For those who might have missed it, the OC register did a great piece on a single street in Santa Ana that highlights just how out of hand the subprime lending got in our little Orange County.
While there are plenty of references to how the real estate market moved on the way up, one of the best descriptions is that of the Plankton Theory submitted by Bill Gross (Pimco’s “Bond King”), it is everpresent that the foundation of the housing market lies not only in entry-level homes and buyers, but also in lower-priced communities. Without that “first house”, there is no property ladder.
However, the reckless lending was aimed directly at “getting people on the ladder”. No matter how you look at it, these were in many cases people who would have never been able to buy a home, either because their credit, income, or both would not support it. In many cases, these would-be homeowners have trouble with their day-to-day finances, much less than the kind of commitment required to buy, pay for, and maintain a home in the long-run. No doubt about it, in the long run, buying a house is generally a smart move, but those who struggle with daily living expenses often do so, not because of their income, but rather their lack of financial restraint.
The OC Register takes us down Camile Street in Santa Ana:
A year ago, Angelita Medina Albarran, 47, a garment worker at St. John Knits, took out two loans from Fremont Investment & Loan to cover the entire $600,000 purchase price for 919 W. Camile St., a 1,450-square-foot bungalow. Her five grown children help pay the mortgage – $4,000 a month and scheduled to rise in May.
“La droga,” Medina Albarran said. That’s Spanish for “drug” – Mexican slang for a crippling debt. The people of West Camile Street, she said, are “endrogados” – hooked on debt.
With what happened to Fremont, New Century, and other imploded lenders that reads like the who’s who of subprime lending, it is unlikely that these drug addicts will be getting another fix. When you consider that these people were paying $400 per square foot to live in one of the worst neighborhoods in Southern California, you can just begin to see the problem. When I first moved to California in 1999, few places cost $400 per square foot, and only in the poshest neighborhoods (Beverly Hills, Bel Aire, just to name a couple).
This was truly subprime central:
A Register analysis of federal housing data pinpointed West Camile Street as a center of the subprime borrowing binge. In 2005, 75 percent of the home loans in the surrounding census tract were subprime.
That’s the highest concentration of subprime loans in Orange County and one of the densest in California. More than 200 neighborhoods in California, particularly in south Los Angeles and the Inland Empire, were similarly dependent on subprime lending. So were at least three dozen counties in other states.
What this means is that all of the wealth that was “created” in the last few years was primarily created by former entry level buyers selling and buying larger and so on up the food chain. When these plankton are gone, there is no food for the chain and it dies off.
From April through June a record 17,408 California homes were lost to foreclosure, according to DataQuick Information Systems, a La Jolla real estate tracking company. The Center for Responsible Lending, which opposes predatory lending, estimates that 23 percent of subprime mortgages made in Orange County last year will end in foreclosure. That would be about 2,500 of the 11,000 homes bought with subprime mortgages, or 7 percent of the 36,000 homes bought last year in Orange County.
That would be only a small portion of what the larger problem is. I wouldn’t be surprised to see 10 to 20% of the homes bought last year to enter foreclosure. Never before has there ever been this kind of speculation, never before has there been so little to lose put down by buyers.
In a related link, another article trumpets that “OC is Home to many of the Top 10 Subprime Lenders”
Their list is as follows:
1. Argent Mortgage (Orange)
2. New Century Mortgage (Irvine)
3. Fremont Investment & Loan (Brea)
4. Option One (Irvine)
5. National City Bank of Indiana (Indianapolis)
6. Countrywide Home Loans (Calabasas)
7. Long Beach Mortgage Company (Seattle) a.k.a. WaMu
8. WMC Mortgage (Burbank)
9. Ameriquest (Orange)
10. Accredited Home Lenders (San Diego)
While you might marvel that these top 10 represent over 40% of the subprime market, it is perhaps even more surprising to know that all but 2 are Southern Californian companies. (although, I might count Long Beach Mortgage as well), but that these 90% of the top 10 by number and volume. The remainder of the market is perhaps not as concentrated, but make no mistake, lending is the biggest business here.
When we feel the pinch, it will be doubly bad. Not only were we selling the stuff, we were snorting it too.
Remember, kids, drugs kill.
I’ll leave you with this moment of zen. 21% of the outstanding loans in Orange County are of the subprime variety, and I’d wager a guess at at least that many Alt-A. Much of those sources of lending are over 10% now, and even Jumbo Prime loans have jumped to rates and spreads not seen since 2000. Since the median income has not made a substantial move in the past 7 years, you’d be believing a lie if you heard anyone tell you that OC housing prices won’t come down hard. They will.
Why would you buy a home when you can’t understand the documentation?…That blows my mind!.
I’ve been reading your site stealthly since last October and you’ve been right on the money by the way.
Not only will prices fall, but a lot of marriages will fail. So not only will there be ton of houses on the market there will be a ton of milfs’s too…I wonder if anyone on Camille street needs a Sancho.
“the median income has not made a substantial move in the past 7 years”
This is the thing that gets me most. Prices went through the roof, but incomes have not. The average income in 2000 was (almost) enough money to buy the average priced home in 2000 assuming standard loan terms (20% down, good credit history, low debt-to-income).
I still see a lot of people say “But this is California, things are differnt. We’ll never see 50% price declines” Sure, there are lot of high income families in California who can support high prices, but wait and see what happens when there are twice as many homes for sale as there are buyers.
Already over 1 year ago, Martin Wolf understood that you can’t have your cake and eat it too.
http://www.ft.com/cms/s/b7e802.....e2340.html
Excellent article and read. I recommend it highly.
From the same Article:
Fed injected some more cash today.
The inflation will be massive when it finaly trickles down.
The other thing to consider in this cycle is the normal buisness cycles and how much overspending was done on the cheap credit.
So, there was probably borrowing against the future there as well. This should all keep rolling in over the next couple of years.
The FED tinkering is probably going to cause all of the down cycles to suddenly line up.
so… great depression here we come.
Never mind. The something something billion disapeared into the swirling vortex.
It’s amazing (as Huell Houser would say), listening to the analysts on Wall Street now singing a different song. It was just weeks ago they indicated that the market is strong and would not be effected by the “insignificant” sub-prime issues…. just like a typical weatherman who doesn’t know ____! They indicated today no problems in the standard conventional lending world, just show up with the minimum 20% down and required documentation…. who are they kidding for those looking at a $750,000 typical home purchase in California. $150,000 down your ready to roll with a $600,000 mortgage @ 6.9% for 30 years with a total monthly house payment including taxes and insurance of $4600 +/-….yes, please sign me up quickly.
Disturbing info from a large prime wholesaler. Signed docs and they may not fund the loan because it is unsaleable according to the Wall St banks like Goldman or Bear.
http://thegreatloanblog.blogspot.com/
Disturbing info from a large prime wholesaler. Signed docs and they may not fund the loan because it is unsaleable according to the Wall St banks like Goldman or Bear.
Great post.
One might ponder whether in Santa Ana some of the mortgage lenders may eventually be hauled into court and be accused of deceptive lending practices by the large immigrant contingent (both legal and illegal) that resides in Santa Ana?
Wow, if you’re a trial lawyer get ready to make some money, right?
Not so sure. First, a lot of these lenders will be rotting corpses by the time lawsuits are filed. Not much money to win anymore, unless they go after the State of California for failing to regulate. Like taxes?
Second, not sure there exists a legal foot to stand on since attorneys woulod be clamoring for the “murder weapon”, a.k.a. the gun that was put to the mortgage signatory’s head.