California foreclosures fully recovered in 2016

0.3% of California’s mortgaged homes were in some stage of foreclosure at the end of the fourth quarter (Q4) of 2016. This is the same as the prior quarter and down slightly from 0.4% a year earlier. The only state with a lower foreclosure inventory is Colorado, with 0.2% of homes in some stage of foreclosure, according to CoreLogic.

The national average foreclosure inventory is 0.8% as of Q4 2016, down from 0.9% in Q3 2016.

19,251 foreclosures were completed in California during 2016. This is about 4,600 fewer or 19% less than the 23,875 foreclosures that took place in 2015.

5% of all U.S. foreclosures took place in California in 2016. Considering California mortgages make up 13% of all U.S. mortgages, the Golden State is doing miraculously well on the foreclosure front — especially considering the severity of the housing crash in our state.

Mortgage delinquencies are a leading indicator of future foreclosure trends. Nationally, the share of homes 90 or more days delinquent and in serious risk of foreclosure was 2.6% in Q4 2016, level with the previous quarter. In California, 1.3% of homes were 90 or more days delinquent and in serious risk of foreclosure, also level with the prior quarter.

Editor’s note — Traditionally, lenders commence foreclosure by recording a notice of default (NOD) following 90 days of delinquency on mortgage payments. However, beginning January 2014, mortgage servicers are required to wait until a mortgage is at least 120 delinquent before commencing foreclosure on a first lien mortgage secured by an owner’s principal residence. [12 Code of Federal Regulations §1024.41(f)(1); see RPI Form 471 — 471-6]

In the Los Angeles metropolitan area, foreclosures made up 0.3% of mortgaged homes in 2016, down from 0.5% in 2015.

3,346 foreclosures were completed in Los Angeles during 2016, down from 4,074 in 2015. Thus, 1-in-6 foreclosures taking place in California during 2016 occurred in populous Los Angeles.

At the other end of the spectrum, San Francisco foreclosures have scraped bottom with just 0.1% of mortgaged homes in some stage of foreclosure. 139 foreclosures took place in San Francisco in 2016, compared with the 180 foreclosures occurring here in 2015.

Have foreclosures hit bottom?

The foreclosure inventory and the share of seriously delinquent mortgages remained level with the prior quarter in Q4 2016, having declined slightly from the previous year. Considering foreclosures are now level with the early years of the Millennium Boom, have we reached a full recovery from the foreclosure crisis here in California?

Basically, yes. But there are some headwinds in our future, all brought about by the mortgage interest rate rise, which began in Q4 2016.

Higher mortgage rates cause homebuyer purchasing power to decrease. Like opposing ends of a teeter-totter, when rates go up, the amount of mortgage principal homebuyers qualify for axiomatically goes down. As a result, this drags home prices down.

However, as long as home prices continue to rise, negative equity homeowners will be lifted above water. Homeowners who are able to sell their home due to their positive equity position in the property will always choose to sell rather than let the bank foreclose and take a long-lasting hit on their credit report.

Due to the sticky price phenomenon, home prices will continue to rise until around late-2017, when the impact of higher mortgage interest rates will catch up with homebuyer purchasing power, causing:

prices to decline;
the number of negative equity homeowners to rise; and
those at risk of foreclosure to increase yet again.

In 2018, we may see a small uptick foreclosures as underwater homeowners throw in the towel and decide to default rather than wait for prices to rise again. But this uptick in foreclosures will likely be shallow and brief here in California. Our economy is strong and any nationwide recession we may be experiencing at that time will be muted in California’s housing market.