Foreclosures spike - and will get much worse

NEW YORK (CNNMoney.com) -- The risk of foreclosure is on a rapid rise nationally and, with a possible recession at hand, this spike in mortgage-defaults could last for years.
A report released Monday by First American Core Logic rates foreclosure risk for 381 metropolitan areas, and found that the risk of foreclosure has jumped 22 percent from January, 2007, and 9 percent from three months ago.
The risk scores are calculated based on economic factors such as job growth or loss, as well as incidences of fraud and other collateral risks. Home price trends are specially important.
"Before, it was all about the economy. Now, price drops are overcoming economic conditions [in driving up foreclosures]," said Mark Fleming, Core Logic's chief economist.
The Core Logic report speculated that foreclosure risks may get a lot worse, and stay that way for a long time.
In the wake of recent speculation that the United States economy may be entering a recession -- or is already in one - the report stressed that defaults continued rising for almost 2 years after the end of the last recession in 2001.
Based on that history, Core Logic expects that foreclosure risk will continue to increase over the next 18 months, at least.
Key to that finding is the added risk caused by the recent up-tick in job losses. Low unemployment had been a big factor in keeping foreclosure risk in check the past few years, according to Fleming.
The price declines are biting hardest in California, especially the Central Valley cities that had recorded outsized price gains during the boom. Of the top 10 large cities facing the highest risk of foreclosure over the next six months, five are in California. Of the 36 markets nationwide undergoing double-digit price declines, 22 are in California.
Bakersfield, Calif., was rated the highest risk market among the 100 largest metro areas. Home prices there are in steep decline, falling 16.9 percent during the past year, according to First American Loan Performance. Fleming pointed out that Bakersfield is a good example of a trend that is playing out in many markets.
Bakersfield acts like a satellite city for Los Angeles, where population density makes further housing development expensive. Supply of developable land in Los Angeles is scarce, which props up prices there, even in down years.
During the boom, home buyers priced out of L.A. purchased in far-flung markets like Bakersfield, where plentiful agricultural land was cheaply converted to housing. Many of the new residents continued to work in the Los Angeles area, a long but doable commute.
When demand slackened and prices slumped in Los Angeles, more people could afford to buy closer to the city, and demand dropped disproportionately in Bakersfield as well as in other nearby cities like Riverside and San Bernardino, sending prices plunging.
"Volatility in these places is high, especially on the down side," said Fleming.
And that goes a long way in explaining why foreclosure prospects are on the rise in Bakersfield, Stockton, Calif. (number 2 on the Core Logic list), Fresno, Calif. (number 3) and Riverside-San Bernardino (number 6).
Home sales way off
Monday, the government reported the steepest drop in new single-family home sales ever recorded. It was the first year on record that existing home prices posted declines. That followed last weeks announcement from the National Association of Realtors that home prices had recorded their first yearly decline ever.
After price drops, many mortgage borrowers find themselves underwater, owing more on their mortgages than their homes are worth. That makes it difficult for them to maintain their house payments if they run into any problems; they have one less asset (their home) to borrow against
The other main factor causing the heightened foreclosure risk is systemic economic problems. Cities such as Detroit (number 8 on the top 10 list), Warren, Mich. (number 4) and Youngstown, Ohio (number 10) are dependent on the auto and other heavy industry for jobs, and these industries have been laying off workers.
Midwestern markets ranked even higher up on the list in the recent past. Their present rankings don't represent any improvement on their part, but instead the rapid deterioration in the Sun Belt.