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California defaults and foreclosures up again

Tuesday, July 24, 2007

The second quarter of 2007 featured California's highest foreclosure losses in nearly 20 years, according to DataQuick, the real estate information service based in La Jolla, Calif. Trustees Deeds recorded, which reflect actual home loss due to foreclosure, totaled 17,408 in the second quarter—the highest recorded number of home losses due to foreclosure since DataQuick began collecting data in 1988.

"There can be no doubt that California is in the midst of a foreclosure crisis," said Paul Leonard, director of the California office of the Center for Responsible Lending (CRL). "Record level foreclosures demand swift action from regulators and legislators to fix the mortgage market that has gotten homeowners into trouble."

CRL's December 2006 report Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners projected that 460,000 Californians would lose their homes due to foreclosures on risky subprime loans originated since 1998. Subprime loans are responsible for a disproportionate share of foreclosures in California and across the nation. These loans have relied heavily on risky features, including adjustable rates and stated incomes, which taken together have made it difficult for borrowers to pay their higher mortgage payments when rates adjust.

Indeed, DataQuick's second quarter foreclosure number—17,408—beats the previous record, set in 1996, by nearly 2,000 lost homes. Default numbers—those homeowners who are behind in payments and at risk for foreclosure—hit records in Riverside, Contra Costa, Sacramento and most Central Valley counties. Merced, which topped the list of U.S. cities ranked by projected foreclosure rates in CRL's December report, is bearing out the projection: mortgages are most likely to go into default there, in San Joaquin and Riverside counties.

"The most disturbing element of DataQuick's data is not the record numbers, but the fact that they won't be record numbers for long," said Leonard. "As the risky adjustable rate mortgages originated in 2005 and 2006 begin to adjust this year and next, and housing prices flatten or decline, we can only expect the damage to get worse," he continued.

To combat the crisis, CRL calls for California to take a comprehensive approach to assisting borrowers currently at risk and providing adequate protections to all new subprime borrowers. Recommended policy changes include:

  • Establishing emergency funding for housing counselors and attorneys to assist borrowers in trouble;
  • Implementing streamlined and objective standards for borrowers to qualify for refinance or relief through loan modifications;
  • Qualifying all borrowers at the fully-indexed rate, using reasonable assumptions for debt-to-income ratios;
  • Requiring lenders to verify income, using the array of tools already available;
  • Requiring escrow accounts for subprime borrowers to cover taxes and insurance;
  • Banning prepayment penalties, which lock subprime borrowers in the subprime market.

"The evidence is clear: immediate action is needed to help the thousands of Californians who are at risk for losing their homes due to risky products and practices that have dominated the subprime market in recent years," said Leonard. "The California legislature has dragged its feet long enough. Now is the time for real action and real leadership."

For more information: Ginna Green at (510) 379-5513 or