California Mortgage Defaults Hit 8-Year High

That's the headline from the Silicon Valley Business Journal.  The San Jose Mercury News states it more plainly as "More Californians fall behind on their mortgages."

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Impact on Silicon Valley Real Estate: There's a Moral Below...

So what's the impact here in Silicon Valley?  According to John Karevoll, who works at DataQuick, the company that compiled these statistics, "None right now.  Literally none."

Why? 

Mortgages are in default when a "Notice of Default" is recorded with the county by the lender.  This usually happens after falling behind a few months on mortgage payments.

According to Karevoll, only 10% of Bay Area homeowners lose their homes in a foreclosure sale after a Notice of Default.  Most make other arrangements.

Because the number of additional homes put on the market due to foreclosure is relatively low, overall supply has remained steady and prices have remained stable. 

In fact, the homes in California least likely to go into foreclosure are in Marin, Santa Clara, and San Francisco counties.  San Mateo has good numbers as well. 

Not surprisingly, Northern California has many high-paying jobs that help account for the health of the real estate market as well as the smaller number of foreclosures.

Be Alert During the First 18 Months of Home Ownership

The moral of this story is that home owners need to be extra careful with their finances during two periods.  The first 18 months of home ownership is an especially high-risk period.

There are a lot of defaults during the first year-and-a-half because home owners often incur costs that are unexpected or not budgeted. 

Property taxes, maintenance, added utility bills, and the extra furniture needed to fill out a larger space often stretch finances more than planned, especially compared to renting where these bills are smaller or don't exist at all!

Be Very Alert When Your Before Your Interest Rate Resets

If you've taken out an adjustable rate mortgage (ARM), you'll need to be vigilant well before the period of your initial rate expires. 

There is nothing wrong with taking an adjustable rate mortgage, but you need to be aware that the initial rate will change, and possibly increase. 

The interest rate reset on adjustable rate mortgages can cause monthly payments to shoot up hundreds or even thousands of dollars in some cases so it's very important to estimate what that number is and speak to a mortgage professional about the advantages of refinancing at that point.