California foreclosure sales and notice of default (NOD) filings fell slightly in the second quarter of 2014 (Q2 2014). However, the number of real estate owned (REO) resales rose.

REO resales rise slightly

Roughly 7,000 REO resales took place in Q2 2014. REO resales were up about 7% from the prior quarter. However, the REO resales taking place last quarter still amounted to only half the REO resales which took place one year ago. 6% of all California resales were REOs in Q2 2014, down from 12% one year ago. At foreclosure sales, individuals (mainly speculators), rather than foreclosing lenders or the government, bought 41% of homes solddown from 54% last year. The third-party high-bidder situation indicates speculators remain somewhat optimistic about a future rise in real estate resale pricing. However, the optimism is waning.

NODs lowest since 2005

In Q2 2014, California NOD recordings totaled just over 17,500. This is down from 25,700 NODs one year earlier, making it the lowest number of NODs recorded in a single quarter since Q4 2005. NOD volume peaked at 135,431 NODs recorded in Q1 2009. In California, an average of nine months pass between an NOD recording and the foreclosure sale, indicated by a trustee’s deed.

Foreclosures decline

Foreclosure sales recorded in Q1 2014 totaled roughly 7,400, down from 9,800 foreclosure sales recorded a year earlier. The number of foreclosure sales is still higher than before the recession, though it’s almost back to historical norms. Are foreclosures finally recovered for good? Not quite. Expect foreclosures to rise again when mortgage rates begin to increase significantly, likely in 2015. Among California’s largest counties, the greatest one-year drops in foreclosure sales took place in San Francisco (-58%), Riverside (-30%) and Orange (-36%) counties.

Short sales: lenders’ Plan B

Roughly 6,700 short sales closed in Q2 2014. Short sales comprised only 6% of California resale activity, down from 14% a year earlier. Short sales are lenders’ preferred alternative to foreclosure, though until this past quarter short sales actually eclipsed the number of foreclosure sales. Lenders go with this “Plan B” to avoid both taking on additional REO property and potential government settlements.

What’s in store?

Although steadily decreasing, foreclosures are going to remain higher than average due to negative equity. Negative equity still plagues roughly 850,000 California homes. Today’s continuing downward trend in NODs is going to be countered by a drop off in home prices (and increased mortgage delinquencies) later in 2014. Many of California’s vastly underwater homeowners won’t reach positive equity soon enough to dismiss the idea of a strategic default or short sale. Eventually, increasing numbers of these homeowners will walk away, frustrated by the conduct of their mortgage lender, rising interest rates and flattening prices. Re: California foreclosure starts lowest since 2005 from DataQuick