Property foreclosures soar to benumbing $250 million.

Property foreclosures soar to benumbing $250 million

Property foreclosures in Los Angeles County, which have been steadily climbing in recent months, jumped to stratospheric heights in July, according to statistics released last week by TRW REDI Property Data.

Lenders foreclosed on 615 local properties worth nearly $250 million in July, almost twice the value of properties foreclosed in the prior month and nearly four times the value of foreclosures a year earlier.

Put another way, the value of properties foreclosed in the single month of July 1991 surpassed the entire aggregate value of properties foreclosed in the first seven months of 1990.

Foreclosures, like bankruptcies, are considered a lagging economic indicator. In other words, they correspond to local economic conditions that existed three to six months before, sources said.

"Foreclosure is one of the last things to happen in an economic downturn," explained Michael Bazdarich to MB Economics in La Canada Flintridge. "A homeowner doesn't get a raise or bonus, then gets laid off and uses up his unemployment benefits and savings. He tries to hold on and tough it out, but finally gives up the ghost."

Regional economists said last week that recovery is still at least six months away for L.A. County's sagging economy. Hence, local foreclosures are expected to continue at nose-bleeder levels for another year.

"This (high) level of foreclosures is very consistent with the general unraveling of the local economy; it gives me a sick feeling," said David Hensley, director of the UCLA Business Forecasting Project. "We were hoping construction might come back this fall because (house-buying) activity had picked up in the spring. But all the news I've gotten in the past few months has been bad; that little springtime boom has faded. It may have just been caused by pent-up demand from the (Persian Gulf) war months."

Fallout from the foreclosure explosion is being felt throughout California. But it is particularly acute in Southern California, where rampant real estate speculation occurred during the mid-and late-1980s.

"The areas where we're seeing the most foreclosure activity are new, fast-growing population centers," said Dave Ross, a spokesman for TRW REDI Property Data. "These high-growth areas tend to have softer underbellies in a recession because property owners there tend to be more highly leveraged and fairly young, which means they're more susceptible to layoffs."

While the jump in property foreclosures in Los Angeles County has been dramatic, increases in the Inland Empire are even worse.

"Riverside and San Bernardino counties, together, represent about 20 percent of all new mortgage activity in California, but they're now representing about 33 percent of the state's total foreclosure activity." Ross reported.

Judy Frumkin of Redloc Info Services Inc., a local real estate information company, added that notices of default (documents that officially mark the beginning of the legal foreclosure process) have been skyrocketing in Riverside County.

"We were seeing 10 defaults a day in Riverside County back in 1987 and now we're seeing nearly as many there as in Los Angeles," Frumkin said. "And about 70 percent of those defaults are not being cured (in time to avert a foreclosure sale)."

About 90 notices of default per day are now being filed in Los Angeles County, she reported.

TRW's latest data also indicated a greater number of commercial properties may be going into foreclosure in L.A. County, as evidenced by a steep rise in the average value of foreclosed properties here.

That average for July was $402,650, up 62 percent from a month earlier. But that still was 10 percent below the year-ago average.

One recent and prominent example of how higher-valued properties are now going into the tank in L.A. County is the exclusive L'Ermitage Hotel in Beverly Hills, which went into foreclosure earlier this summer. That 114-suite establishment was scheduled to be auctioned off at a foreclosure sale last week. But the Sept. 6 sale was postponed at the 11th hour, reported attorneys representing both the hotel's owner, Ashkenazy Enterprises Inc., and its main lender, Beverly Hills Business Bank.

While a greater number of high-value commercial properties do appear to be going into foreclosure in L.A., the bulk of foreclosures are still occurring on residential mortgages.

Many residents end up losing their homes through sheer ignorance, Frumkin said.

"A notice of default doesn't show any date of a foreclosure sale; it just says to contact your lawyer," she explained. "People know they're late (with their mortgage payments), but the reality of the situation doesn't hit them until the notice of trustee sale is filed.

"By then it's too late to put the home on the market," Frumkin continued. "No broker's going to touch it because if it goes to auction they've lost their commissions."

Notice of trustee sales are typically filed seven to 14 days prior to a foreclosure sale.

Most residential mortgages now going into foreclosure belong to overleveraged baby-boomers, sources said.

"The baby-boomer generation in California has been really shaken up by this recession," asserted Eric Brown, partner at the Meyers Group, a local real estate information services company. "We were told to stretch and buy that bigger house because our return was going to be so much greater.

"But now a lot of people are losing those homes," he added. "And those who have watched their friends lose homes are very cautious about buying a home themselves."

Frumkin of Redloc Info Systems agreed. "Interest rates are great, prices have gone down, and it's easier to qualify (for a home loan)," she said. "But people are just not taking advantage of that."

The recent trend among "boomers" is to reject their 1980s materialistic pursuits, and the incredible debt loads those pursuits created, and to enhance their quality of life, sources said.

"There are a number of people out there who are trying to change their life styles," Brown said. "They decide maybe they don't need a BMW; maybe they can get by with a Honda; a lot of people want to have kids. . ."

Hollywood provides further evidence of the "back-to-the-simple-life" craze among baby boomers. A host of movies based on variations of that theme have been released this summer - "City Slickers," "Regarding Henry," "Doc Hollywood" and "The Doctor," to name a few.

An increasing number of baby boomers have also been opting to expand their current, smaller homes rather than trade up.

"Many people still want better homes, but they're not willing to take on larger mortgage payments in these uncertain times," explained TRW spokesman Ross. "So they're taking out a second (mortgage) and adding a second level to their house, or a swimming pool or patio."

Local residential lenders have lately been pointing to their skyrocketing second-mortgage loan volumes with pride, as proof that the housing market is improving. But Ross insisted that conclusion is flawed.

"Soaring second-mortgage loan volume can be a sign of a healthy housing market if home prices are appreciating and the local economy is strong," he said. "But today's second mortgages are supporting the auto industry, pool-and-patio industry and consumer-credit industry much more than the housing industry."

Lower interest rates, changes in the tax laws and fears of home-price declines have prompted droves of homeowners to take equity out of their homes through second mortgages or "cash-out-refies."

(The increasingly popular "cash-out refie" - refinance - loan provides homeowners with a lower-interest mortgage exceeding the amount needed to pay off the existing first mortgage. So the homeowners end up with the benefit of lower monthly mortgage payments, plus some cash in hand, at the expense of reduced equity in their home.)

Interest on home-equity loans remains deductible for income tax purposes, but interest on consumer credit, such as car loans and credit card balances, is not. So homeowners are increasingly taking equity out of their homes to pay off car loans, credit card balances and other forms of consumer debt.

That trend has been exacerbating the property foreclosure problem, Ross said.

People who have substantial equity built up in their homes are less likely to walk away if their mortgages go into default. But with little or no equity, an owner/borrower is much more likely to just give the property back to the lender.

Another reason cited for California's "foreclosure explosion" is lenders' increased preference for foreclosure rather than workout.

"State and federal regulators are now forcing lenders to write down their non-performing loans much more quickly and more drastically than in the past," said Charlotte Chamberlain, a vice president of National Economic Research Associates. "That gives lenders much more incentive to foreclose.

"The loans aren't performing and they've already been written down," she added. "So the lenders figure they may as well take over the property and sell it."

Many of these foreclosed properties will likely be resold by lenders for bargain-basement prices. But that should not further depress the local market, Chamberlain insisted, because the number of foreclosed properties is small relative to the total number of properties being bought and sold in L.A. County.

Table : L.A. County property foreclosures explode

                                   Value of
                    No. of      foreclosures
Period           foreclosures     (millions)
July 1991          615            $247.63
June 1991          509             126.42
July 1990          160              71.91
Jan.-July 1991   3,194             918.88
Jan.-July 1990   1,207             224.49

Source: TRW REDI Property Data