repossessed, however, foreclosed homes have been selling at a reasonably quick pace. It typically takes banks seven weeks to sell a repossessed house, said O'Toole of ForeclosureRadar, but at the end of September lenders had a foreclosure inventory equivalent to a roughly five-week supply of homes, he said.

In the last three months, about 125,000 homes were sold in California. About 40% of those were foreclosures, down from nearly 60% in early 2008.

The slowdown in foreclosures can be seen each weekday morning on the steps of the Los Angeles County Superior Court in Norwalk, where several companies put homes up for auction in the final step of the foreclosure process.

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