In the fourth quarter of 2006, San Diego County experienced a 169 percent increase in homes receiving notices of loan default from a year ago. Default notices — the first step in the foreclosure process — were up to 3,150 from 1,173 for the like quarter 2005, according to DataQuick Information Systems , which compiles home property data.

Throughout California, there were 37,273 default notices — notifying homeowners 90 days behind on payments — sent from October to December 2006, marking the most foreclosure activity since the third quarter of 1998, when the number of default notices hit 38,053.

The study, released in January, states that foreclosures tend to occur a year or two after the loan is made. Most of the loans currently entering default originated between January 2005 and February 2006. After the first year or two, many home buyers who took out adjustable rate mortgages and other “inventive loans” experienced the “reset” of their payments; when a buyer’s introductory interest rate shifts, and monthly payments increase.

Chris Cagan, director of research and analytics at Santa Ana-based First American CoreLogic Inc., a real estate research company, said home price fluctuations would, to a great extent, determine how many homes now in default will go into foreclosure.

“Basically, people get into trouble when they have the double-whammy: the reset of their payment and no equity (in the house) to cope,” said Cagan. “You have to identify who and how many are in the double-whammy (category) and that’s what is summarized.

“The important thing is where the (interest rate) starts and where it ends. I can get a pretty good idea of who gets a small reset and who gets a big one and then figure out who has equity and who doesn’t.”

Trend Expected To Continue

A study by Cagan released March 19 states that, over the next five years, there will be 1.1 million foreclosures on adjustable rate mortgages nationwide, totaling a $112 billion loss to lenders and investors, spread out over the period. The study — titled Mortgage Payment Reset: The Issue and the Impact — uses sophisticated mathematical footwork to estimate the impact as adjustable rate mortgage introductory rates expire and are reset to long-term levels.

“We have a $12 trillion economy and $2 trillion is in mortgage lending, so this (loss) doesn’t dominate the economy and doesn’t break the industry, but it affects those on the margin,” or those with little to no equity whose prices are reset, said Cagan.

Using information from a database of 35 million mortgages and some intense equations, Cagan calculated that 70,000 homes would recover from default for every 1 percent increase in house prices. Inversely, 70,000 additional homes would enter default for every 1 percent decrease.

Locally, the trend is toward decreasing house prices, according to the San Diego Union-Tribune Zip Code chart, which details home sales in the county for February. The chart shows median housing prices dropping in all regions of the county — especially bad news for holders of adjustable rate mortgages expecting that property value would increase faster than their payments would reset.

But Cagan said that there are ways to recover on defaults before falling into foreclosure and a majority of homeowners are getting themselves out before it gets to that point.

“They can pay the defaulted payments, refinance, renegotiate (with the lender) and some people do a short sell, where they sell their home at slightly lower than purchase price to avoid the large losses from foreclosure,” Cagan said. “Lenders don’t want to be burned if they don’t have to be.”