Defaults on California homes dropped 4.2% in Q110 from record levels in 2009, according to the San Diego-based research firm MDA DataQuick. The firm measured 81,054 notices of default (NODs) at county recorder offices in Q110, down from 84,568 in Q409 and down 40.2% from the 135,431 in the first quarter of 2009. “Several factors are at play here and it’s hard to know how they play into each other right now. A year-and-a-half ago the subprime loan mess was the black hole,” said MDA DataQuick president John Walsh. “Now, playing catch-up, is the financial distress households are experiencing because of the recession. Add to the mix shifting policy decisions, both by lending institutions and in public policy.” Walsh added there are signs of the worst trouble moving from the hard-hit entry-level markets to the more expensive neighborhoods. California’s more affordable markets, which represent 25% of the state’s housing inventory, accounted for 47.5% of all default activity last year. In Q110, that number fell to 40.9%. Those percentage points would most likely to have migrated to the mid- to high-end housing markets, but the concentration of default activity remained relatively low. ZIP codes with median sales prices of more than $500,000 saw mortgage defaults rise 1.5% in Q110 but dropped 19% from Q109. “We’re also seeing some lenders become more accommodating to work-outs or short sales, while others appear to be getting stricter about delinquencies. It’s very noisy out there,” Walsh said. On average, DataQuick reported, the foreclosed homes spent 7.5 months in the foreclosure pipeline, compared to a year ago, when it was 6.8 months. “The increase could reflect, among other things, lender backlogs and extra time needed to pursue possible loan modifications and short sales,” according to the report. REO sales accounted for 42.6% of all resale activity in Q110, up from 40.6% in the previous quarter but down from 57.8% last year. Write to Jon Prior.