Nationally, 36,000 foreclosure sales were completed in September 2016, a 7% decrease from a year earlier when 39,000 foreclosure sales took place. Of all mortgaged homes, just 0.9% were in some stage of foreclosure at the end of the third quarter (Q3) of 2016, down from 1.3% a year earlier, according to CoreLogic.
More critically, California performed much better than most of the country, with only 0.3% of all mortgaged homes in some stage of foreclosure in September 2016. 20,900 foreclosure sales have taken place in the 12 months ending September 2016.
Mortgage delinquencies are a leading indicator in future foreclosure trends. Nationally, the share of mortgaged homes 90 or more days delinquent and in serious risk of foreclosure was 2.6% at the end of Q3 2016. This share was half as high in California, where 1.3% of mortgaged homes were 90+ days delinquent.
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)]
The Golden State is golden indeed — when it comes to foreclosures
What has caused California’s foreclosure status to improve more quickly than most other states?
Principally, states where the foreclosure process is judicial continue to lag and are experiencing the highest inventories of properties that are in some stage of the foreclosure process. This is due to the fact that the judicial foreclosure process vastly inflates the length required to complete a foreclosure sale. On average, judicial foreclosures take eight months to multiple years to complete. In contrast, a nonjudicial foreclosure under the power-of-sale provision in the trust deed or other security device takes approximately nine months.
As a result, judicial states, like nearby Nevada, tend to see more abandoned and blighted homes as the foreclosure process is protracted over many months — or even years.
Nonjudicial foreclosure states — including California — have the lowest foreclosure inventories. The quicker the foreclosure process, the faster delinquent homes are flushed through the system and put back on the resale market. Thus, the real estate markets in these states purge the bad inventory and heal that much quicker.
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Further, California has experienced a more rapid recovery in home values than most other states. When home values rise, previously underwater homeowners who owed more on their mortgage than their home’s value are lifted into positive equity status. Unless underwater homeowners are willing and able to take a loss on their home, they are unable to sell without obtaining permission for a short sale from the mortgage holder, or simply defaulting and allowing the bank to foreclose by way of a strategic default.
Homeowners in positive equity have little reason to strategically default as this wipes out all the equity accumulated in the property. Thus, high foreclosure rates often correspond with high regional rates of negative equity. For instance, San Francisco has one of the lowest negative equity rates in the nation at just 0.6%. Likewise, it has a remarkably low foreclosure inventory of 0.1% as of September 2016.
Therefore, as long as home prices continue to rise, expect the foreclosure rate to remain low and continue to decline.
But there are also signals of future conditions that will hamper the recovery. Rising interest rates and slowing home sales volume are both pulling back home prices in Q4 2016. In the first week of December, the average 30-year fixed rate mortgage (FRM) in California rate is 4.0%. This is a significant increase from the 3.4% average seen in October, which amounts to an average decrease in mortgage funds available — called buyer purchasing power — of about $25,000 for a homeowner reliant on mortgage financing (read: the vast majority of borrowers).
In other words, a homeowner has $25,000 less to spend on a property today than a month ago. This will adversely impact both home sales volume and prices — and when prices dip, borderline homeowners will be plunged back underwater, increasing their foreclosure risk.
Agents and brokers: keep an eye on your local markets and watch for home prices to falter in the coming months. When this happens, you can expect to see a small but relatively short-lived uptick in foreclosures. The increase will mostly be absorbed by an improving economy and first-time homebuyers who are eager to buy and just waiting for California’s pricey housing markets to fall within reach.
