Updated: Ground Zero of the Mortgage Meltdown

This stacked graph shows that mortgage lending to Latinos in Southern California's huge Riverside and San Bernardino counties, the Inland Empire, arguably now the foreclosure capital of America, grew 782% from $1.5 billion in 1999 to $13.5 billion in 2006.

Last October, my reader "Tino" introduced me to the federal government's Home Mortgage Disclosure Act database, which was set up to ensure that minorities are getting enough mortgages. It doesn't measure whether they're paying the mortgages back, and it's rather awkward to work with, but it's very useful for understanding how we got the Housing Bubble, which set off the Mortgage Meltdown, which set off the Global Crash.

As you know, somewhere approaching 7/8ths of defaulted mortgage dollars at the time of the economic crash in the fall of 2008 were lost in just four rapidly Hispanicizing states: California, Arizona, Nevada, and Florida. Indeed, California accounted for a sizable majority of foreclosed mortgage dollars by itself.

The above graph focuses on what has been perhaps the Ground Zero of the foreclosure crisis, Southern California's exurban Inland Empire, the Riverside-San Bernardino Metropolitan Statistical Area (Riverside and San Bernardino Counties). In the "Inland Empire, there were 112,284 foreclosure filings in 2008. The Inland Empire accounted for 3.6% of America's foreclosure filings in 2008 and likely approaching 10% of America's defaulted dollars due to the much higher home prices there at the peak of the Housing Bubble.

That was the most foreclosure filings of any metropolitan area in the country, more than the metro areas of greater Phoenix, Las Vegas, Tampa-St. Pete, Miami, Atlanta, New York City, Detroit, or even the giant Los Angeles / Long Beach area. At 8.02% of housing units in foreclosure, Riverside-San Bernardino endured the third highest foreclosure percentage in 2008, trailing only the Stockton and Las Vegas MSAs.

The point of trying to understand what happened is not to pin the blame on somebody, but to understand what happened.

Why has so much money been lost on foreclosures in the Inland Empire?

Well, because so much money was loaned out from, say, 2004 to early 2007.

The above graph, drawn from numbers from the federal Home Mortgage Disclosure Act database, shows for 1999 to 2007 the aggregate of dollars of originations of both "conventional purchase" mortgages (HMDA's Table 4-2) as well as FHA, FSA/RHS, and VA loans (HMDA's Table 4-1).

(Caveats: The graph above doesn't include other types of loans such as nonoccupant, home improvement, or multi-occupant. Nor does it include refinancing. Refinancings are an important part of the Housing Bubble story, but the HMDA database doesn't seem to offer a way to distinguish between refinancings that make it likelier that the borrower will pay back -- e.g., refinancing from a higher variable rate to a lower fixed rate -- versus refinancings that make the loan more risky ... e.g., taking cash out of home equity and blowing it in Vegas. Moreover, Home Equity Lines of Credit are optional for the lender to report, so I don't know how useful HMDA's refinancing data are. Further, to simplify things, I've left off Asian, blacks, and other minorities, mixed couples, and mortgages where race is unknown.)

As over-simplifed as it is, the graphs still gives an informative overall picture of what went on in the Inland Empire that drove prices to absurd levels followed by foreclosures: a giant surge of lending to Hispanics, followed by a sobering up in 2007 (that no doubt accelerated in 2008).

The most obvious fact is that new mortgage dollars flowing to Hispanics in this sprawling California region increased 782% from $1.5 billion in 1999 to $13.5 billion in 2006. Is there a word in the English language for that? We have words like doubling for when something increases 100% and tripling for when it goes up 200%, but is "nontupling" even a word?

This huge increase in demand clearly had a big impact on home prices.

In contrast, the non-Hispanic white borrowing over 1999-2006 was up 134% (more than doubling). To be fair, white borrowing from 1999 to the white peak in 2005 was up 199% (a tripling), but white borrowing in the Inland Empire fell 22% from 2005 to 2006 as more prudent people ran for the hills.

In the Inland Empire in 1999, Hispanics received only 34% as much mortgage money as non-Hispanic whites did. By 2006, Hispanics received 127% as much as whites.

Clearly, there was a mortgage bubble among non-Hispanic whites, too, but white borrowing peaked earlier, in 2004-2005, when home prices weren't quite as ridiculous, and has declined in a somewhat less frantic fashion. In contrast, the Latino bubble peaked in 2005-2006 when home prices peaked, and then started to collapse in 2007. (The bursting of the subprime bubble is usually dated to about the beginning of August 2007, although there were major tremors in March 2007). In 2007, Hispanic borrowing crashed back down to $5.0 billion as financial institutions finally started to worry about loan quality. The dollars flowing to Hispanics fell 63% from 2006 to 2007, versus 38% among whites. In the more realistic atmosphere of 2007, Hispanic borrowing was back down to 75% of white borrowing.

By the way, black borrowing from 1999-2006 was up 464% and Asian/Pacific Islander borrowing was up 987% to $3.4 billion.

These increases in borrowing dollars may sound like some craziness restricted to one section of California, but last year Tino found similar patterns at the national level: mortgage lending for home purchases to Hispanics was up 691% nationally from 1999 to 2006. For blacks, the increase was 397%. For Asians 218%, and for whites about 100%.

So, the Inland Empire wasn't unique in the size of the growth in lending to Hispanics, it just had more to start with (40% in 2000, rising to 47% in 2006). Also, unlike Texas, the supply of homes in California is held back by lots of environmental regulations, so supply lags demand much more in California, making the state more susceptible to price spikes.

In short, as Yogi Berra might say, the Inland Empire is just like the whole country, only more so.

Using Ground Zero as an example, we can get a pretty good understanding of the causes of the Housing Bubble and subsequent Mortgage Meltdown.

What caused the increase in home prices?

First, population growth. The total population of the Riverside and San Bernardino Counties grew 22% from the Census on April 1, 2000 to 2006 (the Census Bureau's American Community Survey estimated population over the 2005-2007 time period). That 731,000 more people.

Hispanics accounted for 71% of the increase (or 521,000 additional people), Asians for 11%, whites for 10%, and blacks for 7%.

This population increase, largely driven by immigrant ethnicities, was seen as leading to every rising home prices, which were seen as as justifying ever riskier lending.

Second, and more important, as we see above, ever more lending was directed to ever more marginal borrowers.

Keep in mind that the Bush Administration was actively promoting riskier lending to minorities, such as by calling for the elimination of down payment requirements and the speeding up of the approval process, in the name of closing the "racial gap" in homeownership rates. Bush's speech at his October 15, 2002 White House Conference on Minority Homeowership was very similar to the speech Angelo Mozilo of Countrywide Financial gave in February 2003 at a Harvard conference.

Not surprisingly, first time homebuyers in California got zero downpayment mortgages less than 7% of the time in the late 1990s, but rocketed up to 33% in 2004 and 41% in 2006.

As late as 2002, the year that George W. Bush announced his goal of adding 5.5 million minority homeowners by 2010, Hispanics in the Inland Empire got only 42% as much in mortgage dollars as whites. From 2002 to 2006, however, lending to whites grew 42%, while lending to Hispanics grew 325% (more than a quadrupling).

A fraction of that growth in lending was of course due to population growth. The Hispanic population in the Inland Empire grew by 42% from the Census in 2000 to 2006, versus just 5% for whites, so let's look at mortgage dollars on a per capita basis to remove the population growth factor:

As you can see, in 2000, Hispanics in Riverside-San Bernardino received $1,417 per capita in mortgage dollars, 43% as much as whites, who got $3,324. In 2006, Hispanics got 117% as much as whites per capita: $7,725 per Hispanic versus $6,612 per white. Lending per capita to Hispanics in the Inland Empire was 5.5 times larger in 2006 than in 2000. Even more bizarrely, the rate at which mortgage money flowed per capita to Hispanics relative whites was 2.7 times greater in 2006 than in 2000.

Relative to whites, were Hispanics really 2.7 times more credit-worthy in 2006 than in 2000? No doubt there was some improvement in Inland Empire Latinos' incomes between 2000 and 2006, as they got more jobs and more pay as, say, mortgage brokers, real estate agents, home construction workers, furniture movers, and ... hey, do you notice the pattern here? Circular logic ...

Yet, Hispanics' ability to repay big mortgages certainly didn't improve 2.7 times relative to their white neighbors' ability to repay in just six years.

One might think that investors might have realized that Hispanics hadn't suddenly become a safe bet to repay huge mortgages. But, mortgage-backed securities hawkers like Angelo Mozilo of Countrywide Financial had a popular answer to doubts: that's just the redlining racist old way of thinking that kept Hispanics and blacks from owning homes at the same rate as whites.

If you wanted to be a big player in modern mortgage finance, like the much honored financial statesman Mr. Mozilo, you constantly repeated the Community Reinvestment Act cant about how America needs to loan more money to lower income and minority communities. In fact, the more you trumpeted how much you were lending to minorities, the more "regulatory cover" you enjoyed from pesky regulators asking questions about your high pressure boiler room operations.

If you wanted to make it big in the mortgage world but had politically incorrect doubts about all this, well, you kept them to yourself.

As Henry Canaday has pointed out:

Is it a coincidence that the biggest purely financial crisis in 75 years, which has cratered the world economy, is occurring because of massive losses in the one financing sector that is most heavily and obviously influenced by government pressure? The investment banks could have used their sophisticated models to underestimate the risks of all sorts of assets, but apparently these models only blew up when used on mortgage-backed securities.

Thanks for reading all this. If you found it useful, please feel free to send it around.

(Boring methodological note: Why I am I using 2000 in this graph and 1999 in the other one? 1999 is the earliest year offered in the federal HMDA database, so I use that. Unfortunately, we don't have detailed population breakdowns for 1999, but we do have them for April 1, 2000 -- the Census -- and for 2005-2007 -- the Census Bureau's American Community Survey.)

Second Boring Note: This is revised from the graph I had up on Sunday that showed just conventional private borrowing but not FHA and other government-aided lending. FHA lending was moderately important back in 1999, so I decided to include it.

My published articles are archived at iSteve.com -- Steve Sailer