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I’ve been doing a lot of yapping about the importance of must-sell inventory (as a catalyst for home price declines) and of mortgage defaults (as an indicator of must-sell inventory). I now offer the inevitable graph, with data kindly provided by local foreclosure guru Ward Hanigan.

The blue line indicates the monthly number of “notices of default,” which are sent when borrowers have neglected their mortgage payments. The red line indicates the number of “trustee’s deeds,” which are filed if lenders end up foreclosing on the defaulting borrowers’ homes. The foreclosure line lags the default line, for obvious reasons, but both data series give a decent read on the amount of must-sell inventory out there.

And it’s certainly out there. Even though job growth remains positive, monthly defaults are now occurring at a pace not seen since the darkest days of the last housing downturn. Foreclosures appear to be close behind. Both sets of numbers have risen far more abruptly than they ever did during the 1990s bust.

Moreover, there’s little reason to believe that these numbers will improve anytime soon. The exotic mortgages that are due to reset in 2007 will be backed by less equity than those that reset last year, for the simple reason that they were originated later in the appreciation cycle. Now that prices have been falling for over a year, many such mortgages will be backed by no equity at all.

Meanwhile, thanks to the mini-panic taking place in the subprime lending industry, people who try to refinance their way out of trouble may have a lot harder time than they would have last year.

Back in the 1990s, home prices remained under pressure until the prevalence of defaulted mortgages and must-sell inventory began to fade. If the same pattern is going to play out this time around, the near-vertical ascent in defaults and the brewing exotic mortgage trouble both indicate that there is more downside ahead.

— RICH TOSCANO

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