FEWER DEFAULT NOTICES IN COUNTY

The number of Sonoma County residents who defaulted on their mortgages leveled off for the first time in almost three years, even as foreclosures continued to spiral to unprecedented highs, according to a new report.

Analysts, however, warned that the wave of foreclosures will likely continue to rise in Sonoma County this year and potentially into 2009.

"We'll need to see two or three quarters of meaningful declines in default activity before it's safe to say that we're coming off some peak," said Andrew LePage, analyst for DataQuick Information Systems.

Lenders seized a record 788 homes in foreclosure in Sonoma County during the second quarter, up 46 percent from the first quarter and nearly five times the total from a year ago, DataQuick reported Tuesday. Every week, lenders took back more than 60 homes from borrowers who had stopped paying their mortgages.

But in the first sign that the mortgage meltdown may be nearing its peak in Sonoma County, loan defaults leveled off during the second quarter.

Lenders sent 1,376 default notices, the first step in the foreclosure process, down 1.1 percent from the record 1,392 default notices in the first quarter.

Statewide, default notices rose 6.6 percent from the first quarter, impacting a record 121,341 loans. The increase was much smaller than in previous quarters, although it is too soon to know whether it signifies a turning point in the foreclosure crisis, said John Walsh, DataQuick president.

"The small increase in defaults from the first to the second quarter may indicate that we're nearing a plateau," Walsh said. "We won't know until the end of the year, but it may be that some lenders are starting to prioritize workouts with homeowners instead of grinding things through the foreclosure process. Of course, they may just be swamped and can't handle processing any more paperwork."

If defaults, indeed, are leveling in Sonoma County, foreclosures would still likely rise for another four to nine months due to the process involved for a bank to take back a home, LePage said.

Sonoma County's housing market is saturated with bank-owned properties and by homeowners who are attempting to sell and avoid foreclosure, driving down property values in many areas. Even if the number of defaults eases, sales of distressed homes will likely occupy a commanding position at least through the end of this year, analysts said.

"I have never seen this many of them in the 20 years I've been in this business. There appears to be no change in the immediate horizon," said John Binns, a CPS agent specializing in selling bank-owned homes.

Every week, more than 100 borrowers in Sonoma County fell behind on payments or stopped paying mortgages, triple the number from a year ago.

Many of these people will lose their homes. Of the borrowers in default, only 22 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe, DataQuick reported. A year ago, it was about 52 percent.

Most purchased their homes around the peak of the housing boom in 2005 and now find they owe more than their home is worth on the market. That sets the stage for a default if they lose a job or otherwise can no longer afford the monthly mortgage payment. They can't refinance if they don't have enough equity and must sell to avoid foreclosure.

Most vulnerable are homeowners who relied on subprime loans with low initial payments that explode when high interest rates kick in, known as a loan reset. The most popular were loans with fixed lower payments for the first two to three years.

Nationwide, 60 percent of these loans have already reset to higher payments, fueling a surge of foreclosures across the country, according to a recent study by First American Core-Logic LoanPerformance, a real estate research firm.

While the majority of these loans have already been absorbed, the ones that remain pose a major challenge for borrowers.

Among the 10,000 outstanding subprime loans issued in Sonoma County around the peak of the housing market, more than 20 percent will reset to higher interest rates over the next year, First American estimates.

Homeowners with loans resetting to higher payments are more likely to default now due to tighter lending guidelines and the steep decline in home values, according to the First American study.

The growing unemployment ranks and rising prices of gas and other goods add to the pressure on homeowners.

"There's no wiggle room in a household budget these days. It just takes one event that causes you to miss a payment and then things start to snowball," said Steve Cochrane, regional economist for Moody's Economy.com.

Statewide, foreclosures continued to rise to new highs. A record 63,061 borrowers lost their homes during the second quarter, up 34 percent from the first quarter and nearly four times the number of a year ago.

The Bay Area housing market remains stronger than inland California. On a loan-by-loan basis, mortgages were least likely to go into default in San Francisco, Marin and San Mateo counties -- a historical norm. The likelihood was highest in Merced, San Joaquin and Stanislaus counties.

Borrowers were typically five months behind on their payments before the lender initiated foreclosure proceedings. The typical loan that went into default was 26 months old, up from 16 months a year earlier. The borrowers owed a median $11,583 on a median $346,400 mortgage, according to DataQuick.

Those homes eventually go back on the market, keeping supplies high and prices low.

"Generally the banks try to price properties at market because they're always taking massive, massive losses on these properties," Binns said. "We've seen a very dramatic decline in pricing. It took place fairly rapidly as opposed to being drawn out over several years."

You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.