Bay Area Mortgage Defaults Holding Steady at High Levels

Bay Area mortgage default rates have fallen from the peak levels recorded in 2009, but seem to have stabilized at relatively high levels.

During the third quarter of 2010, there were 483 default notices recorded in San Francisco, and 12,690 recorded in the nine-county Bay Area. Those figures are more than six times higher than the corresponding figures from the third quarter of 2005.

The recent stability in default activity is at least partially due to forbearance on the part of lenders, who have been under political pressure to help homeowners avoid foreclosure. (Remember, we're not talking about actual defaults, but rather about notices of default, which must be recorded by lenders.) A substantial part of the stability, however, is probably due to the stabilization of Bay Area home prices.

I've talked about the relationship between price declines and default rates in earlier postings, for instance, this one. (The key point is that being underwater on your mortgage makes it tempting to surrender your home to foreclosure.) Now that prices seem to have stabilized, the number of underwater homeowners should begin to fall, mainly due to foreclosures and short sales. That should shortly translate into lower default rates.