California foreclosure starts set record

A record number of California homes entered the foreclosure process during the first quarter when their owners defaulted on their mortgages, as the "nastiest batch" of loans made during the housing boom makes its way through the system, MDA DataQuick said.

The 135,431 default notices sent out by lenders during the first three months of the year surpassed a previous high of 121,673 during the second quarter of 2008 by 11.3 percent. Notices of default are the first stage in the foreclosure process.

Default notices had been on the decline -- 94,240 went out in the third quarter of 2008, and 75,230 during the fourth -- after a new state law took effect requiring lenders to jump through additional hoops before initiating the foreclosure process.

Trustee deeds recorded -- which document the actual loss of a home to foreclosure -- totaled 43,620 during the first quarter, down 5.5 percent from the previous quarter and a 7.6 percent decline from a year ago. Trustee deeds peaked at 79,511 in third-quarter 2008 before dropping because of a temporary foreclosure moratorium.

California's Senate Bill 1137 sought to reduce foreclosures in the state by requiring lenders to reach out to homeowners prior to initiating foreclosure proceedings and requiring a waiting period. But California's new requirements for lenders appear to be delaying, rather than preventing, many foreclosures.

"The nastiest batch of California home loans appears to have been made in mid to late 2006, and the foreclosure process is working its way through those," said John Walsh, DataQuick president, in a statement.

Loans made at that time often carried multiple risk factors -- adjustable rates, low down payments, interest-only payments, or undocumented income -- that, when combined in one loan, can make them "toxic," or at higher risk of default, Walsh said.

Another possible explanation for the dramatic increase in default notices may be that lenders are trying to start the foreclosure process on as many homes as possible before another law, the California Foreclosure Prevention Act, takes effect this summer. ...CONTINUED

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