Foreclosures 101 – Part 2

After U.S. housing prices peaked in mid-2006 and began a sharp decline thereafter, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared.

Because of this, securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The net result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit both in the U.S. and around the world. Many banks and investment firms, including some of the largest, have collapsed altogether.

As U.S. housing prices declined, major foreign financial institutions that had borrowed and invested heavily in subprime mortgage-backed securities also reported significant losses. Defaults and losses on other loan types also increased as the crisis expanded from the housing market to other parts of the economy. At a minimum, total losses are estimated in the tens of trillions world-wide.

So far, here in the U.S., over 11.87 million homes have been foreclosed on since mid-2006. Because consumer spending drops drastically whenever housing values decline, the entire U.S. economy has been in a tail-spin throughout this period. Over 10 million jobs have been totally eliminated due to a dramatic drop in consumer sales and the resultant decline in production. In addition, the general decline in production and exchange has blocked the entry of large numbers of potential new workers into the workforce throughout the past half-dozen years, thus actually displacing even more workers from the economy than ever show up in the official figures. It is generally agreed by economists that the failure to revive the housing market remains the single greatest drag on the economy as a whole.

Throughout this whole process, California has been one of the most heavily hit states in the union. This is because California was one of the principal areas where the housing bubble developed, due largely to its connection with the Pacific Rim economies, and the fact that large numbers of people have migrated to California from other states, as well as from other countries, in order to benefit from this economy. California has consistently been listed in the top five states experiencing foreclosures on a monthly basis. It has often been listed in the number one spot. In December, 2011, California was listed second. Currently (February, 2012), it is listed third, right behind Nevada and Arizona.

According to the California office of the Center for Responsible Lending, 55% of the almost $300 billion worth of ARM  loans (adjustable rate mortgages) nationwide were taken out by California homeowners and about 44% of all option ARMs nationwide went to Californians. Because median home prices plunged in Southern California by 46% between 2007 and 2010, these borrowers were hit with higher monthly payments that they could not afford to pay, and with little or no chance of covering the cost of their mortgage debts even by the sale of the property.

Option ARMs were developed by savings and loans institutions in California in the 1980s. Originally, these loans were made for affluent borrowers with fluctuating but high levels of income. During the so-called “boom years”, lenders began to extend these loans to borrowers who did not pass even the regular standards for home loans. These loans enabled borrowers with low down payments, low credit scores and incomplete financial documents to take out loans to buy homes.

Most option ARMs were written to reset after five years and at any time the principal balance reaches the established ceiling. A number of mortgages have already reached the ceiling and the five-year time frame and many of these have already long since entered the lists of Los Angeles foreclosures. Many more are expected to default this year and will likewise get foreclosed upon.

Here in Los Angeles County, there have already been well over 100,000 mortgage foreclosures . Approximately 60,000 of these foreclosures have occurred here within the City of Los Angeles itself. During the first quarter of 2011,  Los Angeles foreclosures for sale and other distressed properties totaled 2,553, representing the highest total for Los Angeles County in the first quarter and giving the metro area a foreclosure rate of one household for every 46 residential units.

Kwazi Nkrumah

Kwazi Nkrumah

During that same period, the number of bank and federal home foreclosures in California accounted for almost a quarter of the nationwide foreclosure total. Compared with the 2010 first quarter, the total was actually down by 22%. However, the state still had the third highest rate of foreclosure for the period in the whole U.S. One household for every 80 residential units in the state was under foreclosure at that point. Among the 20 metro areas in the U.S. with the highest foreclosure rates for that quarter, 11 were to be found in California. While foreclosure figures dropped toward the middle of last year, they picked up again between October and December, 2011.

Kwazi Nkrumah

Note: This is a revised version of a document Kwazi Nkrumah wrote for the Coffee Party of Los Angeles. It is posted here with the author’s permission. The Coffee Party has been organizing against mortgage foreclosures in North-East and North-Central L.A. Kwazi Nkrumah is an organizer who is active in the Coffee Party, co-founded Occupy the Hood, and supports other grassroots organizations.

This is the second in a series of 5 that will be posted over several weeks. . Part IPart I,  Part III, and Part IV of this series can be accessed here.

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