All data point to escalating foreclosure numbers through the year

Foreclosures have flooded North County’s housing market, and indicators show that the waters will be rising, not receding through the rest of the year.

Just as April’s sales data was the best in months and provided some encouragement for real estate agents, the month’s huge foreclosure numbers offered more ammunition to housing market bears who see San Diego County’s housing recession dragging on for two or three years.

All indications are that North County will see more foreclosures, not fewer, come up for sale over the next six months:

– Fewer than half of San Diego County variable-rate subprime loans —- where interest rates jump after a set period and typically carry high payments because of a borrower’s poor credit score or low down payment —- have already seen payments escalate, according to a report by the New York Federal Reserve Bank.

– Of all North County foreclosed homes that went back to the bank within the last 120 days, 60 percent have not been listed on the market, according to a North County Times analysis of foreclosure, listing, sales and pending sales data. And there have been more finalized foreclosures —- 1,800 homes —- over the last four months than the previous seven months.

– Notices of default, the first step in the foreclosure process, have shot up in North County, reaching a peak for this recession of 1,100 in April, according to data from ForeclosureRadar, a California foreclosure tracking service. Notices of default preceed bank-owned foreclosures (widely viewed as the chief culprit of San Diego County’s home price decline) by six months to a year.

The data put foreclosure analysts at odds with real estate agents, who say that a flurry of buyer activity foretell a housing market recovery locally.

“I am more wondering when is this thing going to blow up, and you’re already talking about the light at the end of the tunnel,” said Ramsey Su, an investor and former real estate broker in San Diego. “It’s going to get worse before it gets better.”

Small-time investor could lose big

Many housing analysts said they think option-adjustable rate mortgages will further exacerbate the foreclosure problem. The loans allow homeowners to pay less than the interest accrued, meaning the amount owed on the mortgage increases, rather than decreases, with each payment.

Eventually, the mortgage balance becomes so large the lender forces the homeowner to pay all interest and some of the principal each month to start drawing down the balance.

For Diane Goodwin of Oceanside, that move would force her to lose two of her investment properties. And if the market does not improve, she said she could lose her other three homes, including her primary residence, over the next year and a half.

All five properties she owns carry the option mortgages, also known as negative amortization loans.

“Yup, big mistake,” she said. “However, we wouldn’t have any of them except the original house if we didn’t use neg-am, so it was a gamble. And at the time, it seemed like a good one. Obviously, we didn’t know what was going to happen to the market.”

There are 19,200 homes with neg-am, non-suprime loans in San Diego County, according to the Federal Reserve report. All of those loans are known as Alt-A, which indicates a more qualified buyer than subprime loans but less qualified than prime loans. In total, there are about 95,000 non-prime loans in the county, according to the data.

That prevalence has raised concerns among foreclosure analysts that neg-am loans will cause a new tidal wave of bank-owned foreclosures.

“I still haven’t seen a real wumph,” said Ward Hanigan, founder of Innovest, a San Diego-based company that tracks foreclosure statistics and buys bank-owned properties.

Hanigan said he thinks San Diego County’s housing market will decline for two more years before any sort of recovery and that an increase in foreclosures will lead the decline.

Based on that prediction, his company has not invested in foreclosures yet, he said.

A few unknowns will play a significant role over the next year.

For example, Goodwin is desperately trying to get her banks to freeze her mortgage payments to avoid foreclosure. But because she has not missed a payment, she said, they will not talk about such a freeze, known as a loan modification.

If more banks engage in loan modifications, more homeowners and investors like Goodwin might dodge foreclosure.

To help even more families facing foreclosure, the state and federal governments have moved aggressively to pass foreclosure-prevention legislation and have organized networks where homeowners can seek free help in securing loan modifications.

However, much of that legislation will not help Goodwin because she is an investor and politicians have repeatedly said they want to avoid bailing out speculators.

But Goodwin said she does not fit the speculator-investor prototype.

“I just wanted to make sure I wasn’t a burden to my family when I get old. It was not to be rich, but to have something so that my kids wouldn’t have to worry about me when I’m 90,” Goodwin said. “So now, instead of being able to retire when I’m 65 or 62-and-a-half, now, realistically, I’ll have to work until I’m 75.”

The negative intangibles

Some unknown factors could increase, instead of reduce, foreclosure numbers. For some housing analysts, the trajectory of the nation’s economy will play the biggest role in foreclosure numbers over the next year.

Housing analysts have said that the primary cause of foreclosures so far has been creative loan products, such as neg-am or subprime loans, that put people into homes they could not really afford.

In contrast, job loss, divorce and death have been the largest foreclosure factors historically. If significant layoffs come —- as some analysts, such as Su, expect —- foreclosure numbers will multiply as traditional home losses combine with evictions brought about by exotic financial instruments and a housing rush from 2000 to 2005.

“I don’t think it would be a linear growth of foreclosures. It would be exponential. It would be catastrophic,” said Su, the San Diego investor. “It would be a situation we have never seen before.”

Some real estate agents, such as Kurt Kinsey of Oceanside, disagree with analysts such as Hanigan. Though Kinsey said he acknowledges there will be more foreclosures through 2008, that does not necessarily mean they will depress home prices.

“It will definitely add pressure to non-distressed sellers, no doubt about it. But most of them (foreclosures) are coming back at price points that are affordable,” Kinsey said. “And from where they started at, they’re starting to come up in price. So if anything, they’re starting to heal some neighborhoods.”

Shadow inventory

Even if foreclosure numbers leveled off next month, it would take a long time to work through the homes already in the foreclosure process.

Notices of default, the first step of the foreclosure process sent out after homeowners start missing payments, are considered a leading indicator of foreclosures.

Hanigan said his statistics show about 50 percent of notices of default are turning into bank-owned foreclosures in San Diego County.

North County has seen notices of default escalate recently, accumulating 4,100 notices in the first four months of the year, according to ForeclosureRadar.

With Hanigan’s 50 percent conversion rate, the notices of default during the first four months of this year will translate into 525 foreclosures per month. During those four months, North County posted an average of 460 foreclosures over the same time period.

And even many of the homes that have completed the foreclosure process have yet to hit the market.

Of the 1,300 North County homes to be seized by banks over the last 120 days, 750 are still not on the market, according to an analysis of ForeclosureRadar data and listing, sales and pending data from Sandicor, a service real estate agents use to post homes for sale.

“I think that the banks are in an analysis paralysis,” said Norm Miller, a real estate professor with University of San Diego’s Burnham-Moores Center for Real Estate. “They’re trying to figure out whether to put it on now and bite the bullet or wait because they think we’re at the bottom. But everyone else is thinking the same way and there’s no way to avoid the rash of foreclosures.”

Some housing analysts disagree with Miller, saying that banks are moving the foreclosures as quickly as possible, but that the process of evicting families and readying homes for sale is time-consuming.

Either way, there are plenty of homes to be sold not listed on the market, called by some as “shadow” or “phantom” inventory.

Many analysts look at inventory, the number of homes for sale divided by the number of sales, to determine the relative health of the housing market.

Some analysts, like Miller, think that current inventory numbers —- though high —- are artificially low because of foreclosure properties not on the market and regular homeowners who do not want to sell in a struggling market.

Still, some neighborhoods, especially those along the coast, have exhibited strength in pricing and few foreclosures.

Further, some areas, such as parts of Oceanside and Escondido, have been so wracked by foreclosures that prices have dipped to $160,000 and most analysts do not expect further declines.

“You look at 10 homes for sale, one is aggressively priced and another is priced at the same price as a year-and-a-half ago. … They’re going to be on the market for a long, long, long time,” Miller said. “So this home is close to bottoming out, and the other one is in la-la land with the assumption that real estate never goes down.”