San Diego Foreclosures Spike, Providing More Opportunities for San Diego Buyers

The already poor performance of many mortgage loans will continue to worsen through the rest of the year.

While the subprime lending market has led the way in the amount of national and San Diego foreclosures, the prime borrowers are beginning to catch up. There has unfortunately been very little foresight on the industry over the last several years. The subprime lending market is for borrowers with credit scores of less than 680. Typically, a borrower with a low credit score who gets a subprime loan will be penalized with a higher interest rate compared to a borrower with a high credit score (good credit history).

So with the recent relaxed regulations on lending, many people who would not have been able to qualify with a less than average credit were still able to borrow money. Lenders used to tell me that they could get anyone a loan, regardless of credit history or score. . .

Now I want to ask the lenders: can those borrowers afford it now?

To entice prospective borrowers, these lenders offered several loan products that had introductory or low initial payments. These loan products typically had an introductory period of 2 to 3 years where the payments were considerably lower compared to a typical mortgage.

In San Diego County, 2005 was the peak of this lending practice. This unfortunately coincided with the highest and most unaffordable home prices the San Diego real estate market had seen. Despite the high prices, home sales in San Diego increased due to a market psychology that "it's a great time to buy", coupled with the ability to get these easy, low-introductory payment loans.

This was especially the case for the subprime market of borrowers who wouldn't have been able to afford to buy without creative financing. Fast forward 2 to 3 years later. . .

We are beginning to see the effects of this unregulated lending practice.

Introductory rates and the accompanying low payment periods are beginning to expire, and all of a sudden, borrowers are facing significantly higher monthly payments. Not only are subprime borrowers feeling the financial crunch, but so are many prime borrowers who didn't fully understand the terms of loan products they were getting into.

It's hard to try to budget for such a significant change in your monthly payment. As a result, many borrowers are in financial distress and can no longer afford their payments. This is a slippery slope -- missed or incomplete payments will result in a default notice. In California, this default notice gives borrowers 90 days to get up to date on their payments. If they don't, the property will go into foreclosure and the borrower will lose his or her home. In the majority of cases, the lending bank ends up taking over the defaulted property.

This year, San Diego County has seen a spike in default notices and foreclosures. This is projected to top-out in mid-2008. Until then, current buyers are seeing some great market deals on properties with price tags that are much less than their last sales amount from a few years ago. However, like everything in real estate, the effect on home prices from recent foreclosures really depends on neighborhood.