L.A. Times: More Californians at risk of losing homes - "People are living on the edge ...they have good jobs but they bought over their heads.."

The quarterly numbers for mortgage default notices are out in this January 24 report by David Streitfeld. We'll compare this report to the October report and see what the numbers are and what people are saying.

For Q4 2006, the number of mortgage default notices issued to Californians was the highest since 1998, rising to 37,273. (The accompanying graph in the story says "Southern California", but I think the number applies to the entire state.) That is up 145% from Q4 2005. The number of foreclosures was 6,078 for Q4 2006, up from 874 in Q4 2005. That's an increase of 595%, nearly 7X.

Yet, the attitude of mortgage lenders and analysts the article surveys is "So far, this isn't alarming", "I don't really see any stress out there. Most people... are figuring out ways to get those mortgages current by any means possible so they're not kicked out on the street."

I don't think they get it. I guess they just don't want to yell "Fire!" in the crowded theatre yet. While I would agree that the pure raw numbers by themselves may not necessarily be indicative of anything, the rate at which they have been changing has definitely been making me take notice!

Unfortunately, this article comes up short. It does not break down the default rates by county, as was done for last quarter. If the L.A. Times subsequently publishes this breakdown, I will blog it.

The article brims with all kinds of rationalizations for the numbers though. At least for this quarter they now admit that the option of escaping foreclosure by selling into a booming market "isn't available to recent buyers or those who have visited the pig (piggy bank) once too often." Also, the economy was very bad here in California for a period of time during the 90's. And yet my interpretation of all this is, isn't it amazing how rapidly these numbers are worsening while the economy is still holding up!?!?!

It's hard to believe that in the mid-1990's, the quarterly defaults routinely exceeded 50,000 and foreclosures topped 15,000. I think we're easily going to blast through those levels and very soon. But the article makes a good point here. Again, the raw numbers are not indicative of anything unless you have something to compare them against. We have a substantially higher supply of housing stock and more homeowners. If we compared the number of homeowners getting default notices compared to the total number of homeowners in the state we'd have a somewhat better idea of how much trouble we are in at this stage. Nevertheless, I find the rates of change alarming, and I am amazed by the seemingly blase attitude toward these changes.

Don't believe for a minute that the mortgage lender fairy is bailing out everybody in trouble. The article talks about a man who was faced with a 50-50 chance of dying on the operating table because of his heart problems. So he refinanced the house to make sure his wife had a cash cushion, failing to read the part about how the payments would skyrocket. And there was another problem. He lived. The equity went toward paying his medical expenses and bills. And then his property value started droppping. As he puts it, "If I hadn't survived, everything would have been fine."

The mortgage broker trying to help this man out of his mess admits, "People are living on the edge, and they can't help it with the price of houses. They have good jobs but they bought over their heads, into the American dream." The Center for Responsible Lending notes that those who bought most recently are most at risk with their subprime loans. The center estimates that 25% of the subprime loans made in Merced will result in foreclosure. Vallejo, Bakersfield, Fresno and Stockton are also high risk, along with several other unnamed California cities. The Center estimates a loan failure rate of 21.4% for 2006 subprime loans in the state, with Nevada and Washington D.C., expected to have worse rates. They will probably get the trend right in their forecast - let's see how the actual numbers fare later.

But back to the blase attitudes of the experts. The jump in foreclosures "won't crash the housing market. As long as no life event comes along that pushes them over the edge, they'll probably be OK. With 85% of Americans dying either of cancer or cardio-vascular diseases thanks to their under-exercised junk food fast food lifestyles, I'm not particularly optimistic that the bulk of leveraged homeowners in poor health will escape such financial catastrophes.