The deluge is over.
Foreclosures and default notices in California and the Bay Area have subsided back to their 2007 levels. Foreclosures are still running about double historical averages, but are a far cry from the sky-high levels during the worst of the housing crisis in 2008.
“The worst is absolutely past us,” said Christopher Thornberg, principal with Beacon Economics, an economics consulting firm. “There is no doubt about it – foreclosures are down, delinquencies are down. It’s clear we are in the healing process. The only question is the pace of recovery.”
In 2008, a quarter of a million California homes were repossessed by lenders, according to data from ForeclosureRadar.com, a Discovery Bay real estate service. This year, the state is on track for about 107,600 homes to go into foreclosure – a decline of 56 percent – assuming the rate established from January through August is maintained. From 1980 to 2011, California’s annual average number of foreclosures was 55,054, according to San Diego’s DataQuick.
In the nine-county Bay Area, 2008 saw 37,600 homes repossessed; this year the region should see about 15,600 foreclosures, a decrease of 58.5 percent, ForeclosureRadar said. That compares with an average of 6,917 Bay Area foreclosures a year from 1980 to 2011.
The pattern holds true in even the hardest-hit counties. Contra Costa, for instance, had 11,380 foreclosures in 2008 and this year is on track to have 4,120. Notices of default, the first step in the foreclosure process, are likewise on a downward trajectory, which presages fewer foreclosures ahead. Fewer than half of default notices result in foreclosures.
It’s not all pretty
To be sure, plenty of distress remains. Millions of homeowners are underwater, owing more than their house is worth. That condition, combined with a financial shock – job loss, illness, business reversal, divorce – lays the groundwork for getting behind on mortgage payments.
“We shouldn’t pretend that everything is hunky-dory,” Thornberg said. “Clearly, some of those underwater people are still delinquent. But there are simply fewer of them than there were before. And a lot of people who are underwater are only modestly so. They see the writing on the wall and know their houses will recover value.”
The recovery is the result of enough time having elapsed since the housing collapse in 2008, Thornberg said, pointing out that the people who received the most toxic subprime loans during the housing boom of the early 2000s have already lost their homes.
Sean O’Toole, CEO and founder of ForeclosureRadar, believes government intervention also made a difference. “There has been a lot of (political) pressure on banks and regulators to slow or stop foreclosures,” he said.
Back in 2006, the time between notice of default and foreclosure averaged 133 days in California, according to ForeclosureRadar. As of August, it averaged 291 days, as various programs and laws went into effect to build in more ways for homeowners to get modified loans.
While help for homeowners remains frustratingly difficult for many, numbers show that loan modifications are slowly gaining traction.
In the second quarter, banks modified 416,036 loans, and started 302,636 new foreclosure actions nationwide, according to the Comptroller of the Currency, a federal government bank regulator that oversees 60 percent of all U.S. first-lien mortgages. Across the country, those modifications reduced borrowers’ monthly payments by an average of 24.6 percent, or $381, it said.
The decline in foreclosures and default notices rebuts the theory that the so-called “shadow inventory” – legions of homes already repossessed by banks or ones that eventually will go into foreclosure – could swamp the real estate market, undermining the recovery. Experts say there simply doesn’t seem to be that many homes in the foreclosure pipeline.
“The banks are not sitting on tens of thousands of vacant (foreclosed) homes,” O’Toole said. “I don’t think there is any chance (shadow inventory) could swamp the market. The regulatory and accounting framework now is geared around letting the banks slowly dole (foreclosures) out over a long period of time so there is no shock to the market.”
Controlling the flow
O’Toole believes there are many homeowners who are behind on payments but haven’t yet received notices of default. But he also thinks banks will make sure those not-yet-official delinquencies trickle through the foreclosure process, as it is to their advantage to avoid a tsunami of foreclosures that would depress prices.
Some people who think a shadow inventory could still overwhelm the housing market have bolstered their theories by pointing out that only about 10 percent of bank-owned foreclosures are on the market at any given time. O’Toole said that is simply a function of an orderly process.
“It takes banks on average nine months to sell a foreclosed home,” he said. “Most of that time is spent doing the eviction, cleaning up the house, and then it is on the market for a short period of time and goes into escrow before it is finally sold.”
So at any given point, most bank-owned foreclosed homes are either being readied for resale or in escrow, he said.
People who work directly with struggling homeowners report that their numbers seem to be shrinking.
“There is still definitely a need, although it is lessening,” said Sheri Powers, director of Oakland’s Unity Council, a nonprofit community development group. “Fewer people are contacting us for assistance or coming to our foreclosure prevention workshops.” Inquiries for foreclosure-prevention help are down by 40 percent, she said.
“Of course, for each person, it is very personal and very urgent,” she said.
She’s also seeing a shift in demographics, with more higher-income homeowners seeking help.
Traditionally, about 5 percent of Unity Council’s homeowner clients earned above 120 percent of the median income for Alameda County (this threshold would be $112,200 for a family of four); in the past year, about 18 percent of clients were above that level, she said. Most commonly, their situation was caused by losing a job or seeing self-employment income decline.
“They have run out of options, out of equity, out of lines of credit,” she said. “Push has come to shove, and now they’re seeking assistance.”
Carolyn Said is a San Francisco Chronicle staff writer. E-mail: firstname.lastname@example.org