Risky subprime loans account for at least a fifth of all mortgages issued in nearly 30 Los Angeles County ZIP codes over the past two years, and for at least 10 percent of loans in another 107 neighborhoods, according to a Business Journal analysis of house and condo sales data.
The review showed that the loans, increasingly being defaulted upon by borrowers, are concentrated in lower income areas of South Central Los Angeles, Latino neighborhoods such as Pacoima and high desert communities such as Palmdale and Lancaster. In one Willowbrook neighborhood, an area near Watts, the loans totaled at least 27 percent of all mortgages. (The 27 percent figure and all similar numbers are conservative because not all subprime loans could be counted in the review.)
The fear is that a high concentration of subprime loans in any neighborhood may lead to a high incidence of defaults, which likely would lead to drooping home prices in that neighborhood. What’s more, a crackdown on subprime lending means the pool of buyers for such homes would likely dry up.
If home owners are unable to move up, the deleterious effect could spread to higher-income neighborhoods.
Christopher Thornberg, a former UCLA economist who has long predicted that Los Angeles was in the midst of an unsustainable run-up in real estate prices, said the figures show that a price correction could be widespread.
“Prices in Watts have very little to do with those in Beverly Hills,” said Thornberg, now principal at Beacon Economics, an economic consultancy. “What this could mean, though, is that if a high amount of (subprime) loans facilitates a price dive in Watts, this could stir a price drop in places like Venice, Mar Vista, Palms, the Valley and so on. And you could see big price volatility in the middle, where most buyers are.”
13 percent countywide
In fact, the review turned up surprising numbers of subprime loans in working class and middle-income neighborhoods across the county.
ZIP codes with at least 10 percent subprime penetration amount to just about half of all residential neighborhoods in the county, spanning from Whittier to Pasadena to Woodland Hills. At least 13 percent of all loans issued countywide for the last two years fall into the subprime category.
The loans are generally issued to buyers with spotty credit history, an inability to document their income or little money to make a down payment. Subprime loans have traditionally accounted for only about 5 percent of all mortgages, but that figure is increasing.
Already, Los Angeles County defaults more than doubled in the fourth quarter of 2006, with 7,445 defaults compared to 3,480 a year earlier, according to DataQuick Information Systems.
“It’s definitely going to be a ripple where many people fall a level down in terms of the value of their homes and in terms of their economic status,” said Stan Ross, chairman of the Lusk Center for Real Estate at USC. “The whole market can eventually be dampened by this.”
The Business Journal analysis was conducted on 2005 and 2006 data provided by HomeData Corp., a Melville, N.Y. company that tracks housing data nationwide. It captured loans issued by prominent local subprime lenders, such as Fremont Investments & Loans, WMC Mortgage and New Century Financial Corp., the failing Orange County lender that has seen a surge of defaults.
However, it did not capture subprime loans issued by large institutions such as Countrywide Financial Corp. of Calabasas and Wells Fargo & Co., which are players in the subprime market but don’t have subprime subsidiaries that report such loans to regulatory agencies. As such, the analysis is a slightly understated representation of the penetration of subprime loans, at least in some neighborhoods.
The data does however bring into sharp focus how subprime loans are concentrated in lower-income areas. The Willowbrook neighborhood with the highest concentration of subprime loans, the 90059 ZIP code, had 319 such loans issued over the past two years. That’s more than all the ZIP codes in Santa Monica, Beverly Hills, Malibu, Bel-Air, Palos Verdes, Pacific Palisades, San Marino and Manhattan Beach combined.
Seven of the top 10 neighborhoods were in the South Central Los Angeles area. But in absolute numbers, two neighborhoods in Palmdale and Lancaster communities with lower priced homes that often attract first time home buyers had the greatest number of subprime loans. Palmdale’s 93550 ZIP code had 852, accounting for 22 percent of loans; Lancaster’s 93535 ZIP code had 817, also accounting for 22 percent.
On the other hand, one ZIP code in Santa Monica, 90401, had none. Another ZIP code in L.A., 90071, an upscale condominium neighborhood downtown, also had none.
Easy credit
One difficulty in establishing the possible effect is that the high numbers of subprime loans was unprecedented prior to the tail end of this last housing boom. That’s when subprime lenders began making the loans in large numbers.
There also are indications that the loans, which are costlier than prime loans with their lower interest rates, were being given to home buyers who should have qualified for better rates. Those increased monthly mortgage costs also could lead to unnecessary foreclosures.
“Take an Ameriquest or a Fremont for example. If you’re a minority you could walk in there with pretty good credit, but you’re still likely to walk out with a subprime loan because that’s what they do, that’s what they’re in business to do,” said Keith Corbett, executive vice president of the Center for Responsible Lending. “That’s the market they chose to make a niche in; that’s where the loans move faster. This makes their marketing pitches more alluring, which leads borrowers into stupid snap decisions.”
The center estimates that 52 percent of all loans made to African-Americans nationwide last year were subprime, with Latinos coming in second at 46 percent.
James Williams has a street level feel for L.A.’s epicenter of subprime lending as a realtor and owner of Coldwell Banker Enjoyable Estates, which was based in Culver City but also serves South Los Angeles.
“Over the past couple of years especially last year we have seen a high volume of those types of loans in this area. Borrowers are stretching because of the high price,” said Williams, who noted that even crummy homes in the neighborhood can go for close to $400,000.
He noted a recent house that listed for $390,000 on 115th Street in the heart of the 90059 zip code. The property is currently in escrow and was sold within ten days of its listing. He thinks that’s an aberration.
“The rest of the area is pretty depressed and you will see some price drops, not immediately but certainly within six months. There will be a lot of short selling, and lenders and realtors will probably get out of (the Willowbrook) area,” he said.
Williams, like Thornberg, fears that when prices drop there will be a cascading effect that will ultimately depress prices throughout Los Angeles. “Here’s the key. If a person in Watts can’t sell his house, he can’t move up to Fox Hills and that person in Fox Hills can’t move to Westwood. It goes from there,” he said.
So far, though, the fears have yet to translate in a wide scale documented fall in prices. According to HomeData, the median home price in Los Angeles County rose 4.8 percent in February to $550,000, despite a 31 percent drop in the number of homes sold.
However, Corbett said the number of subprime loans in the county are bound to eventually have an effect.
“This bears watching. Because there are people who don’t believe anything is wrong, people who brag about how ownership is up,” he said. “The question I always ask is, of all these new home owners, how many of them actually have good loans?”
