Sharp rise in Sonoma County foreclosures

More and more Sonoma County homeowners are falling behind on their mortgage payments, a sign that financial pressure is building on people who used adjustable-rate loans to buy homes at the market's peak, according to a report issued Tuesday.

Mortgage defaults, the first step in the foreclosure process, are at their highest level in Sonoma County since at least 1992, according to DataQuick Information Systems, a La Jolla firm that tracks real estate trends.

Lenders sent default notices to 462 homeowners in Sonoma County during the second quarter, up 14 percent from last quarter and up 129 percent from the same period a year ago, DataQuick reported.

Meanwhile, the number of people who ultimately lose their homes is soaring as many find it tougher than ever to get back on track after missing a mortgage payment.

Between April and June, 163 Sonoma County homeowners lost their homes in foreclosure proceedings, up 806 percent from a year ago, when lenders seized 18 homes.

Evidence of financial strain -- particularly on newer homeowners -- is widespread, said Sandra Geary, owner broker of RE/MAX North Bay Realty.

Geary, who represents a buyer looking for a home in Santa Rosa under $400,000, found 15 homes in the northwest part of town that fit the bill. Thirteen were "short sales" forced on sellers because they were behind on their payments, she said.

"I just said 'I can't believe that 13 of these people are losing their homes,' " Geary recalled. "It's so sad."

The surge in foreclosure activity in Sonoma County mirrors an increase in mortgage defaults across California as the housing slump approaches its third year. Statewide, default notices jumped 158 percent in the second quarter, compared with a year ago.

Most of the loans that went into default last quarter were issued between July 2005 and August 2006, said Marshall Prentice, DataQuick's president.

"A lot of the loans that went bad last quarter were made at or just beyond the cycle's peak, between summer '05 and summer '06. Appreciation rates for most of that period were in the double digits and lenders let many households stretch their finances to the max, and beyond. It's that pool of 'beyond' mortgages that the market is working its way through," Prentice said in a statement.

A year ago, 88 percent of homeowners in default were able to avoid foreclosure by bringing their payments current, refinancing, or selling the home and paying off what they owe. Today, only 55 percent of homeowners in default are able to hold onto their houses, DataQuick reported.

The sluggish real estate market, along with the widespread use of multiple-loan financing to purchase homes at the market's peak, have combined to drive up foreclosures, DataQuick analyst John Karevoll said.

The involvement of multiple lenders compounds the problem when people get behind in their payments. Homeowners selling a home in a short sale might be able to pay off the first lender, but the lenders in second or even third position will likely remain, Karevoll said.

In the formal foreclosure process, however, second mortgages and lines of credit can often be written off, making that route more attractive to many, Karevoll said.

"That means more and more of these people in default have to go through the whole default process," Karevoll said.

On primary mortgages statewide, homeowners were a median five months behind on their payments when the lender started the default process. Borrowers owed a median $11,126 on a median $342,000 mortgage.

On lines of credit statewide, homeowners were a median eight months behind on their payments. Borrowers owed a median $3,457 on a median $67,121 credit line.

Geary said she recently listed a home for $435,000 that a couple paid $535,000 for two years ago. The sellers can no longer afford the home after the payment on their adjustable-rate mortgage increased $600 a month.

"It makes you want to cry, because what do you think that does to the house down the street?" Geary said.

So far, DataQuick has not seen evidence that foreclosures are dragging down property values in most parts of California.

Many properties that claim to be "short sales" or foreclosure sales really aren't, Karevoll said. Many are marketing ploys to get buyers excited about getting a deal, he said.

Bank-owned properties continue to sell at the same prices as private sales, unlike 11 years ago, when many lenders dumped properties at below-market rates, Karevoll said. That drove down prices almost 10 percent in some areas, he said.

Despite the rising number of bank-owned properties on the market, lenders don't appear to be panicking, Karevoll said. Unlike the 1990s, the broader economy is relatively strong today, which means the real estate market should work through this period of softness, he said.

The number of new loans entering the critical default period of between one and two years is dropping, Karevoll said, meaning the worst may be over.

Unless, of course, a recession hits. In that case, all bets are off.

"If we hit a recession by the end of this year, then things are going to get genuinely bloody out there," he said.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.