HOUSING: Subprime no longer main perpetrator of foreclosures

Price decline main contributor to foreclosures, reports suggest

By ZACH FOX - Staff Writer | Sunday, July 20, 2008 12:14 AM PDT ∞

"Subprime" is so passe. The hot term to associate with foreclosures is "price decline."

Data suggest that North County's foreclosure beast evolving as it spreads beyond subprime ---- reserved for the highest risk borrowers ---- to all sorts of loans.

In two areas that have dominated foreclosures over the last year ---- north Oceanside and east Escondido ---- cases have flattened over the last three months. Meanwhile, foreclosures in neighborhoods with newer homes and higher median incomes, such as places in San Marcos and Carlsbad, are growing.

The numbers indicate that risk profiles do not drive foreclosures. Instead, housing analysts point to price declines.

"As prices continue to decline, we'll see more foreclosures. And as we see more foreclosures, we see more price declines," said Sean O'Toole, founder of ForeclosureRadar, a tracking service in Northern California. "It's kind of a toilet bowl effect."

A study released a month ago by the Boston branch of the Federal Reserve, the national bank, reported that homeowners who lost more than 20 percent of their home value were 14 times more likely to enter foreclosure than the typical borrower. By contrast, subprime borrowers were only six times more likely to not pay their mortgages than prime borrowers.

In north Oceanside, the pace of notices of default was flat for the last three months, according to data from ForeclosureRadar and the San Diego Association of Governments.

Over the same three months, the rate of new notices of default in San Marcos shot up 28 percent.

Therefore, while overall numbers stabilized in June compared with the previous two months, the problem appears to be growing in San Marcos, Vista and Carlsbad as the housing decline spreads to higher-value houses.

The overall pace "hasn't dissipated at all," said Ward Hanigan, founder of Innovest, a San Diego foreclosure investment firm.

Hanigan said he does not expect to buy up foreclosed properties until 2010. He said his company is waiting until a recovery is in sight for housing.

"When the banks get so desperate that they'll sell us one or two properties at a wholesale price, then we'll know we're at a bottom," he said. "We're not at that liquidation mind-set yet."

New notices of default ---- the first step of the foreclosure process ---- are declining among lenders that specialized in subprime loans, O'Toole said.

In North County, just 30 percent of all foreclosures are finalized, or bank-owned foreclosures. However, for major subprime lenders such as the defunct Fieldstone Mortgage, bank-owned properties constitute 40 percent or more of all foreclosures, meaning subprime lenders appear to have worked through more of their foreclosures.

Another indicator that price serves as the leading contributor to foreclosure is the level of negative equity, or number of homes where mortgage amounts exceed home value. Of all North County homes in some stage of foreclosure, 70 percent boast negative equity, with some home values up to 30 percent below mortgages, according to ForeclosureRadar.

O'Toole said those numbers might underestimate the percent of foreclosures with negative equity because estimated values are hard to keep up to date. And each month for the last seven months, San Diego County homes on average lost more than 2 percent of value per month, according to Standard & Poor's Case-Shiller Home Price Index.

Therefore, as price depreciation continues, more homeowners find themselves with negative equity, also known as being "underwater."

As homeowners jump ship, the price depreciation is hitting the bottom lines of banks.

JPMorgan Chase released its second-quarter earnings report Thursday. Its findings support the trend of price depreciation forcing foreclosures among less risky borrowers.

While subprime losses continued to dominate, foreclosures on prime mortgages are starting to hit the bank hard. Subprime losses have jumped sixfold from a year ago. Prime losses are up 25-fold.

"We are seeing that the problem loans have spilled beyond subprime, beyond home equity (lines of credit) and into prime," said Thomas Kelly, spokesman for the bank. "Some people could afford it (the house), but chose not to, and the biggest impact is falling home prices."

Losses on prime, or low-risk, mortgages tore a $104 million chunk out of JPMorgan Chase's bottom line in the second quarter. In 2009, the bank thinks losses from prime loans could reach $300 million per quarter.

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com.

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