The Big Hurt of the Housing Bust
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.
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.