SoCal Homeowners Did This to Themselves

Are you looking for one more thing to be incensed about? Well, here you go. The WSJ, citing a study done by a professor at Cal State Fullerton says that in Southern California, borrowers who defaulted on their mortgages tended not to have bought at the top of the market but had refinanced their houses at least once.

From the Journal:

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.”

So, the object of so much journalistic moralizing, the poor homeowner who was done in by unscrupulous agents, a misguided national interest rate policy and other assorted villains, turns out to be just as slick as all the rest. Instead of losing everything they have in fact extracted enormous sums of cash from their properties and left the bag for someone else to hold.

If the study is accurate and if its findings hold true across the country then one has to inquire as to why such enormous sums of money are being expended upon a class of people who have suffered no economic loss.

Realistically, I’m posing a rhetorical question since the truth will not be known until long after the last loan modification has been done. It will be the stuff of congressional hearings and academic papers but the money will have long since vanished.

What we might learn from this is what I’ve been harping on for the last week or so. We are continually discovering that our notions about what caused the housing bubble and ensuing crisis are faulty. Congress and the administration need to slow down in their mad rush to put in place regulations to prevent a repetition of the problem until such time as there is better data showing exactly it is that we need to cure.

Comments

[Jason722:]

Nice find, Tom. Thanks for highlighting this study and providing more viewpoints for the debate.

Jul 29 08:11 AM

[Leftfield:]

Congress: Ready, shoot, aim!
Often wrong, never in doubt.

Jul 29 08:49 AM

[receipt:]

Having lived in Pasadena, Chico, and San Jose for a total of about 11 years during my life before my wife passed away, I decided the cost of real estate and income taxes made retirement in "The Golden State" of California prohibitive. So, I did the responsible thing and moved to a residence I could afford in Omaha, Nebraska. Sure I would have preferred to live in sun drenched Southern California, but since I realized I couldn't afford to, I moved to a less desirable location where the cost of living was much lower.

Imagine my state of mind after realizing the I was the SUCKA! Hmmm, let's see........it will surely be a joy to continue to properly file my federal income tax return again this year. Made a fool of by my own country......which I fought for and still love.....but worry very very much about its' future.

Jul 29 09:33 AM

[Trane250:]

Too bad that it's not possible to repossess all of the goodies that the homeowners bought with their home equity lines of credit. But the mindset of Californians being what it is, this whole process will start up again some day. This is not the first time that this has happened.

Jul 29 09:58 AM

[john s. gordon:]

the essence of yuppiedom:
" you are what you own".
> jack

Jul 29 10:24 AM

[ccerenz2:]

This professor is on to something. In my neighborhood 8% of the properties are in the foreclosure process. These are homes at $900K and above. Having access to the tax records, which includes mortgage data, it is clear that those in trouble ran up the mortgages through refi, and second mortgages.
Some of these people thought they could live on a deficit because the house price was always going to rise, but others took trips, boughtexpensive cars, houses full of furniture etc. The interesting thing to me is this. Yes, they lost their homes, but they drove away in the cars, moved out the furniture, and are still wearing the expensive clothing.

Jul 29 10:29 AM

[notsosmart:]

with the next earthquake it may break off & float out into the pacific.it then becomes a nation & we bail it out.pelosi will be its 1st pres.

Jul 29 10:30 AM

[SoCalGal:]

The key to this article is: If the study is accurate and if its findings hold true across the country then one has to inquire as to why such enormous sums of money are being expended upon a class of people who have suffered no economic loss.

That's a big "if" and I really doubt the veracity of the study.

Jul 29 11:16 AM

[Gregman2:]

Very nice, Tom. It would be interesting to see more data on the income side (in efforts to explain such massive borrowing). Were second more homes bought. It's clearly a misuse of debt, but still...one wonders: Why?

Jul 29 11:37 AM

[Tom Lindmark:]

I agree it's a big if but why do you doubt the veracity of the study?


On Jul 29 11:16 AM SoCalGal wrote:

> The key to this article is: If the study is accurate and if its
> findings hold true across the country then one has to inquire as
> to why such enormous sums of money are being expended upon a class
> of people who have suffered no economic loss.
>
> That's a big "if" and I really doubt the veracity of the study.

Jul 29 11:48 AM

[awake09:]

"Congress and the administration need to slow down in their mad rush..."

What else could we apply this lesson to? These Administration econo-butchers act like they only have a short time to do all they want to do. Hopefully, they are right.

Jul 29 06:42 PM

[awake09:]

And who is the troll going down the list and voting thumbs down on every single comment? Go back to your D'Underground.

Jul 29 06:46 PM

[SoCalGal:]

Tom Lindmark, I doubt the veracity of the study because (a) it wasn't cited, only quoted; (b) it's only one study, not corroborated by other studies; and (c) it's the author's opinion only as to the conclusions drawn by his "study."

Aug 02 12:11 PM

[SoCalGal:]

Tom Lindmark, I doubt the veracity of the study because (a) it wasn't cited, only quoted; (b) it's only one study, not corroborated by other studies; and (c) it's the author's opinion only as to the conclusions drawn by his "study."

Aug 02 12:13 PM