I will start by discussing the California foreclosure process. The foreclosure process begins by a filing of a Notice of Default. Usually this is filed when the borrower gets behind at least three payments. Since many lenders have not been too excited about getting any more properties back, they have delayed starting a foreclosure for up to a year.

Recent policy changes have lenders foreclosing in a timelier manner lately. This caused an upswing in the number of foreclosures recorded in the last half of 1996 and first six months of 1997.

A minimum of ninety days after the Notice of Default is recorded and the borrower not made up the delinquent payments the lender records a Notice of Trustee Sale. Then the procedure allows the lender to hold a Trustee Sale auction. The sale is usually held at the courthouse by the trustee at least twenty-one days after the first publishing of this notice.

The opening bid is usually the amount owed to the lender, including late payments and the fees of a trustee. The trustee handles the foreclosure for the lender. If no one bids for the property  which is the case about 95% of the time  the property reverts back to the lender. A Trustee's Deed is recorded giving the foreclosing lender title. The property is now a R.E.O. (real estate owned) property.

There is a definite correlation between the number of Notices of Trustee Sale and the price of homes. As the number of properties taken back by the bank increases, price increases in the market gradually slow or stop.

The 1990 to 1997 California real estate recession saw Trustee Sale recordings soar to an all time high. In 1996 the seven Southern California counties had between 65,000 and 70,000 notices. Even with the high interest rates of the early 1980s, the number of Trustee Sales didn't come close to recent figures.

Ironically, the main reason for the increase in Trustee Sales was the decrease in property value. Many people just let their property be foreclosed. After all, they owed more on the property than the property was worth. Most of the time, California law prohibits the lender from going after the borrower for any deficiency the lender suffers when they resale the home. These ``Anti-Deficiency Laws" allowed many borrowers to hand over their house keys to the lender and avoid personal loss.

A complete foreclosure from the time the first payment is missed to the sale of the property usually is about eight months. This includes three months before the lender begins foreclosure and a bit less than five months for the process. Does foreclosure affect the former owner's ability to buy another home? These same people can qualify successfully for a new home loan in less than three years.

A major difference during the recent recession compared with other recessions, was the number of properties going to Trustee Sale compared with the number Defaults recorded. In 1990 saw 67,710 Notices of Default, but only 7,182 Trustee Sales  11% of Defaults were foreclosed. By 1994, 112,451 Notices of Default were recorded and over half of them went to Trustee Sale.

What was the major reason for the price downturn? Lender owned property (R.E.O.)! When lenders foreclosed they had to sell it. They were competing against all the other privately owned properties for sale with one big advantage: lenders can sell for less than what they are owed.

As lenders took more property back they became more motivated to sell. They became more flexible on price. R.E.O.s were the cheapest properties available. In some markets, they represented over 50% of all closed sales. It was very hard for the private party home sellers to compete with lender prices.

Many of the foreclosed loans were backed by government entities such as FHA, VA, or Fannie Mae (FNMA). These government agencies still have a huge inventory of homes competing with the private sector. The amount of properties owned by lenders and government agencies is still increasing despite their efforts to sell the properties. Every month lenders continue to take back more properties than they sold the previous month.

We are seeing the first signs of the real estate comeback. It isn't happening overnight. The market must first absorb a huge inventory of homes over the next two years. Not only are R.E.O. inventories high, but there is a pent-up market of private party sellers waiting for a better market. The amount of home sales is increasing, maybe faster than I predicted, but don't look for major price inflation in the rest of 1998. We are getting inflation in certain markets and I expect them to continue to outpace the state, but mostly we are ridding ourselves of bank, government and pent-up private seller inventory.

The numbers of Trustee Sales declined in 1997. The trend will continue for the next seven years. We won't see another increase in Trustee Sales until about 2004-2005. This will signal the end of the current boom and the beginning of another slow down.

Past history shows to keep an eye on the trend, not the number of Trustee Sales. It is the direction that important. Newspapers are reporting a downturn in foreclosures. This will boost public confidence in purchasing real estate. The numbers don't have to get down to where they were in 1987-1990 for inflation profits to be made.

The amount of Trustee Sale recordings may dip below 10,000 a year soon, but that won't be necessary. The perception of improvement is more important than the actual numbers. Instead of letting properties go back to the bank, owners will be encouraged by the positive news and keep their loans current. The unfortunates who lose their ability to afford their house will look to investors for help.