The Big Hurt of the Housing Bust


Posted on 03 October 2011

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By Peter Schrag

Even if you’re used to depressing numbers, the current data on the California housing bust have to come as a shock. As of now, some 2.2 million California homeowners, representing 32 percent of mortgagees, are “underwater”, owing more on their mortgages than their houses are worth. Among their occupants are more than a million children. Foreclosures continue to run at a rate of over 150,000 a year.

Little of this story is a secret; parts have been known for years. But both as an economic tale – its drag on jobs and economic activity generally – and as a human story, it gets less attention than it demands. For a whole political party, which still talks as if regulation and taxes are the nation’s biggest job killers, it’s not a story at all.

Part of the reason for the neglect is that the housing debacle is a complicated story -- economically, politically and morally:

*Who or what is ultimately responsible: predatory lenders and brokers; investment houses the bundled low quality mortgages into high-rated bonds; the suck-up Wall Street rating agencies that ignored their gaping flaws; gullible home buyers who should have known they couldn’t afford the payments when their adjustable mortgage interest went up or didn’t know what they were signing; a regulatory system that regulated neither wisely nor well, and often irresponsibly, or just a broader culture of greed and outright fraud?

*What measures can be pursued to protect homeowners, recapture as much of their losses from malfeasant lenders and create systems and institutions to prevent it from ever happening again. Since it wasn’t just the homeowners who were skinned but the investors who bought bonds backed by shaky mortgages and the government that bailed the banks out, finding an adequate resolution becomes particularly complicated.

California Attorney General Kamala Harris says California was “uniquely harmed by what happened in our country.” Only Arizona and Nevada have had higher foreclosure rates than California. Among the ten cities hardest hit in this country, she said, eight are in California, most of them in the San Joaquin Valley and the Inland Empire. Whole communities, she said, have been devastated.

And as Harris, in a talk at PPIC, the Public Policy Institute of California, pointed out last week, some of the homeowners hardest hit are now the targets of a second wave of predators, lawyers and law firms who collected between $4000 and $10,000 each from victims for the “right” to join a class action suit against the banks and brokers who had defrauded the first time around.

Some were also rushed into foreclosures, often without proper notification that modifications of loans and other options were available. In the notorious wave of “robo signatures” only a machine signed the legal documents required for foreclosure. Overall, as she said, there’s been a wide and notorious range of bad conduct.

But there may be another reason why the festering disaster hasn’t risen higher on the national agenda. Roughly half of those who are underwater in California – and probably as many in other Western and Southwestern states -- are African Americans and Latinos.
It’s surprising that the proportion isn’t higher. In 2007 University of Southern California demographer Dowell Myers reported that in 2005, then the most recent year for which data were available – and, as it turned out, also near the peak of the housing boom/bubble – five of the ten most common names of California’s new homebuyers were Garcia, Hernandez, Rodriguez, Lopez and Martinez.

For the majority of voters, who are whiter, older and more affluent than the general population, Lopez and Martinez don’t sound like they could be your sister or your son. They’re “others” – maybe even illegal aliens who have no right to be here at all.

Harris, who in her first nine months in office has seized on the housing mess as one of her signature issues, is pursuing it on two different tracks: Earlier this year she created a “Mortgage Fraud Strike Force” to “monitor and prosecute violations at every step of the mortgage process, from the origination of loans to the marketing of mortgage-backed securities.” Given the way mortgages were securitized and transferred, there’s even a question about who owns the loan.

At the national level, she’d been part of multistate coalition of attorneys general negotiating with banks and other lenders, but on Friday, joining New York State, she pulled out, declaring that the mortgage providers were not giving enough to compensate homeowners and demanding too much in immunity to future legal claims. As she herself pointed out in her PPIC talk Thursday, every day more homeowners are being hurt, and this decision may shut off any chance of a quick settlement. But the risk of acting without more information is equally great. 

Because Texas, strange to say, passed anti-predatory lending laws a decade ago – before the housing bubble, and thus avoiding part of it – the state and its economy were spared some of the damage when the bubble burst. Last week, when asked, Harris said she knew nothing about the Texas law, but said she’d look into it.

Here again, it gets complicated. Dreams, too, have their price. If public policy restricts lenders too much, potential homeowners will be denied access. When it makes access too easy the scammers will thrive. If the law hits the banks too hard, somebody will again have to make them whole. But unless we regulate those deemed too big to fail, or prevent them from becoming that big, we’ll repeat the disasters.  

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Peter Schrag, whose exclusive weekly column appears every Monday in the California Progress Report, is the former editorial page editor and columnist of the Sacramento Bee. He is the author of Paradise Lost: California’s Experience, America’s Future and California: America’s High Stakes Experiment. His new book, Not Fit for Our Society: Nativism, Eugenics, Immigration is now on sale. 

California is less attractive to live. The tax rate is driving people out combined with the high cost of living. So, the high taxed professional (or two income professionals) are moving out. They are taking their income and with it the demand for housing is leaving. As for Texas, that is where they are going which helps the Texas market. One other point, in Texas you cannot (by law) take a home equity mortgage more then 80% of the house's value. In California, that same number is 110%. Thus, people speculate in California but can't in Texas.

Funny, that the one thing that saved Texas from the worst of the housing bubble were strict regulations supported by consumer advocacy groups across the country.

Of course, what Texas really represents is out nation's race to the bottom...a few details on Perry's disastrous record from a great piece by Joshua Holland entitled "21 reasons Rick Perry's Texas is a complete disaster" (http://www.alternet.org/news/152037/21_reasons_rick_perry%27s_texas_is_a...):

...let's take a broader look at how Texans are faring under Rick Perry's watch. (Several of the following items were compiled by Peter Montgomery at Right-Wing Watch.)

1. Texas leads the nation in the percentage of its population without health insurance (2010).

2. Only one state covered a smaller share of its poor population with Medicaid (PDF).

3. It's also number 1 in the percentage of children who lack insurance (2009).

4. Texas ranks dead last in the number of women who receive early prenatal care (2010).

5. It has the sixth highest rate of infectious diseases in America (2010).

6. It ranked 35th in the share of its children being immunized (2010)...

7. ...And 40th in overall health (2010).

8. Those numbers shouldn't come as a surprise – Texas had the ninth lowest level of health care spending per person (2010).

9. Texas ranked 36th in the nation in terms of its high school graduation rate (2010).

10. It has the lowest share of the population aged 25 and older holding a high-school diploma of any state (2008).

11. Its students have the sixth lowest SAT scores in the country (2008).

12. But Texas ranks fourth in terms of teen pregnancies (2005).

13. It's got the 16th highest crime rate (2010).

14. It ranks 17th in occupational fatalities (2010).

15. It's tied (with Missouri) for 19th in terms of the share of its citizens requiring food-stamps (2009).

16. It leads the nation in the amount of recognized carcinogens released into the air (2002).

17. Has the fourth highest amount of toxic chemicals in the environment (2002).

18. Texas’ per capita income growth was the eighth slowest of any state in the country between 1998 and 2008.

19. It ranks 47th median household net worth (averaged from 2007 to 2009).

20. Only seven states have a higher percentage of children in poverty (2010), and ...

21. ... Only nine states have a higher percentage of people of all ages living below the poverty line (2008).

A bit of what you say is exaggerated, but the general thrust is that if you require government assistance than Texas is not a good place to come to. You are right. However, if you are gainfully employed, then Texas is where you want to go.

In 2006 as a real estate agent I placed a fixer on the market. In quick time I received 14 offers that were identical using the buyer's name of Lopez. The problem was that I suspected the agents had attended a seminar where they were given this boiler-plate contract to write themselves and gain about $20,000 in commissions and kick-backs. I called all over town to confirm it was possible these "sales" could be funded by the bank. To me they were obviously fraudulent. I was assured that at that point in 2006 any contract regardless of how crazy would be funded by someone. Now we know the rest of the story. None of it is pretty.
I was saved by an honest "flipper" who still rents the property.