As I've mentioned before, one of the weird things about the mortgage meltdown compared to other financial bubbles was how concentrated it was among the non-affluent. Usually, bubbles put a lot of money in the hands of well-to-do people who end up blowing it. The collapse of the oil bubble in 1982, for instance, wiped out a lot of J.R. Ewing-types in ostrich-skin cowboy boots who had gotten rich in the 1970s.
But the more you look at finer-grained data, the more you see that this was all about money going to the, roughly, second quartile of society: exactly who had to get the mortgages to raise the homeownership rate from its traditional 64% to 69%, just as the Clinton and Bush Administrations hoped.
Browsing through 27 screens of Los Angeles County foreclosure data by zip code, I could better grasp why money managers in New York and London and Shanghai gave out so many stupid loans for homes in crummy neighborhoods. How can any outsider remember the difference between Huntington Beach and Huntington Park, Lynwood and Lawnwood? Aren't they all in LA? Sunshine! Swimming pools! Movie stars!
But, by accident, one of screens compared three zip codes from two places everybody should have heard of:
| _____________________ | Median sale price | __________ ___ | ______Foreclosures____ | ___ |
| ZIP Code | Community | Sept. 2008 Price (000s) | Sept 2008 Sales | Q3 2007 | Q3 2008 | ||
| Map Beverly Hills, Los Angeles 90210 | 90210 | Beverly Hills | 1215 | 10 | 1 | 6 | |
| Map Beverly Hills, Los Angeles 90211 | 90211 | Beverly Hills | 1 | 0 | 1 | ||
| Map Beverly Hills, Los Angeles 90212 | 90212 | Beverly Hills | 1 | 0 | 0 | ||
| Map Compton, Los Angeles 90220 | 90220 | Compton | 205 | 20 | 30 | 100 | |
| Map Compton, Los Angeles 90221 | 90221 | Compton | 245 | 14 | 21 | 86 | |
| Map Compton, Los Angeles 90222 | 90222 | Compton | 210 | 9 | 16 | 66 |
So, there were 7 foreclosures in Beverly Hills and 252 in Compton in Q3-2008. Now, those places aren't anymore exactly like you probably think: Compton has been majority Hispanic since the 2000 Census and Beverly Hills is guesstimated to be 30% Iranians.
Beverly Hills has a large number of hustlers trying to put one over on the world (compared to, say, sedate San Marino near Pasadena, with just one foreclosure). But, still, a lot more money has been lost, so far, in Compton.
I deleted the column showing price declines since Q3-2007 to squeeze the table in, but just a year ago, Compton homes were average in the mid-300k range. For example, in 2007 a 500 sq. ft. Compton one-bedroom house sold for $340k.
So, the difference in price at the top of the bubble between Beverly Hills and Compton was less than an order of magnitude. In contrast, the difference in average net worth outside of home equity between the two populations must have been two or even three orders of magnitude.
In LA County, though, the real wipeout has come in the farthest exurbs, the high desert Antelope Valley, Lancaster and Palmdale, about 65 miles north of downtown LA by highway.
| _____________________ | Median sale price | _____________ | ______Foreclosures____ | ___ |
| ZIP Code | Community | Sept. 2008 Price (000s) | Change from 2007 | Sept 2008 Sales | Q3 2007 | Q3 2008 |
| 93535 | Lancaster | 140 | -45.00% | 137 | 149 | 621 |
| 93536 | Lancaster | 242 | -27.00% | 158 | 118 | 383 |
| 93543 | Littlerock | 140 | -47.00% | 18 | 22 | 78 |
| 93544 | Llano | 339 | 1 | 0 | 2 | |
| 93550 | Palmdale | 147 | -48.00% | 115 | 143 | 532 |
| 93551 | Palmdale | 245 | -38.00% | 105 | 99 | 312 |
| 93552 | Palmdale | 170 | -45.00% | 86 | 73 | 319 |
| 93553 | Pearblossom | 211 | -32.00% | 1 | 2 | 4 |
| 93591 | Palmdale | 91 | -62.00% | 13 | 23 | 70 |
93535 is Lake Los Angeles, west of Palmdale, which ain't got no Lake, ain't got no Los Angeles, and sure as hell ain't got no Lake Los Angeles, to paraphrase Wesley Snipes' wife's opinion of the Vista View Apartments in which she lived in "White Men Can't Jump."
There were 621 foreclosures out of about 14,000 owner-occupied homes in just three months there. Ouch. It's half white, 30% Latino, maybe 15% black. Very working class. Back in 1999, the poverty rate was 18% compared to 14% statewide, so it, at least then, wasn't extremely poor, it was just a lot of working class families trying to get by, trying to keep their kids out of the underclass. (Or get rich quick off flipping homes, if somebody would lend them $300,000 with no money down.)
What was everybody thinking? What possible reason was there for thinking that the American working class was suddenly developing the earning power to pay off these giant mortgages?
This just shows how expensive political correctness is.
News for you, Steve. Outside of Californians, Americans haven't heard of Compton, either.
ReplyDeleteYou might think that even money managers would clue into the names of Hawaiian Gardens, Bell Gardens, and the preposterously named Santa Fe Springs. They sound like the names of trailer parks.
ReplyDeleteThe mortgage originators only had to keep the loan current for either 90 or 180 days after they sold it to a financial company to be securitized.
ReplyDeleteOf course the mortgage agents knew that most of these people couldn't pay their mortgage, but there was no incentive to act on this knowledge. As long as they paid their loan for the required period, the agent gets their fee. After that it's OPP.
That's why you got 2/28 ARM's, with sweet-heart terms in the beginning. I doubt there was pressure to get more black people, or get more hispanics specifically (there was certainly no such law mandating it for private originators), I think they just needed warm bodies to sign on the line that is dotted.
Of course there is this whole notion of the "American Dream" of home ownership, but I don't see why that should be a national policy. I think Republicans believed that turning people into homeowners would make them vote Republican, which was presumably based on some statistics. Hence the whole "ownership society" BS.
What about the show trial in which Al Greenspan blames derivatives and lack of regulation for the meltdown?
ReplyDeleteThe fed was supposed to have resorted to the 1994 Home Owner Equity Protection Act to prohibit Liar Loans and ARMs. No mention of why the global market for mortgage based securities was so high. Freddie and Fannie are INNOCENT of all wrong doing. No, according to Greenspan, foreign investors wanted those mortgage based securities so Wall Street cracked the whip and insisted on ever more suspect home loans!
This is the official source of the catastrophe, derivatives and not bad loans. Unwarranted faith in Fannie and Freddie who went to pains to hide their volatility by hiding the profits that indicated they were risky ventures despite being GSEs wasn't the problem. Nor was the CRA which was the basis for undermining the traditional lending standards starting in the early 90s.
There are people who get very angry (and may even act as tattle tales hanging by blog threads) if you blame anything but derivatives for the mortgage crises. But no one discusses Home Owner Equity Protection Act vs the suspension of lending standards. Didn't the PC suspension of lending standards automatically cancel the Equity Protection Act? And if traditional lending standards had remained intact, would there have been a significant increase in homeownership among minority and lower income buyers?
Subprime loans on used cars and trailers have never become an issue because the people who choose to pay high interest to get loans they wouldn't otherwise qualify for take the risk in the form of higher interest rates. The lenders are more than protected if and when such a borrower defaults yet no one gets to upset about it. The borrower was free to evaluate the terms of the loan and suffer the consequences. So I can't draw any other conclusion than that the PC attempt to engineer outcomes while denying the reasons for the lower rates of home ownership among minorities is the true source of the problem.
But for most purposes practical and political, we all must believe the derivatives did it!
However, those mortgages were then packaged as mortgage backed securities and sold to the wealthy!
ReplyDeleteMSN's real estate section has an article on how Lancaster, California is performing here.
ReplyDeleteThe problem with the derivatives is that they magnified the effects of bad loans due to high leverage ratios.
ReplyDeleteWould there have been an issue with derivatives if none of the loans defaulted? At first glance it does not sound like it would.
Clearly bad loans are an issue, perhaps *the* issue. It is foolish to think otherwise.
Robert Lindsay's blog in criticising you, claimed the rate of foreclosures was constant between ethnic groups. Is he distorting the facts?
ReplyDelete"News for you, Steve. Outside of Californians, Americans haven't heard of Compton, either."
ReplyDeleteWell, I realize a single example does not a trend make, but as a data point, I live in Wyoming, and I certainly HAVE heard of Compton and the Crips and Tookie Williams.
Robert Lindsay distorting the facts?
ReplyDeleteHeaven forbid!
The first gangsta rap album was NWA's "Straight Outta Compton" in 1988.
ReplyDeleteRe: Robert Lindsay
ReplyDeleteI don't seen any links to any text sources, just this assertion:
"Rate of subprime mortgage defaults by race:
"Whites 19%
"Blacks 19%
"Hispanics 19%
"End of discussion!"
Well, if that's not convincing, I don't know what is ...
Even if it were true, the rate of subprime borrowing is much higher among minorities, so it's a red herring.
If nothing else some of us Brits have heard of NWA and thus of Compton.
ReplyDeleteYou'd have to have been living in a hole not to have heard of Compton.
ReplyDeletethe obvious relevant data point is that NAMs default on education loans at a much higher rate as steve showed several posts back
ReplyDeletebeggars the imagination to assume pattern is starkly different for home loans
Oh, the uniformed masses.
ReplyDeletehttp://www.youtube.com/watch?v=
nkPb4s0-QcI&feature=related
Any data on whether these properties were to be owner occupied or investment?
ReplyDeleteDid I miss that in the quick read?
My wife and I looked at picking up a couple of properties in the "second" area Steve speaks of.
But we had no intention of living there.
I imagine that most were for owner occupied. Just wonder what the mix is.
Again, it goes to show you the power of daytime TV advertising. As well as the power of what a company can accomplish if it is tosses out credit ratings, down payments, and common sense.
Totally agree with The Outlaw.
Anon,
ReplyDeleteUh, most everyone under 50 has heard of Compton. NWA and Snoop, and Dr Dre have been giving Compton props since the mid-late 90's.