California Notice of Defaults hit Record in 2009: Approximately 476,000 Notice of Defaults but Foreclosures Fell. HAMP Most Active in California. Approximately 5,900 Permanent HAMP Mods in California.

California is at the center of the foreclosure wave.  Of the 306,000 foreclosure filings in November 23 percent hit in California.  You cannot talk about housing distress without looking at the state of California.  The California housing market will be in a slump for many years and there are a variety of reasons why California housing will see no recovery in 2010.  One of the most important leading indicators of housing distress is notice of defaults.  With so much talk about housing recovering the data is showing that 2009 will set a record in terms of NODs filed in California.  476,000 notice of defaults will be filed by the end of the year setting a pace of over 1,300 NODs filed per day in 2009.

Let us put the data into perspective:

The above chart might as well be an inverse of housing values.  In 2005 and 2006 as prices reached their apex, NODs were at low rates.  But starting in 2007, the numbers ramped up as many toxic mortgages including option ARMs started defaulting in mass and entering the first stages of foreclosure.  The above data is extremely important because the foreclosure process has been extended to a stunning 18 months to 2 years given all the current moratoriums.  So a notice of default filed today might not become a foreclosure until the middle to late 2010.  It is a building pipeline.  Until NODs drop, there is little reason to believe things will improve.

Many have argued that HAMP will help many of these loans.  California is the largest HAMP state:

Yet the above number is a misnomer.  In fact, nationwide only a handful of modifications have become permanent:

Of the 759,000 HAMP trials started only 4 percent have become permanent.  This number is abysmal.  In fact, if we take the 148,000 trial mods in California we can assume that only 5,920 have made it to the permanent stage.  We had 476,000 notice of defaults filed in 2009!  The HAMP is merely a delay of reality.  We are only making an assumption here but it is based on a wealth of data.  It might very well be that California has an even lower rate than the 4 percent since many more mortgages in California are underwater and we have a higher percentage of people strategically defaulting.

What this tells us is a couple of things.  If HAMP continues at the current rate we are going to see a flood of foreclosures hitting the market in the next year.  Where else will they go?  Sure banks can hold on to homes with no payments or convert loans to interest only loans like Wells Fargo is doing but will homeowners continue to pay?

Actual foreclosures will drop a bit this year but this is because of temporary data shifting programs like HAMP:

The fact that so few loans are being permanently modified tells us we will see this number increase again in 2010 for California.  This will happen right in line with option ARM recasts that predominantly are targeted in one state.

Why are loan mods failing so much?  There are a variety of reasons.  For one, initial trial periods were done with low documentation.  Now that documentation needs to be provided, many people simply do not qualify.  That is a major issue.  Another issue is many people are not responding.  Many people underwater don’t want a modification.  And finally, the HAMP program is really targeted at protecting the bottom line of banks and not homeowners.  Borrowers are now highly suspicious of the banking system and they have a right to feel this way.

Overall 2010 is going to be another dismal year for housing.  HAMP is proving to be a drop in the bucket and once this is realized, more foreclosures will be flooding  the market especially in California.

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