Portrait of California Foreclosures

An important and empirically robust new study belies the stereotype of the California foreclosure crisis as resulting from house flippers and social climbers overreaching to buy 4,000 square foot mansions.

The typical California home in foreclosure is a very modest 1,500-square-foot, 2- to 3-bedroom house in the Central Valley or Inland Empire, refinanced in 2005 or 2006 by a Latino family.  The average home value at the time of the loan was about $400,000, considerably less than the $500,000 median home price statewide.   At today’s prices, that average California foreclosure property is likely to be worth between $200,000 and $300,000.   Fewer than half of mortgages in foreclosure were purchase loans.  Thus, the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes.  Essentially half of all foreclosures in California involve Hispanics, roughly in the same proportion that subprime mortgages were given out in the years prior to the crisis.  Thus, the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off.

The picture that emerges from this foreclosure study is of a generation of Hispanic homeowners, typically refinancing an existing, modest home, rather than buying an extravagant McMansion, losing years of accumulated wealth and savings in the process.  Opponents of foreclosure relief and debt reduction regularly invoke the useful fiction of foreclosure victims as profligate yuppies with surplus bathrooms.  The facts are otherwise.

Comments

[mt]

Thanks for this post and the link to the report, which I read. I did not see anything that supported this statement, "Thus, the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes." Nothing in the report tells you what the refinancings were used for, or even if they were take-out refinancings. The only item in the report that came close to the quote was a reference to "declining economic conditions" in the relevant areas, but in the relevant timeframe when the loans were being taken out, the Inland Empire was not declining but booming; it was the fastest growing area in CA, mainly due to the construction industry. I would expect a detailed examination of the use of proceeds, if possible, would show a much more varied picture and there would be a fair amount of refis that funded real estate speculation.

[Patches]

I see it daily. Didn't read the report but see it day in and day out here at work. Also older debtors on fixed incomes were extremely hard hit! They could not secure funds to fix that roof, garage, wheelchair ramp etc.... They took out homeEqs and were given adjustable rate mortgages for their trouble. (I won't say who but it starts with a big fat "B"!) Taking their "fees" from the debtors own equity, with a promise that home appreciation was a hard and fast rule of Real Estate. That they could do it faster with in-house underwriting via Conventional (BS) home EQS! Now there is a class action settlement where they promised the court that they will Modify or "set up modification" procedures and then they don't actually modify!

As for Hispanics... its south Texas..... of course they are.... here anyway.

[EsKate]

Thanks for the links, and I hope a lot more studies are conducted in other states. Maybe more reports like these are already out there, but I certainly haven't been finding that many.

[b]

if by middle-class standard of living you mean they used the HELOC to buy 57" flat-screen TVs, swimming pools, and SUVs with borrowed, rather than hard-earned, money, then you hit the nail on the head. it's the American way.

[Steve Sanchez]

I think it is a combination of all those. They are definitely investors who ended up buying one too many houses. Then you have people who got carried away with the rising housing prices and decided to jump into it, and then getting caught up in the downturn. Then you have the rest of the population that just happened to be in a bad situation, either through laid off from the job or something unfortunate like that. The foreclosure number supports the evidence that more bankruptcies are being filed in every state because of the worsening economy. Bankruptcy will probably not get any better until the real estate market start to turn around. Here is my personal story about how I fell into bankruptcy http://tofilebankruptcyornot.com/about-us/

[ronald]

This has been a national credit bubble and housing refi was the big fuel. What the money was spent on is beside the point since housing valuation jumped the creek millions of homeowners over ATM'd their properties and are now stuck with large mortgage debt that doesn't reflect either their ability to service the debt and that most are underwater. The fact that the Latino community and other lower echelon on the economic ladder make up the bulk of foreclosures to date is not news but it will creep up the social economic ladder as the credit bubble deflates.

[FactChecker]

I somewhat agree with this post that it is not necessarily large homes and a lot of minorities have thought that they could finally qualify for a house and in some cases predatory lending and the rush and anxiousness for fear prices will keep rising led people to buy. However, a lot of Asians have experience foreclosure issues particularly in California but one point you left out is that nearly 1/3rd of California's population is already Hispanic if not more due to illegal immigrations and hard to count folks. You also forget that proposition 13 is responsible for the housing bubble as well which affects people who relocate to neighboring states such as arizona and nevada and in limited cases states such as Idaho and Colorado as well as Oregon, all of which comprise the top 10 foreclosure states (when prices get high people sell their homes in california and move to arizona , colorado, nevada, and oregon).

[Patrick Hake]

It would be interesting to see whether the data would say, based on the education level and net worth coming into the boom, rather than on racial or cultural lines.

There were a lot of blue collar workers, of all races, who went willingly along with the banks marketing of "unlocking their equity" to consolidate unsecured credit and finance cars, boats, etc..

It was sold as the responsible move at the time.

"Why pay a higher rate, when you can refinance at a lower rate and have a tax deduction as well"

The problem is that the "smart move" was based on the assumption that prices never go down, which we now know to be untrue.

Anyone that is adult at this time, will remember this recession for the rest of their life and advise against this kind of risky behaviour. Unfortunately, in about 20 years there will be a new crop of people who think they are smarter than the current generation, and they will probably do it all over again.