• Tue
  • Jul 29, 2014
  • Updated: 11:35pm

Rising mortgage defaults raise alarm

PUBLISHED : Wednesday, 09 August, 2006, 12:00am
UPDATED : Wednesday, 09 August, 2006, 12:00am
 

Signs are mounting that the fading housing market in the US is triggering distress among a growing number of borrowers, clouding the prospects for US consumers who have carried along the stubbornly strong economy for more than four years.


In California - its real estate now representing a staggering 25 per cent of the value of all US housing - lenders warned 20,752 homeowners in the second quarter that they were on the path to foreclosure because of missed payments. That represents a rise of 67 per cent from the year-earlier period and the highest jump since DataQuick Information Systems in La Jolla began tracking the default notices back in 1992. In the San Francisco Bay Area, one of the hotbeds of the recent real estate boom, foreclosure warnings shot up a hefty 37.1 per cent.


'We're seeing more people calling and coming in and wanting to know what to do,' said Pam Canada, executive director of the Neighbourworks Homeownership Centre in Sacramento.


The organisation advises people on how to buy homes and stay in them.


DataQuick analyst Andrew LePage sees the number as a sign that more people across the state and the country are on track to lose their homes because of rising interest rates, a record-low affordability and increasing signs of a slowing economy.


While the latest statistics appear to be staggering, the numbers rise from a comparably low level. At 20,752 the number of California default notices is still significantly lower than the historical quarterly average of 32,762.


'This is an important trend to watch, but it doesn't strike us as ominous,' said DataQuick president Marshall Prentice.


According to his assessment, defaults would have to 'roughly double from today's level before they would begin to impact home values much'.


Nevertheless, alarm bells are ringing, not only among lenders, developers and analysts. 'If we start seeing a levelling off in the market and properties start to dip, that' s where you're going to see the trouble begin,' said John Arvanitis, president of Sunrise Vista Mortgage in Citrus Heights.


Default notices are a prelude to foreclosures, and their number is rising too in California. According to DataQuick, their second-quarter jump in the sunshine state was 215 per cent.


If the Federal Reserve Board keeps interest rates rising, there may be trouble brewing. Last year, about 77 per cent of the region's homebuyers took up low-rate, adjustable-rate mortgages. Many of these people bought houses they otherwise could not afford. But with interest rates having gone up 17 times since June 2004, many homeowners find themselves in dire straits with mortgages that exceed 100 per cent of their home's value.


'They're in over their heads basically and can't be bailed out with refinancing. The real heartbreaking part is there's not a lot of solutions,' Mrs Canada of Neighbourworks said.


And there is further proof that the housing market continues to slow. The Mortgage Bankers Association reported last month that mortgage applications nationwide fell to the lowest level since May 2002. For Ryan Ratcliff of the UCLA Anderson Forecast, the numbers represent more of a glide path than an outright crash.


But there are strong opposing views as well. 'Homes with negative equity are growing exponentially across the US,' said Margot Murphy, a founder of RealEstateProGuides.com.


The most sought-after people in the market, it seems, are now professionals who can save tens of thousands of dollars for distressed owners by avoiding costs associated with completing a foreclosure process against defaulted borrowers.


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