Foreclosure Crisis Defers or Denies the American Dream
Charlene Crowell | 8/27/2010, 10:51 a.m.
As the U.S. Treasury Department devoted a day's discussion this week to the future of two housing government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, the Center for Responsible Lending (CRL) issued a new research report that details the impacts and characteristics of foreclosures in the nation's most populous state, California.
Dreams Deferred dispels the McMansion myth that the foreclosure crisis is the result of consumers purchasing high-priced, opulent estates. Instead, the new report found that the majority of California foreclosures were modest homes of three bedrooms or less with a median size of only 1,492 square feet.
Although foreclosures are highest in major cities such as Los Angeles, the highest concentration or density of foreclosures occurred in the big-city exurbs of Central Valley and Inland Empire.
Once again, CRL found distinct racial disparities in foreclosures. California Latino and African-American borrowers were heavily hit with foreclosures compared to non-Hispanic whites. Representing nearly half of all California foreclosures, Latinos were affected 2.3 times more often and African-Americans were affected 1.9 times more often.
As foreclosures continue to affect even more families, it is important to remember how this crisis actually began. Long-standing lender practices were shoved aside in favor of risky underwriting and broker kick-backs for pushing consumers to accept high-cost loans. This specific issue is directly addressed in Dreams Deferred.
"The combination of originators aggressively seeking to make as many loans as possible without due regard for underwriting standards and Wall Street's conviction that risk could be adequately managed" says the report plus, "Complex financial instruments helped inflate an enormous housing bubble in California and many other states."
In the aftermath of the housing bubble burst, 34 percent of California mortgages, according to CoreLogic, are upside down, owing far more than the home is now worth. Moreover, CoreLogic also found that three of the nation's four largest metro areas with negative equity are in California, Los Angeles, Riverside/San Bernardino/Ontario and San Francisco.
In its glory days of economic and population growth, California was known as the Golden State. Yet in recent years, that golden image has been tarnished by the profusion of foreclosures that still continue. Further complicating the likelihood of sustained economic recovery are double-digit unemployment and a state deficit so severe that state vendors get vouchers instead of payment and public employees may face furloughs this year.
Although California's mix of economic ills is one of the nation's worst, the underlying ills can be found in communities and states across the nation. Beyond nagging levels of unemployment, wages are flat for those fortunate enough to still be employed. As mortgage lenders look for higher credit scores, low debt ratios, and available cash after down payments and closing costs have been paid, fewer families can make the transition from renters to homeowners despite current low-interest rates.
California also illustrates another key issue that should be included in current housing policy discussions: affordability. According to a 2009 fourth quarter analysis by the Center for Housing Policy, Paycheck to Paycheck, California has 11 of the nation's most expensive housing markets.
When it comes to housing affordability, California is not alone. Other states where housing costs were found to outpace incomes include Arizona, Connecticut, Hawaii, Massachusetts, Maryland, New Jersey, New York, Washington State and Washington, DC.
What policymakers must understand is that if this trend continues, this generation will collectively lose its American dream as well as the economic benefits and pride derived from homeownership.
Charlene Crowell is the Center for Responsible Lending's Communications Manager for State Policy and Outreach. She can be reached at: Charlene.firstname.lastname@example.org.