Southern California Real Estate Bubble Crash Blog

It’s no surprise to most readers, but banks are finally figuring out that which was already extensively investigated and reported on by SoCal bubble bloggers; that the primary determinant of foreclosure is not the point at which the buyer purchased the home, but rather all of the “wealth harvesting” that was done via refinancings and second mortgages.  Nowhere is this more prevalent than in Orange County, it seems.  Most of the area’s extravagent showings of wealth were actually extracted from home equity.

A recent study by CSU Fullerton with assistance from Fannie Mae has linked the correlation of cash-out refinancings with foreclosure.  The main takeaway:  Homedebtors who are now in foreclosure are not victims of circumstance (the prevalent thinking in Washington), but rather victims of their own selfish and greedy tastes.

The Wall Street Journal has some a great summary up by Nick Timiraos.

Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.

The original loan-to-value ratio for these borrowers stood at a reasonable 84%, but second and third liens left homeowners with a combined loan-to-value ratio of about 150% by the time of the foreclosure sale date.

Borrowers, meanwhile, took out around $2 billion in equity from their homes, or nearly eight times the $262 million that they put into their homes. Lenders lost around four times as much as borrowers, seeing $1 billion in losses.

“[W]hile house price declines were important in explaining the incidence of negative equity, its magnitude was more strongly influenced by increased debt usage,” writes Mr. LaCour-Little. “Hence, borrower behavior, rather than housing market forces, is the predominant factor affecting outcomes.”

What happened in SoCal over the past few years has been tragic, not only because of what happened to families, but rather that it was a tragic waste of human abilities; a misallocation of our skills into a non-productive asset.  Rather than investing time and capital into a productive enterprise, it was wastefully fed into a giant Ponzi scheme.

Unfortunately, old speculative habits die hard, as is evidenced by the dearth of investment-worthy housing in the midst of a sea of WTF asking prices.

Now that the goose that laid the golden egg is killed, cooked, and finding its way through the proverbial lower intestine of our financial system, wealth will need to be made from something other than housing.  Here’s to hoping it’s something that actually produces value for our company.  However, considering the loose monetary and regulatory policies that are still written in stone, I wouldn’t hold my breath.