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The number of Bay Area homeowners in danger of losing their homes to foreclosure spiked this spring, as more people found themselves unable to make their mortgage payments or sell for enough money to cover their loans.
A total of 2,910 homeowners in the nine-county Bay Area got "notices of default" from their mortgage lenders in the April-through-June period, a 37 percent increase from the same time in 2005, according to a report Wednesday from DataQuick Information Systems.
But in Santa Clara County, where home prices have held up better than in most other counties, the increase was the second-lowest in the Bay Area and second-lowest in the state. Five hundred thirty homeowners received default notices in the second quarter, up 14.5 percent from a year earlier.
A smaller proportion of homeowners face foreclosure in California than in most other states, largely because home values have risen quickly enough here that they can sell at a profit. But experts said the spike in defaults suggests that as home prices flatten or drop and higher interest rates squeeze household budgets, even more Californians will slide toward foreclosure in the coming months.
Notices of default are the first step in the foreclosure process.
Statewide, the number of homeowners in default reached 20,752, a 67 percent increase from the second quarter of 2005, when default rates hovered near historic lows. It was the steepest increase in at least 14 years, DataQuick said.
San Mateo County saw defaults increase 51 percent, to 222 homeowners. In Alameda County there was a 42 percent increase, to 649. Santa Cruz stayed flat from last year, at 73.
When large numbers of financially distressed homeowners are forced to put their homes on the market, the oversupply can drive down home values. But DataQuick President Marshall Prentice said default rates would need to double before they would drive down home values much.
Prentice attributed most of the rise in defaults to slower appreciation, not to homeowners unable to handle rising monthly payments on their adjustable-rate mortgages, which have been increasingly popular -- and controversial -- in recent years.
DataQuick recently researched the percentage of notices of default that go to borrowers with adjustable rate mortgages and found that it is not disproportionately higher than the portion of adjustable rate mortgages in the marketplace, said DataQuick spokesman Andrew LePage.
But Greg McBride, a senior financial analyst at Bankrate.com, thought DataQuick underplayed the effect of rising interest rates on foreclosure activity.
"I think rising interest rates are front and center as cause for defaults," he said. Slower home appreciation alone "doesn't cause you to default," he said. "That combined with a payment that's risen sharply, that could limit your options and lead you into default."
McBride said the pain of rising short-term interest rates -- those governed by the Federal Reserve Board -- is most immediately felt by those with credit card debt and home equity lines of credit.
And Californians currently have an outstanding balance of nearly $79 billion on their home equity lines of credit, according to Loan Performance, a San Francisco company that tracks loan data for the mortgage industry. Homeowners in the San Jose metro area have about $5.1 billion worth of debt on their home equity credit lines.
Eric Kinney, a loan officer with First Horizon Home Loans in Los Altos, said his office is getting more calls lately from homeowners anxious to refinance their adjustable-rate home equity lines of credit or second mortgages into fixed-rate loans. Some are just worried about rising rates, he said, and others are already having problems making the payments now that the prime rate -- which governs the rates on most equity loans -- is up to 8.25 percent.
His office is also getting more inquiries from recent home buyers who want to refinance but who have loaded up on credit card debt, making it hard to qualify for loans with favorable rates because their credit scores have dropped.
Joy Thormodsgard, chief executive of Consumer Credit Counseling Service, which serves a six-county area from Ventura to Santa Clara, said 35 percent more people sought financial counseling from her organization -- as opposed to help with bankruptcy or credit reports -- in the first seven months of 2006 than during to the same period in 2005, for a total of 2,312 customers. A very small fraction specifically sought help on mortgage or foreclosure issues in the second quarter, but the number was up steeply from last year -- from seven to 12.
"What we're seeing is, it's the newer loans, the creative financing" that is common to the customers seeking help from her company. Thormodsgard said she expects the trend to worsen as more homeowners with adjustable-rate mortgages see their monthly payments rise.
McBride said he expects the topic of interest rates and their relationship to default rates to be revisited often in the next two years, as borrowers' interest rates reset.
"The impact of rising interest rates on adjustable-rate mortgages is in a very early stage," he said. "The pig is just making its way through the snake's belly."
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