California's Foreclosure Drop--Too Good to Be True?

Foreclosures and defaults are declining in California, but the trend could be short-lived.

By + More

As an epicenter of the nation’s worst housing bust in recent history, California remains an important bellwether for the housing market recovery. So when news that foreclosure starts in the beleaguered state plummeted to an 87-month low in January, industry watchers took notice.

Notices of default in the state dropped 62 percent from December 2012, and 75 percent from January 2012, according to RealtyTrac’s January U.S. Foreclosure Market Report, the biggest single-month drop in California NODs since RealtyTrac began issuing its foreclosure report in 2005.

Could California’s battered housing market finally be pulling out of its long and painful decline? As with all news that seems “almost too good to be true,” it probably is.

That’s because the major drop in foreclosures is tied to recent state legislation passed—dubbed the Homeowner Bill of Rights—that went into effect January 1. Among other things, the law prohibits lenders from simultaneously proceeding with a foreclosure while working on alternatives to foreclosure.

[READ: 90 Percent of U.S. Cities Post Home Price Gains]

But while foreclosures are seeing a precipitous decline, it’s not likely to last given the past examples in California itself, as well as other states that tried similar measures to slow the hemorrhaging of their housing markets.

California lawmakers made their first foray into foreclosure prevention legislation in September 2008, tacking on an extra 30 days to the foreclosure process to make sure homeowners were given ample opportunity to avoid unnecessary or improper foreclosure.

That law resulted in a temporary drop in California foreclosure starts, with NODs cut in half for a few months. But by early 2009 California foreclosure starts had bounced back to levels higher than before the law took effect.

[RELATED: Florida's 'Fair Foreclosure Act' Is Anything But Fair]

More recently, foreclosure prevention laws in Washington and Nevada have followed a similar boomerang pattern—albeit a pattern that took longer to develop. A July 2011 law in Washington state triggered a 12-month foreclosure slowdown, but the state’s foreclosure starts have now increased on an annual basis over the last seven months, hitting a 26-month high in September 2012.

Meanwhile, Nevada foreclosure starts rebounded to a 16-month high in January after a 14-month foreclosure hiatus following a new law that took effect in October 2011.

Maybe the pattern will be different with the California Homeowner Bill of Rights. But don’t count on it.

Daren Blomquist, Vice President at foreclosure information firm RealtyTrac, is an expert on foreclosure statistics and trends. He manages RealtyTrac’s monthly newsletter, the Foreclosure News Report, and produces the firm’s U.S. foreclosure market and sales reports.