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RISMEDIA, Jan. 26, 2007-(MCT)-Homeowners spending their equity, buyers wanting the lowest payments, flattening appreciation and stringent new loan rules have led to record levels of foreclosure activity in the East Bay, California experts said Wednesday.

In the last quarter of 2006, about 1,000 more mortgage default notices than last year went out to Contra Costa County homeowners, a 179% increase.

An additional 700 showed up in Alameda County (a 157% uptick) and 500 more (or 163%) went out in Solano County-signaling the highest rate of foreclosure activity ever for Solano County and the highest since 1998 for Alameda County, DataQuick Information Services reported.

"The main culprit here is the loss of appreciation," said Andrew LePage, an analyst with DataQuick. "The market has flattened out in the terms of home prices. … There was always a certain amount of buyers in financial distress, but it was masked when prices were jumping 10 (percent) to 20 percent a year."

Ed Jeffry, a loan consultant with Peregrine Lending Co. in Walnut Creek, said stringent new loan qualifications make it harder to refinance into lower-interest loans.

"Rates climb as your loan devalues," Jeffry said. "So it makes no sense to refinance."

Even those with high credit scores will be given higher rates if they reach close to 100% of their loan, he said.

"If the NOD (notice of default) rate continues to rocket from here, it could get nasty," LePage said. "We're not there yet, and we may not ever get there."

A notice of default is the first step in the foreclosure process, usually sent by a lender after a few missed payments. On primary mortgages, homeowners were a median five months behind on their payments when their lender started the process, according to DataQuick, owing $10,555 on a $324,000 mortgage.

On lines of credit, homeowners were six months behind on their payments and owed a median of $3,582 on a $60,000 credit line. The usual age of the loan was 15 months.

Most homeowners manage to prevent foreclosure by paying missed payments, refinancing or selling the home. About 32% of homeowners who found themselves in default earlier in the year lost their homes in the fourth quarter, up from 8% a year ago.

Actual foreclosure sales totaled 6,078 statewide during the fourth quarter, up 76.9% from 3,435 for the previous quarter and up 595.4% from 874 from last year.

Jeffry said that in the past few months four lenders he has used have stopped providing home loans. The quality of applicants has deteriorated, and he is referring many of his clients to bankruptcy attorneys, he said.

The appreciation that would have allowed many clients to keep spending equity and in a more luxurious lifestyle is no longer around.

"People haven't been doing their homework or getting themselves into a better financial place," he said.

Instead, many succumbed to the lure of easy home equity or low payments.

"For so long people have relied on the advice of the guy who used to sell shoes at Payless who now sells loans," Jeffry said. "They need to make a wise choice."

Last month, the Center for Responsible Lending reported that high-risk loans and "exploding ARMs" that have a steep payment increase after two years could lead to a foreclosure crisis. The center projected that about 19.4% of all subprime loans issued in 2005 and 2006 would end in foreclosure.

According to a report by the center, of the 24,356 subprime loans originating in the East Bay in 2005, about 5,188 will face foreclosure, said Paul Leonard, director of the California office for the Center for Responsible Lending in Oakland.

Subprime loans, which usually have a prepayment penalty, "teaser" interest-only rates and then high monthly payments after two years, are meant for home buyers with lower credit scores, but many people who could qualify for prime rates are steered to them, Leonard said.

"They are sometimes all too happy to give you a subprime loan because they are more profitable for mortgage brokers," he said.

Copyright © 2007, Contra Costa Times, Walnut Creek, Calif.
Distributed by McClatchy-Tribune Information Services.