A regional market where there are a lot of delinquent loans should be a region where delinquent loans are renegotiated and not foreclosed on. In a region with lots of foreclosed-on houses, vacancies are high--and the marginal foreclosure hurts rather than helps the bank's cash flow. But that logic doesnn't seem to be applying east of LA:
FT.com / In depth - Subprime assault on southern California: By Matthew Garrahan: Far away from the sun-kissed beaches and palm trees that make up southern California’s idyllic coastline, trouble is brewing in the Inland Empire. Two years ago the sprawling arid region that lies to the east of Los Angeles was one of California’s property hot spots. House buyers priced out of expensive Orange County and the more affluent neighbourhoods of Los Angeles poured into towns such as Riverside, Moreno Valley and Perris. Limited housing stock and a relatively benign regulatory environment attracted developers, who built scores of new homes.
For a while, the Inland Empire rode the coat-tails of the California housing bubble as buyers, many of whom had limited financial means, took out subprime mortgages with low “teaser” rates. But with the subprime sector collapsing, the area is facing a looming crisis, with an increasing number of homeowners delinquent, or failing to make payments on their loans. Delinquency often leads to mortgage foreclosure, or the repossession of the house by the lender. “It used to be that we would get one call a month from someone needing help [about mortgage foreclosure],” says Vilma Mercado, home ownership centres manager with the Neighbourhood Housing Service of the Inland Empire, which promotes home ownership. “Now we’re getting close to 50.”... Riverside County appears to have been most badly hit by the subprime collapse, with mortgage defaults in the first three months of the year up 168 per cent on the same period of 2006, according to DataQuick.
Several factors have contributed to the region’s problems. “There’s a lot of predatory lending going on,” says Gary Aguilar, vice-president of counselling services at Springboard, a national service for people struggling with debt, which is based in Riverside. “I heard of one homeowner going through a divorce who ended up with a $115,000 [£57,410] mortgage on a $45,000 home.” When property prices were rising, buyers did not want to miss out, he says. “Everyone was jumping on board to buy a home. The majority of people did whatever they could do to have the American Dream and purchased homes they just couldn’t afford.” Ms Mercado says many buyers were not adequately prepared. “A lot of people moved into these areas thinking they were more affordable, but didn’t understand what they were getting into.” The increase in foreclosures in the region, she adds, is “absolutely overwhelming”.
Almost two years ago Sonya Mcphearson and her husband moved from Los Angeles to San Bernadino, where they bought a six-bedroom house for $480,000. Ms Mcphearson works in a hospital in Los Angeles 70 miles away. She commutes by train but stays with her sister during the week to save money. Her husband is a truck driver.Ms Mcphearson says that the couple were unaware they had taken out an adjustable rate mortgage. “Our payments went up and we couldn’t afford to pay. Now we’re three months behind and we’ve been told we have to leave. I don’t know what we’re going to do.” Refinancing the mortgage is not an option. The Inland Empire was one of the last parts of California to experience dramatic house price inflation, with the price of property in some towns doubling in five years.But last year the number of newly built houses coming on to the market reached its highest level in two decades. Prices fell and many of the buyers who had taken out subprime mortgages found themselves trapped. They could no longer rely on the equity in their homes to refinance their loans....
[T]he US Supreme Court appears to have curtailed California’s ambitions with a ruling this week that limits the power of individual states to regulate lending practices. However, any action that California or the federal government takes to resolve the subprime collapse is likely to come too late for the people currently facing foreclosure in the Inland Empire. The increase in foreclosures has “come on strongly and quickly and none of us anticipated it”, says Ms Mercado. “And it is nowhere near ending.”