While default notices remain far below levels seen during the county's housing bust in the early-1990s, the third quarter's 39.5 percent increase is only the second time the number of defaults has increased year-over-year since the end of 2002.

The other time was in the second quarter, when defaults in San Diego County increased 15 percent to 894, compared with 776 for the second quarter 2004, according to DataQuick.

Housing experts contend the increases by themselves are not startling. Defaults have dipped to record lows over the past three years. Even with the recent increases, they remain well below historical norms.

But with recent slowing sales and appreciation in the county's once blistering housing market, the increase in defaults is likely to be watched closely as a beacon to where the market is headed.

Some housing experts wonder if recent increases in interest rates are beginning to cause pain to borrowers, particularly those who stretched financially to get into San Diego's high-priced homes.

The Federal Reserve Board has raised short-term interest rates 11 times in recent months, which can impact payments on adjustable rate mortgages and home equity lines of credit. Long-term interest rates for 30-year-fixed mortgages also have been edging upward recently - now ranging between 6 percent and 6.25 percent for so called "jumbo" loans over $360,000.

"Over the past two years, interest rates have been fairly benign," said Scott Harmes of Hammersmith Capital in San Diego. "I don't think we've seen enough movement in rates to correlate that with a increase in defaults."

"If somebody gets into a financial jam, it's not so easy now" to sell, he said. "But most people who have owned their home more than a year have enough equity that they can play with the price and get it sold."

Mortgage brokers say some high-risk loans, such as negative amortization Option ARMs, have become popular with San Diego buyers trying to qualify for loans at today's prices.

Those loans usually start with a teaser interest rate of 1 percent for a certain period of time. But when that period ends, payments can increase dramatically for borrowers.

"The only product that would have any impact at all (on default rates) is the Pay Option ARM," said Rob McNelis, president of One Stop Lending in San Diego. "That could have a slight impact if they're sold improperly, and that's probably happening to some extent, unfortunately."

McNelis doesn't think that Option ARMs are a leading cause behind the rise in defaults, however. He believes softer sales and lower appreciation in San Diego County are the culprits.

In September, annual appreciation for the median priced home in San Diego was 3.75 percent, down from the double-digit gains posted through most of 2004.

Lenders typically file default notices with the county when borrowers are three months behind on their payments, say mortgage brokers. They don't proceed to foreclosure until borrowers miss six months of payments.

Only a small percentage of defaults advance to become full-blown foreclosures. Of the 21,771 home sales in San Diego County during the first half of this year, only 70 were foreclosure sales, according to a study by First American Real Estate Solutions released yesterday.

This is cache, read story here