Mortgage defaults rose to a three-year high in California for the second quarter of 2006. The 67% year-to-year increase saw 20,752 default notices sent to homeowners across the state.

When compared to the first quarter, the increase was 10.5%, up from 18,778. There were 12,408 notices sent out in the second quarter of 2005. Notices of default mark the first step in the foreclosure process.

"This is an important trend to watch, but doesn't strike us as ominous," said Marshall Prentice, DataQuick's president. "We would have to see defaults roughly double from today's level before they would begin to impact home values much."

Prentice added that due to the extreme low numbers of defaults in recent years, most industry experts have expected to see defaults rise as home appreciation slowed.

"We hear a lot of talk about rising payments on adjustable-rate loans triggering borrower distress," he said. "While there's no doubt some of that is going on, as far as we can tell the spike in defaults is mainly the result of slowing price appreciation."

Slowing prices make it more difficult for homeowners to sell their homes for the amount they owe. Many are left with more debt than home value.

With the increases in interest rates over the past two years, the formerly booming market has begun a slowdown. California defaults hit a low of 12,145 in the third quarter of 2004. During 2004, home prices were gaining over 20% annually.

This year, annual price gains have fallen into single digits in many of California's key markets, according to DataQuick data. As home prices level out, more defaults are expected to come.

In July, median home prices in San Diego and Sacramento counties fell about 1% for the year. Second-quarter defaults rose by 99% in San Diego County and 109% in Sacramento County.

DataQuick reported that defaults remain one-third the peak levels reached in 1996, the last time a housing recession hit California.