Default Notices Jump to Record Highs in California

Dataquick released the latest notice of default statistics in California and while the results are certainly not pretty, the report is filled with many interesting tidbits. A total of 135,431 defaults notices were sent out during the January to March period in California, an increase of 80% from the prior quarter and 19% year over year. According to John Walsh, Dataquick President: “The nastiest bunch of home loans appears to have been made in mid-to-late 2006 and the foreclosure process is working its way through those.”

According to Dataquick, the median origination month for last quarter’s defaulted loans was July 2006. That’s only four months later than the median origination month for defaulted loans a year ago in the first quarter of 2008. Default rates for loans originated before 2004 have a default rate of 1%, compared to 4.9% for loans originated in 2005, 8.5% for loans originated in 2006, and 4.7% for 2007. While the 2007 vintage is just getting warmed up, many of the subprime lenders had the decency to go bust in the first quarter, so perhaps 2006 will wind up being the peak when all is said and done. Dataquick has isolated the period between August 2006 and November 2006 as particularly toxic, with a 9% default rate on all loans issued in that period so far. Particularly jarring is the rates of default for many of the now-defunct sub-prime lenders during this period; ResMae (69.9%), Master Financial (64.6%), and Ownit Mortgage Solutions (63.6%). Of the major lenders, IndyMac wins with an 18.9% default rate, followed by World Savings (8%), Countrywide (7.7%), Washington Mutual (6.3%), and Wells (3.4.%.) Both Bank of America and Citi had default rates of less than 1% for loans originated in late 2006.

The good news is that defaults turn into foreclosures which then get auctioned off to new buyers who can actually afford the properties. According to the WSJ, bidding wars are emerging at foreclosure auctions as potential homeowners and investors duke it out for properties that are trading at enormous discounts relative to the bubble years. Housing is actually becoming affordable for those willing to jump into the foreclosure fray and the glut of homes on the market is shrinking with some areas running into shortages of moderately priced homes in middle-class neighborhoods. What appears to be happening in some of the hardest-hit areas is a two-tiered pricing system. Most of the sales occurring are foreclosed properties while the non-foreclosed listings sit on the market at higher prices gathering dust. In Sacramento, for example, about two-thirds of all March sales were foreclosures. The supply of foreclosed homes currently listed for sale is about enough to last about a month at the recent sales pace. But the rest of the homes constitute an 8 months supply. Home prices will most likely decline further as sellers of non-foreclosed homes are forced to cut their asking prices to do a deal, but the trend towards affordability is encouraging. A family earning the median pretax income of $52,800 a year needs to spend 25% of that income to buy a median-priced home, down from 44% in mid-2006. For the Los Angeles metro area that ratio has dropped to 45% from 105%and in Phoenix it is down to 19% from 46%, according to John Burns, a real-estate consultant in Irvine.