San Diego County saw a significant jump in defaults, trustee sales and bank real estate owned (REO) sales during the first quarter of 2006, and interest-only loans and loans with very low teaser rates are seen as the major cause.
During the first quarter of 2006, ForeclosureS.com tracked 1,714 defaults in San Diego County, compared to just 949 during the same quarter last year. The number of trustee sales nearly doubled from 283 to 532. The number of bank REO sales more than doubled from 78 to 204 during the same period.
During the same period, the number of trust deeds in the County climbed to 241 from 188 in the 4Q of 2005. (Trustee Deeds Chart)
"In San Diego for example, in recent years more than half of home purchases were financed with interest-only adjustable rate loans or option adjustable-rate mortgages (ARMs) with very low teaser rates," said Alexis McGee, ForeclosureS.com president
McGee said San Diego has seen some big changes in the past year, and not for the better. "There has been a big jump. You were one of the lowest. Now you are one of the highest. You are getting close to L.A.'s numbers, and given the differences in population, that's scary," she said.
According to a recent study by Christopher Cagan of First American Real Estate Solutions, someone paying $800 per month on an option ARM could see his or her payment jump to $3,000 per month.
"That's likely to result in default," he said.
"Whether people are paying interest-only or not, these loans are coming due and the ones who aren't refinancing are in trouble and are ending up on our lists," McGee said.
As alarming as these increases in foreclosure actions may seem, they are but a fraction of the figures in the years from 1996 through 1998.
"We are nowhere near those numbers," McGee said.
Still, she noted that the combination of rising interest rates, flattening price appreciation and growing inventories of unsold homes were putting more households in financial distress and making it more difficult for troubled homeowners to sell their way out of foreclosure.
"In California, we recorded 28,550 notices of default and foreclosures in the first quarter of 2006, and 9,222 new defaults in April," McGee said.
She went on to say that because coastal markets such as San Diego had been badly overheated for more than five years, many homebuyers used so-called exotic mortgages to qualify for more expensive homes.
One possible example of this trend involves a three-bedroom, three-bath home that is currently in default in the 91915 ZIP code of Chula Vista. The owner has $132,000 in equity on a $1.03 million home with a $900,000 loan.
A home that is scheduled to go to a foreclosure sale within the next few days is a 3,671-square-foot, four-bedroom, three-bath unit in El Cajon that has $276,241 in equity on a $751,759 loan. The house has a value of $1.02 million.
Another home in Coronado is about to go through an REO sale. That property is valued at more than $2 million.
San Diego and California aren't alone.
McGee said Nevada foreclosure activity had more than doubled this year from the fourth quarter of 2005. "We saw 4,544 foreclosures in (the first quarter) of 2006, and almost 1,700 in April alone. That market (Nevada) was in the hands of speculators with more than 25 percent of new home sales going to out of state investors. Now they're being washed out of the market," she stated.
McGee went on to say that in Colorado, ForeclosureS.com recorded a 50 percent increase in new foreclosures in the first quarter of 2006 from the fourth quarter of 2005 and a 96 percent year-over-year increase.
ForeclosureS.com has been tracking housing markets, publishing foreclosure property information and training and assisting investors since 1992. The company extended its foreclosure property listing service nationwide in late 2005.