In the third quarter of the fiscal year, California homeowners received nearly 26 percent more default notices than in the previous three months. DataQuick, a real estate information service reported Tuesday that 71,275 first-time notices of default were issued in July, August and September compared to 56,633 in the second quarter of the fiscal year.
For nearly a year, there was a lull in foreclosures when banks were found to be improperly processing them, using abusive practices such as "robo-signing," approving foreclosure paperwork without actually reading it. Now the banks must deal with the backlog of foreclosures.
This increase comes at a time when talks with State Attorney General Kamala Harris over a broad foreclosure settlement have broken down. Notices of default are the first formal step in the foreclosure process and La Jolla-based DataQuick reported that most of the mortgages, home equity loans and lines of credit going into default are from 2005 to 2007.
Chris Thornberg, founding principal of Beacon Economics told Larry Mantle that he’s not sure whether the negotiations between Harris and the banks will spark notable changes. While the pace of overall foreclosures picked up in the third quarter, the number of homes substantially behind on mortgage payments continues to fall in California.
“The primary reason people get foreclosed on is because they’re not paying their mortgage, simple as that. And whatever sort of contractual gimmicks you want to play — ‘Well this wasn’t signed, that’s not here, or this piece of information is missing’ — doesn’t take away from that fact that these folks simply aren’t paying their debt,” he said.
Thornberg went on to say that refinancing mortgages is “probably one of the best policy proposals that have been put forward by the administration on the housing market” for those with minor financial problems. However, he suggested a more controversial move for those significantly underwater with payments: Walk away.
“I would almost argue that not allowing those folks to refinance, that hastening the foreclosure process, might ultimately be in the best financial interest of that particular household. I mean, if you’re 25 percent underwater in the state of California, you’re probably in a $50,000 to $100,000 hole. Frankly, your credit score is going to heal a lot faster than your equity,” he said.
Thornberg said though it would be traumatic in the short run, people should stay hopeful.
“I think you’d be surprised by how rapidly people can get back into the housing market,” he said. “If you’ve kept your nose clean in other parts of your financial life, that is to say you’ve kept up-to-date on your credit cards, your auto loans, things like that — why not have Fannie [Mae] and Freddie [Mac] be willing to extend a new loan to those folks despite the recent foreclosure?”
Are you headed toward default and are you looking to the state for help? What are the latest terms of a settlement deal? Are those new terms a push to get California back to the table? What would it take for Kamala Harris to change her position?
Andrew LePage, analyst with DataQuick Information Systems
Chris Thornberg, Principal, Beacon Economics