California Mortgage Defaults On The Rise

For the first time in three years, mortgage defaults have increased in California, with the majority of default notices addressed to residents of Southern California. (A default notice is, to my understanding, a notice sent to the borrower after they have missed a certain number of payments. It is not a full blown foreclosure, where the house is seized, but it is the first step on the road to foreclosure.) During Q3 2005, over 12,500 default notices were sent to Californian home owners.

From California mortgage defaults rise for first time in 3 years, "Financially distressed homeowners have largely been able to avoid foreclosures because rising real estate prices allow them to sell their properties instead." While home prices have been rising over the past several years, I saw the start of the slowdown we currently are mired in when house hunting last year. Even a year ago, the days-on-market numbers were increasing, seller and buyers were agreeing on prices below the original asking price... and now local realtors are going months without a sale.

Historically, the mortgage defaults are still at low levels due in large part to the boom in housing prices over the past half-decade. But what happens when the boom slows (as it is now) and then retreats? What happens as interest rates continue to rise and home owners shackled with adjustable rate mortgages or (gasp) interest-only loans, start having to dole out more per month than they had budgeted and they're upside down in their home? (Don't forget, in 2004 48% of all mortgages taken out for San Diego properties were interest-only!)

It will be interesting to see how this metric fares over time. I can't see it heading any other way than up...