After years of industry-blocked efforts to strengthen lending standards, the growth in reckless lending and abusive practices has left California facing a foreclosure crisis with catastrophic consequences for families, communities, and the California economy as a whole. California needs policy reforms to stem the tide of foreclosures, and to tighten lending standards to prevent a repeat of this foreclosure crisis.

Defaults And Foreclosures Have Increased Sharply Since 2006. Completed quarterly foreclosures increased from less than 3,500 in 3Q 2006, to nearly 80,000 foreclosures in 3Q 2008, setting the pace for more than 300,000 foreclosures in the next 12 months. Notices of default – the first step in the foreclosure process – have steadily increased, topping out at over 120,000 in 2Q 2008, with a drop in 3Q 2008 following a statutory delay in the foreclosure process. It remains unclear whether this will avert (rather than just delay) more foreclosures.

The Next Foreclosure Wave Is Coming. A second tier of risky loans – called Alt-A, or nontraditional loans – was made to near-prime quality borrowers. Risky features of these loans included stated incomes, interest only, and often negative amortization (in payment option ARMs). In 2007, $61.7 billion in Alt- A loans were made in California, a full 44.6% of all Alt-A loans. Of this, $31.4 billion were payment option ARMs, accounting for 55.9% of the U.S. market share. As subprime loans begin to pass their payment reset dates, Alt-A loans will enter a period of dramatic payment resets, often resulting in even bigger percentage payment increases than on subprime loans. The Alt-A loans will represent the next large wave of foreclosures, hitting in 2009-2012, and given California's market share, this wave will hit California especially hard.

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