Foreclosure Frenzy

WITH HOMES IN LOS ANGELES going into foreclosure at alarming rates — by one estimate, nearly one per hour — none other than the Rev. Jesse Jackson is in town to put the crisis in perspective.

Looking somber and dressed in black, the veteran activist mounts his latest grandstand — the porch of a home in South Los Angeles, where, flanked by the requisite news cameras, he is moved to roll out the metaphors.

“We’re looking at a tsunami coming our way, a great economic Titanic,” Jackson says, blithely mixing icebergs and oranges. “There are 2.2 million American houses facing foreclosure. There are 10 million more with subprime loans.”

As more homeowners go into default, stripping hundreds of millions of dollars from tax rolls, the nation — and especially Los Angeles — may require a massive, government-backed intervention like a Marshall Plan, Jackson says. “How did we bail out Europe?” he says. “Two percent, 50-year loans. We may need something of that magnitude.”

While Jackson paints a nefarious picture of the crisis, accusing “predatory” lenders of suckering homeowners in “what could be the biggest economic fraud our nation’s ever known,” the real story is far more complicated, involving both lender and buyer greed, lax regulation — and the market truism that what goes up must come down.

The politicos, bureaucrats and economic experts agree on one thing — that the foreclosure tsunami is sending boatloads of people under, and Los Angeles is going to take a massive hit.

Numbers gleaned from DataQuick and First American Title Corp., two acknowledged authorities in the esoteric world of mortgage underwriting, show that foreclosures in L.A. County have risen to about 150 a week, or nearly one home foreclosed per hour, says the nonprofit group Los Angeles Neighborhood Housing Services.

Nationally, L.A. ranks second only to Cook County, Illinois, as a hot spot of mortgage defaults, and Riverside and San Bernardino counties also crack the Top 10, says Heather Peters, deputy secretary of the state Business, Transportation and Housing Agency. On top of that, home sales in Southern California have collapsed, hitting a 20-year low in September.

Governor Arnold Schwarzenegger, who cited the collapse of the housing bubble last week in calling for a drastic 10 percent state budget cut, says California’s foreclosure rate is twice the national average and homeowners here hold a fifth of the nation’s “subprime adjustable-rate mortgages” — a mouthful, but a key cause of the unfolding crisis.

And the whole ugly mess is likely to get much worse.

“We have really not hit the bottom yet,” says Jon Haveman, a former senior economist with the President’s Council of Economic Advisers and now a partner at the research firm Beacon Economics in San Rafael. “The number of people in arrears on their payments — who are 60 or 90 days delinquent, and are not yet in the foreclosure process — is increasing.”

Huge numbers of adjustable-rate mortgages are “resetting” — jumping to higher rates — because their alluring, introductory terms are expiring as has long been expected, Haveman says. A homeowner paying, say, $1,200 a month might suddenly need $1,700 a month. In extreme cases, a $1,500-a-month payment might jump closer to $3,000. “It’s hitting hard now,” he says, “and it will continue to hit hard through March of 2008.”

Haveman disputes the notion, peddled by some politicos in California and in Congress, that foreclosures are mainly pinching lower-income groups. The truth is, if L.A. gets slammed with a housing recession, it can thank widespread bad judgment by middle-class home buyers.

For Angelenos who watched, confounded, as many home buyers somehow were able to afford $585,000 homes — the median, at which 50 percent of L.A. home buyers paid more and 50 percent paid less — the mystery has been solved: Buyers couldn’t actually afford the prices, but bought anyway.

“THESE ARE MIDDLE-INCOME PEOPLE who are taking on more house than they can afford,” Haveman says. “For the last five years, the world of real-estate finance has not been normal — it’s been loose.”

Southern California’s extraordinary run-up in home prices convinced middle-class buyers that it was safe to embrace “creative” loan schemes, often aggressively pushed by people reaping hefty commissions. The buyers, often ignoring the Los Angeles housing-price collapse of 1990-91, took it on faith that property values would keep going up.

One of the most thorough analyses of the now-emerging data has been done by USC’s Raphael Bostic, a former research economist at the Fed. After sifting through a year’s worth of numbers from RealtyTrac, an Irvine-based commercial information clearinghouse, Bostic found that lenders and borrowers alike merely dispensed with old rules of thumb.

Even in long-costly Los Angeles, buyers used to put 20 percent down, and were advised not to spend more than a quarter of their income on a mortgage. Those crucial rules “have broken down,” Bostic says. People recklessly spent far more on mortgages — even 40 percent of their income, meaning any kind of unexpected expense could suddenly leave them scrambling to pay.

“There are a whole bunch of people on the edge who are going to be over the edge once these resets kick in,” Bostic warns. Like Haveman, he sees a big hit on the middle class, though near the lower end.

“A lot of the people we’re talking about would be considered the middle class,” he says. “But one thing we’ve seen is what some people have called the ‘democratization’ of home ownership — it’s moved down a little bit into lower-income groups.”

Foreclosures are hitting every community, from Woodland Hills and Bel Air to Boyle Heights and Fairfax. But while they will probably hit hardest in lower-middle-class areas, they are not expected to be dramatic in Latino neighborhoods. Among Latino homeowners, for whatever reason, foreclosure rates are strikingly low. “To me it’s a puzzle,” Bostic says.

Hyde Park in South Los Angeles, the scene of Jesse Jackson’s press conference, is an area where middle-class home buyers are going under. The largely African-American community contains streets of modest, Spanish-style homes that hover around $475,000 in value.

Herman and Karen Lee, who agreed to let Jackson use their neatly trimmed Craftsman as his soapbox, say they know of at least five neighbors who have lost homes in recent years. “You will see one of your neighbors gone when you get up in the morning,” says Herman Lee, 68, a retired postal worker. “Two or three days later, you’ll see someone moving in, and you’ll never see a for-sale sign go up. One of the houses across the street from me changed hands four times in the last 10 years, and I never saw a for-sale sign go up.”

Homes are repossessed and often resold online, he says.

Unscrupulous lenders constitute a significant part of the problem, experts say, but no one seems sure to what extent. Regulators have filed few criminal charges, though they claim to be looking for bad guys.

“You turn on the lights,” says Peters of the state housing agency, “and the cockroaches scatter. It’s hard to catch them all.” A number of subprime lenders, who brokered deals using their own lines of credit and then sold the loans to investors, have gone belly up and essentially vanished, regulators say.

In spite of it all, some economists see hope — and perhaps even a bit of redemption — amid the misery. Stephen Levy of the Center for the Continuing Study of the California Economy, in Palo Alto, can’t imagine that 10 percent state budget cuts will actually happen — and, in fact, Sacramento pols have rarely made such budget cuts in California’s history, not even during the Gray Davis deficit debacle.

Says Levy, “What’s [Schwarzenegger] going to do, let all the prisoners go?” Nor does he see banks and lenders making much profit off the homes they repossess. “They can’t sell them — they’ve got no buyers at those prices that they made the loans for.”

The banks and lenders are so averse to owning all these L.A. homes, in a gasping housing market whose bubble has clearly burst, that Levy says banks and lenders will probably begin offering families ways to restructure and reduce the existing mortgages. Meanwhile, falling home prices will help those who were kept out of the skyrocketing market but would like to buy.

For L.A., Levy says, “as painful as it is, the extent to which housing prices come back to Earth makes the housing market more open to people. High housing prices were going to kill us.”

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