Foreclosures … mortgages … subprime lending: terms which have become closely associated with the word “crisis” over the past few years.

In January 2007, MuniNet ran California Tops List of Subprime Mortgage Foreclosure Risk, an article highlighting the Center for Responsible Lending’s report that named California as the state with the highest vulnerability to loss as a result of failed subprime mortgages.

Almost two years later, California continues to lead the pack. While adjustable rate mortgages (ARMs) have been the most problematic type of loans nationwide, the Center for Responsible Lending recently reported that California carried more than half of the country’s ARM foreclosures as of September 30, 2008.

The release, based on data from the Mortgage Bankers Association (MBA), says that nearly 11 percent of all mortgage loans in California were delinquent or in foreclosure at the end of the third quarter of 2008. Of the 7.3 million outstanding mortgage loans in the state, 112,000 started the foreclosure process and 449,000 were seriously delinquent.

These figures “underscore the need for swift and effective solutions to mitigate the foreclosures that are at the root of the worst economic crisis in decades and the personal financial crisis of millions of homeowners and their neighbors,” according to the Center’s news release.

In August, the Center estimated 336,000 projected foreclosures (in late 2008 through the end of 2009) in California, the highest in any state, followed by 198,828 in Florida, and 143,091 in Texas.

The foreclosure issue not only contributes to higher delinquencies, but leads to a chain reaction involving lower property values (due to decreased real estate values), which translate into lower assessments, leading to lower property tax collections in many states. This correlation has strong implications not only for the real estate market, but for the municipal bond market as well.

California’s Proposition 13

In 1978, California voters passed Proposition 13, legislation that limits property tax growth to two percent unless a home is transferred by sale (or if property is related to new construction).

Proposition 13 makes California’s predicament more complicated than other states.

See the National Bureau of Economic Research (NBER) article entitled The Lock-In Effect of California’s Proposition 13 for a discussion of the impact of Proposition 13 on California property values as well as mobility in the state.

In June 2008, the Public Policy Institute of California published Proposition 13: 30 Years Later, a report that provides a statistical snapshot of the effects of this legislation spanning three decades.

The full official Constitutional article, Article 13A: Tax Limitation, can be accessed through California Legislative Information web site.