Report: Looming foreclosure wave will derail recession recovery in California

WASHINGTON, D.C.
November 6, 2009 5:58am

Hold the thought that California might be part of the nation’s recovery from the Great Recession, says the Center for Responsible Lending.

It says a tsunami of new foreclosures looms over California, ready to swamp any “green shoots” of an economic recovery.

“Indeed, with over one million mortgage foreclosures looming, continuing record levels of unemployment and a worsening state budget that will bring more reductions in state and local services, California is not yet out of the woods,” it says.

CRL points to record levels of unemployment, record levels of mortgage delinquencies, and precipitous declines in housing values as precursors to a further deepening of the state’s economy.

It says that “defective mortgage products” have left many California homeowners in mortgages that exceed the value of their homes – “under water.”

“For California, Deutsche Bank projects that as of Q1 2009, 54.3 percent California homeowners were underwater on their mortgages, and that within two years, 67.9 percent will be under water. Projections for areas like Modesto and Stockton are more extreme with 2011 estimates at nearly 90 percent,” the report says.

The much-vaunted loan modification programs touted by the government are more difficult to obtain and less likely to succeed when properties are under water, the report says.

“California is also home to the largest share of very risky loans called Payment Option Arms, which the data show are not faring well. Many of those types of loans, made primarily in 2004-2007, will have their payments reset in the next few years, drastically raising mortgage payments for borrowers and leading to a new wave of foreclosures,” the report says.

The state is in a “spiral of bad news,” CRL says, that has no upside.

“Unemployment-driven defaults are putting further downward pressure on the housing prices and preventing a more robust economic resurgence,” it says.

The Center for Responsible Lending says waiting for Washington’s cavalry to ride in over the horizon is waiting for disaster.

“If we are to get the economy on solid footing again, California must adequately address the mortgage crisis by preventing avoidable foreclosures and stabilizing the housing market for the long-term,” it says.

It makes two major recommendations for state government action:

• Establish a foreclosure process that ensures that mortgage loan servicers carefully review and document their economic alternatives to foreclosures that will keep borrowers in their homes.

• Given the large numbers of borrows who are deep underwater, loan servicers should be encouraged to reduce outstanding principal balances in their loan modifications, so that borrowers can begin building equity in their homes.

The Center for Responsible Lending describes itself as a nonprofit, nonpartisan research and policy organization “dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.”