Southern California Real Estate Bubble Crash Blog

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.

Not exactly in SoCal (it’s in Sacramento), but you see a trend here:

Former employees of Folsom-based Central Pacific Mortgage are angry over the lack of warning before this week’s sudden layoffs.

As News10 first reported Tuesday, Central Pacific Mortgage and its Florida-based division Ivanhoe Mortgage abruptly closed their doors Monday saying they had no money to meet Wednesday’s payroll.

An estimated 260 people in Folsom, Orlando and in branch operations centers in other parts of the country were told on Monday to clear out their desks by the end of the day.

“The moral thing to do would of been to at least give the little people a fair warning,” said one former Ivanhoe employee by email.

So much for morality… No need to get on a soap box here about bad loans, the employees can do it just fine. I guess it’s just cosmic karma when you issue bad loans.

“It’s like a freight train coming at us full bore,” said Michael McGee of Winchester-McGee Financial. “The type of risk that’s been involved in the industry is far beyond anything I’ve ever seen.”

So far, the pain has been felt around the world in Subprimes.

I try to catch all of them in Southern California. This is because much of our booming economy has rested on real estate and lending. SoCal is the grand central station of mortgage lending; much of the world’s transactions pass through here.

Bloomberg reported some time ago about WMC Mortgage’s subprime unit slashing its workforce.

General Electric Co.’s U.S. mortgage unit will curtail lending and fire 460 workers, or 20 percent of staff, amid a rise in defaults by people with poor credit.

GE’s WMC Mortgage, the fifth-biggest subprime lender in the U.S., this week stopped making mortgages without down payments or to borrowers with credit scores below 600. WMC last year had $33 billion in new loan volume, according to industry newsletter Inside B&C Lending.

“We’ve realigned our resources to fit the size of the market,” said Brandie Young, a spokeswoman for Burbank, California-based WMC. The lender is adjusting underwriting policies amid a “fluid market,” she said.

Burbank is off the beaten path for mortgage lenders, but that many jobs can create problems in the short term. Longer term, migration patterns will likely happen because of it. Anyone who still thinks that our economy is booming in SoCal and we are immune to a slowdown need only look at our archives of the past 3 months and at the ml-implode.com site to see that over 40 lenders have imploded since the beginning of the year.