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California Default Notices Fall 24 Percent In 4Q

— Mortgage default notices for California homeowners fell 24 percent during the fourth quarter, suggesting the worst might be over for foreclosures in entry-level markets while problems spread to pricier neighborhoods, a research firm said Wednesday.

There were 84,568 default notices filed from October through December, down from 111,689 during the previous three-month period but up 12 percent from 75,230 during the same period of 2008, MDA DataQuick reported.

The latest tally is down 38 percent from the peak of 135,431 in the first quarter of 2009 and marks the third straight quarterly decline. MDA DataQuick cautioned that the peak number was inflated by new notification requirements that delayed some foreclosures in 2008.

However, default notices are climbing in mid- and high-end neighborhoods, as homeowners who were able to make payments longer than those in entry-level markets feel the results of the recession and job losses, said MDA DataQuick president John Walsh.

The state's most affordable markets accounted for 35 percent of all defaults in the latest quarter, down from 52 percent of all defaults a year ago. Those markets account for about one of every four homes.

In upscale Orange County, for example, default notices increased 24 percent from a year earlier. Defaults also rose sharply in Santa Barbara, Santa Cruz and other markets on the coast.

On the flip side, default notices fell 13 percent in Merced County, which was hammered early in the foreclosure crisis. The hard-hit Inland Empire, east of Los Angeles, showed declines or only slight increases.

Notices of default are the first step in the formal foreclosure process.

The number of homes actually lost to foreclosure totaled 51,060 in the most recent quarter, up 2 percent from 50,013 during the previous three months and up 11 percent from 46,183 during the same period of 2008.

The latest number is down 36 percent from an all-time high of 79,511 in the third quarter of 2008.

The results show that Californians are still working through a period of easy credit from several years ago, San Diego-based MDA DataQuick said.

Loans defaulting in the fourth quarter had a median origination in July 2006, same as the third quarter. The median origination was June 2006 in the same period of 2008, meaning the market has worked through only one month of bad loans last year.

"Mid-2006 was clearly the worst of the 'loans gone wild' period, and it's taking a long time to work through them," Walsh said.

Gary Painter, director of University of Southern California's Lusk Center for Real Estate, said the numbers underscore how homeowners in high-end neighborhoods were able to stave off foreclosure longer than others.

"The people at the bottom end of the market are going to walk away first," he said. "I think the worst in the starter home market is over but it is still historically high. It's just not as bad as it was, but we have turned that corner."

It is too early to say foreclosures across the market peaked or that the housing market overall has rebounded, Painter said.

"We're not going to see - for the next year certainly - any huge spikes in prices," he said.

MDA DataQuick analyst Andrew LePage agreed that it's too early to say foreclosures overall have turned the corner. Late payments on home loans - a step prior to filing a default notice - have risen over the last year, suggesting there may be lots of foreclosures to come.

Still, a return to the "dark days of 2008" is unlikely in entry-level markets like the Inland Empire and Merced County in central California.

"We're not through yet but a huge percentage (of subprime loans have) already been flushed through the system," he said. "It's still pretty bad by historical standards."

The drop in defaults comes as banks come under pressure in Washington to ease the terms of troubled home loans.

Banks lowered mortgage payments for 172,288 California borrowers through December under the Obama administration Making Home Affordable program launched in March, but only 7.8 percent of those modifications were permanent, according to government data.

The absence of permanent modifications fuels questions about how long defaults will continue to fall, LePage said.

"There's still a lot of uncertainty about how the distress will play out the next year or two," he said.

Still, the decline in defaults indicates that banks are turning more to short sales and loan renegotiations, Walsh said. A short sale is when the seller owes more than the house is worth, and the lender is willing to take the loss to exit the investment.

"A lot of the mortgage loans that are in distress are being kept out of the foreclosure process," said Celia Chen, senior director of Moody's Economy.com.

Countrywide had more defaulted loans than any other lender with 5,588, followed by Wells Fargo at 3,482, Washington Mutual at 3,460 and Bank of America with 1,760. Last quarter's default rate on loans that originated in the second half of 2006 ranged from 1.5 percent for Bank of America to 13.1 percent for World Savings.

Foreclosures continued to decline as a percentage of home sales in California. Foreclosures accounted for 40.7 percent of existing homes sold in the fourth quarter, down from 42.7 percent in the third quarter and 54.4 percent during the same period of 2008.

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