I noticed something interesting on the way to work this morning — a new handpainted sign reading, “Trapped in a 1% mortgage? Call 555-5555.”
For the second quarter of 2006, California mortgage defaults were up nearly 70% over 2005. The default rate doubled in San Diego and Riverside counties, as well as in Northern California excluding the Bay Area.
In previous regional real estate downturns, default rates typically don’t spike until well after prices peak. Hopeful homeowners hang on as long as they can, making payments and listing their properties for sale. As a result, normally, a real estate bust follows the slow timetable now playing out in Florida. But out here in California, lending practices from the past several years may serve to accelerate a downturn.
The big difference is teaser rate mortgages, in which a homebuyer pays only 1% for a couple of years, after which the rate resets to a variable based on short-term US rates. Because the Fed has raised rates so much, the reset can cause the homeowner’s mortgage payment to abruptly double (or more). Finance types have speculated for some time that teaser-rate mortgages might accelerate defaults in a downturn. Now it appears actually to be happening.