STATE'S FORECLOSURE ACTIVITY IS RISING HIGHER PAYMENTS ON RISKY ADJUSTABLE-RATE LOANS CITED AS FACTOR.

Byline: GREGORY J. WILCOX Staff Writer

Foreclosure activity in California and other Western housing markets is on the increase in part because high-risk adjustable-rate loans are beginning to reset to fully amortized payment schedules, a property tracker said Monday.

During the year's first three months, all types of foreclosure activity in California jumped an annual 33.6 percent, to 28,550 incidents, said Sacramento-based Foreclosures.com.

Notices of defaults, one of three indicators tracked and the first step in the foreclosure process, increased 36.5 percent, to 20,515 incidents.

And the number of real estate-owned properties, the final step in the process and notification that there is a new owner, increased 27 percent, to 1,41l.

``I think it's all the washing of the market,'' said company President Alexis McGee.

And activity was expected to pick up since levels sank to record lows as the market peaked. Now home sales are softening, appreciation is not as robust as a year ago, interest rates are rising and inventory is building.

McGee also said the creative adjustable loans that helped buyers jump into high-priced markets such as Southern California will continue to impact foreclosure activity as the market continues its shake-out.

``I don't see those low numbers coming back,'' she said.

Analysts have noted that of the six Southern California counties, San Diego is the furthest along in the cycle. McGee said that in recent years more than half of home purchases were financed with interest-only adjustable loans or option adjustables with very low teaser rates.

A recent study by Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions in Santa Ana, found that most of the trouble should come from teaser-rate loans that will reset in 2007 and 2008.

``The people who bought in '03 or '04 tend to have equity so they can usually work something out. Next year and the year after next is when things will get sticky,'' Cagan said.

Someone who paid about $500,000 for a home in the San Fernando Valley last year and got a teaser rate of 1 percent would have initially paid $1,608 a month. If that loan resets next year at 6.5 percent, the payment soars 96.5 percent, to $3,160.

Buyers with hybrid loans are not at as much risk.

``If prices are going up 20 percent a year everyone is a genius and mistakes are forgiven. The problem is when prices level off,'' Cagan said.

Homeowners who bought near the peak face the most risk and the economic fallout will be limited.

``It will not break the economy,'' Cagan said.

The Foreclosures.com analysis also showed that:

Nevada foreclosure activity has more than doubled this year to 4,544 incidents versus the 2005 final quarter. The problem there is speculation, with 25 percent of new home sales going to out-of-state investors.

Colorado has a 50 percent increase in new foreclosures in this year's first three months compared with the final three months of last year. And they are up an annual 96 percent.

greg.wilcox(at)dailynews.com

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