Back in mid-2006, nearly a year before I launched ForeclosureRadar.com, I wrote an article for iTulip.com to help Eric's readers better understand current foreclosure statistics. In it, I introduced the fact that there is a base rate of foreclosure that happens regardless of the housing market. This base rate of foreclosure being due to the Five D's: Death, Disease, Drugs, Divorce, Denial.

From the time I started buying foreclosures, through writing that article in mid-2006, the housing market was booming. Selling most homes was easy, and anyone with a pulse could get a loan (one lender actually went as far as to advertise a "pulse loan"). In this environment, many found it hard to believe that foreclosures even occurred. I initially struggled to make sense of it myself. Why would there ever be homes with tens or even hundreds of thousands in equity being sold at the foreclosure steps? Building this list bridged that gap for me. While the Five D's now represent a small percentage of the foreclosures that we see, I still feel it is an important part of the larger story.

I've wrestled a bit with whether this list is right or not over the years. Some have argued that drug use is a disease, or that denial is a cop-out/catch-all. I had even added a 6th at one point, Duty, as our service members began losing their homes while serving in Iraq. I've since dropped Duty as part of the base rate, as I sincerely hope that it is a temporary problem that will not continue. After all the arguments, this is the list that continues to stick. Let's take a quick look at each:

Death: Turns out some folks die with a mortgage and no heir. Others fail to prepare, and while their heirs fight over who gets what, no one pays the bills. There are any number of variations on these basic themes - but it happens. Every once in a while, I'll see a 25 year old first mortgage with a tiny balance go to foreclosure. Some investors assume it is a 2nd due to the low balance and their failure to notice the loan date. Mostly these tend to remind me of the importance of friends and family, and of keeping my own will in order.

Disease: No one should underestimate how debilitating getting sick can be. When you're fighting for your health, nothing else seems to matter. It often has significant impacts on income, as well as the ability to cope with the stress of major financial issues like having to sell your home. Shortly after our son was born, my wife's back went out; two back surgeries later she was beginning to recover, when our son was diagnosed with juvenile rheumatoid arthritis. Had I still been working in tech at the time, I have no idea how we would have managed. Fortunately, my foreclosure business and our past savings provided the flexibility and income we needed to get through (everyone is doing GREAT now by the way). Many are not so fortunate. Some may argue that foreclosure shouldn't happen in these cases - but understand that someone still has to pay, so unless you're ready to either pay higher mortgage rates, or higher taxes to provide for folks in this situation, foreclosure will remain a common outcome.

Drugs: My favorite example here is a guy that had $200k of equity, yet stopped making payments on his house to get his girlfriend cosmetic surgery. He could have sold the house. He could have gotten a home equity line. He could have found a different girlfriend. :-) Instead he lost his house. Given the dazed look, paraphernalia, and complete lack of ability to reason, the only thing that surprised me here was that he was a framer - a particularly difficult construction job that involves walking on unfinished roofs with circular saws and a hammer. Apparently the drug use didn't affect his sense of balance in the same way it affected his judgement.

Divorce: We once had a women show up at the courthouse steps to show the auctioneer a court order which clearly stated that her husband had to make the payments on the house. After a quick call to the attorney handling the file for the bank, the auctioneer calmly replied "he didn't" and proceeded to sell the house. It boggles my mind to think about what now must be billions of dollars that have been lost fighting in divorce. Ed McMahon actually recently stated it as one the reasons behind his own foreclosure. Fortunately I have not been through it, so I won't pretend to know how hard it is. I do expect it will continue to provide profits for attorneys and foreclosure investors for many years to come.

Denial: This one is the most difficult to explain, but I can't tell you the number of times I've met homeowners that were simply in complete denial of their present situation. This can continue all the way through the foreclosure and into the eviction. We even had one couple move back into the house in the night after the Sheriff had physically removed them earlier in the day. When the Sheriff came back the next day, they calmly explained they would continue moving back into "their" house and there was nothing anyone could do about it. Spending a night in a holding cell and some family intervention finally resolved it, though they likely still believe it is their house.

Now let me be clear that these are NOT the only reasons that foreclosures happen - these instead are the most likely causes when the market is strong and the owner has plenty of equity. They occur regardless of the housing market or economy. They are the base rate of foreclosure.

There's an awful lot of debate about who is to blame for the current foreclosure crisis and who should, or should not, be bailed out. Some folks are down right angry.

My father was a logic and philosophy professor. As a kid growing up I was allowed to do almost anything I wanted so long as I could make a valid argument for doing it. This was much harder than you might expect thanks to the many fallacies that rendered my arguments invalid in my father's eyes. That my teacher said it was true didn't make it so (the appeal to authority fallacy). But of all the fallacies that my father used to thwart my plans, the one I remember best is the post hoc ergo propter hoc fallacy - which says that just because something happened first doesn't mean it CAUSED what happened next.

Subprime loans were the first to foreclose, but that isn't enough to prove subprime lending caused this crisis. Speculation is correlated with foreclosures, but is it really the cause?

The truth is that there were a lot of things at play and we are unlikely to ever see a root cause analysis on the subject that would satisfy my father. But among all the arguments, I do see a theme... an ever increasing willingness to trade tomorrow for a better today.

Let's take a quick look at a few of things I like to point to as potential causes of today's foreclosure crisis, and see if perhaps you agree:

1. Federal Reserve effectively lowers reserve requirements in the early to mid nineties, likely in response to the housing crisis. Allow banks to lend a greater percentage of their deposits pumping money into the economy (and perhaps fueled the dot com bubble), but increased risk of bank failures.

2. Congress passes the Taxpayer Relief Act of 1997 allowing homeowners to exempt up to $500k ($250k if you're single) in capital gains on the sale of a primary residence. Helps get real estate market restarted after a significant downturn, but highly incentivizes everyone to speculate with their primary residence.

3. After the dot com bubble collapses the U.S Federal Reserve lowers rates 11 times from 6.5% to 1.75%. According to Greenspan this didn't help put money into the economy until the invention of the Structured Investment Vehicle, which essentially allowed banks to make highly leveraged investments by moving them off their balance sheet avoiding regulations. This helped free up credit to stimulate the economy, but encouraged riskier lending.

4. Lenders invent new products in ever increasing competition for new customers. All types of financial engineering are employed to lower payments - adjustable mortgages with teaser rates, negative amortization, high debt-to-income ratios, etc. All of which increase the loan amount a borrower can afford on a given income... at least to start. This created unprecedented demand for housing and increases in prices, but higher prices decrease home affordability, and low initial payments ultimately have to adjust upwards.

5. Counties and cities see unprecedented growth in revenue from building permits and property taxes and race to approve ever more development to fund the expansion of services. Yet over-development was one of the most cited causes of the last real estate downturns.

6. Rather than slowing development as demand falters builders continue building at record paces. Yet the Boston Fed found that declining prices play the dominant role in generating foreclosures.

7. And through it all consumer debt continues to rise as people increasingly make the decision to pay Tuesday for a hamburger today.

In each of these cases I'd argue that we have chosen instant gratification today without regard for the future. Perhaps every once in a while it would be better for us to trade a little pain today for a better tomorrow.

Peter Viles over at the LA Time's LA Land Blog brought U.S. Representative's Laura Richardson's foreclosure to my attention and wondered if I could shed some light on the contradiction between the reporting that her 2nd home in Sacramento had been foreclosed on (which we confirmed), and her office's statement denying the foreclosure.

Lets dissect the statement one claim at a time:

1. "the residential property in Sacramento California is not in foreclosure..."

Having been sold at auction on May 7, 2007 with the Trustees Deed transfering the property recorded on May 19, 2007 as document number 487, the property is no longer "in" foreclosure, it has instead been foreclosed "on".

2. "and has NOT been seized by the bank"

It also has not been and will not be "seized by the bank" as it was also sold at the auction to a 3rd party investor - Jim York's Red Rock Mortgage. As such seizing the property was his responsibilty not the banks.

3. "I have worked with my lender to complete a loan modification and have
renegotiated the terms of the agreement -- with no special provisions.
I fully intend to fulfill all financial obligations of this property."

Had she only not said "this property" she'd be in good shape here too. Turns out her home in Long Beach was also recently in foreclosure with a Notice of Default filed by Title Trust Deed Service Company with the LA County Recorders office on March 31, 2008 as document number 546450 on behalf of Litton Loan Servicing. According to that document she was $19,921.74 behind on that mortgage as of March 28, 2008. Checking on the trustee sale number for this default it appears that this foreclosure action has in fact been cancelled - quite possibly due to a loan modification as claimed. Perhaps she simply got confused regarding which of her two foreclosures she was talking about.

I know nothing about Rep. Richardson except that she certainly isn't alone in facing foreclosure difficulties. I hope that rather than running from this she stands up and talks honestly about her personal foreclsoure crisis rather than simply trying to walk away.

DataQuick release their April sales report today for CA which showed a 26.8% increase in sales over the previous month. Great news and confirms the reports I've been getting from my Realtor friends that things are picking up.

But is the worst really behind us?

Some believe so, in this CNBC report respected investment researcher Charles Biderman predicts that all the REO inventory will be gone by June. Click here to watch.

Thanks to a new addition to DataQuick's monthly CA Sales Report which tells us the percentage of monthly home sales that are bank resales, we can now quite easily see just how well banks are actually doing on getting rid of inventory.

According to DataQuick 37.7 percent of April sales and 35.4 percent of March sales were bank resales. That puts the total bank properties sold over those two months at 20,440.

Now compare that to the 37,793 properties that banks added to their inventory based on ForeclosureRadar's exclusive tracking of every foreclosure auction in the state over the same two months..

So much for REOs being gone by June - just in the last two months the banks had a net INCREASE of 17,353 in their CA REO Inventory (roughly $7.3B in bad loans).

Looking at what lies ahead, we expect to see the banks take back another 40,000 to 50,000 properties in California over just the next two months based simply on the increases in notices of defaults over the last 4 months, and the month to date foreclosure sales.

Bottom line - foreclosure inventories are rising and will likely continue to rise in the coming months despite the pickup in home sales.

I've been regulalrly interviewed about the foreclosure crisis since starting our California Foreclosure Report in March of last year. As the numbers continue to increase each month, I often get asked "Is there any good news?" I've had the same answer all along, and a report today from Wells Fargo and the National Association of Homebuilders confirms it - foreclosures are bringing affordability back to California.

If you look at the NAHB press release or the headlines today on this story you'll miss my point. They make it qute clear that California dominates the list of LEAST affordable homes in the nation. What the press release and the headlines miss is how much California has improved!!!

Let's start with improvements in affordability since Q4 2005, one of the lowest points in affordability for California. Nationally affordability has impoved 24% since that time. Now check out the 15 most improved areas in the nation according to data I pulled from the Wells/NAHB report:

WOW!!! All 15 of the MOST IMPROVED MARKETS since Q4 2005 are in California!

And take a look at the signficant improvements that we have seen in just the last quarter:

While the price adjustments that have enabled this will be painful for banks, builders, those who bought recently, and those who used their home as an ATM, these increases in affordability are exactly what we need to get back to a healthy real estate market. If lenders had simply paid attenion to what borrowers can actually afford perhaps we never would have had this mess. Hopefully it's a lesson they learn well.