Stockton, California Shows Us How Bad The Mortgage Meltdown Can Get

An article from the BBC profiling Stockton, California does an excellent job of showing just how crazy the mortgage market got:

Steve Carrigan is in charge of economic development for Stockton. He says bank loans made it a party every day.

“People went to the bank and got a loan on the increase in the price of their home. They went out and spent all that money,” he explains.

“Price of the home went up again, they went back to the bank and got another loan. They went out again and spent that money on cars and jewellery and furniture – whatever they wanted.”

With the help of the banks, Mr Carrigan says, people in Stockton “spent their house”.

…and an excellent job explaining what is happening to banks now that the price of homes is dropping (and why they’re suddenly worried about how much it costs to provide hand soap in the break room):

Banks had got round regulators’ rules by selling off their risky loans, but because so many of the securitised loans were bought by other banks, the losses were still inside the banking system.

Loans held in SIVs were technically off banks’ balance sheets, but when the value of the loans inside SIVs started to collapse, the banks which set them up found that they were still responsible for them.

So losses from investments which might have appeared outside the scope of the regulators’ 10:1 rule, suddenly started turning up on bank balance sheets.

No-one knows how big the losses from investments based on American mortgages will eventually prove to be – estimates now range from $200bn upwards.


City of debt shows US housing woe
[BBC via Digg]
(Photo:Google Maps)

Comments

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  1. Crazytree says:

    I wondered how many so many people up in Stockton were in BMW’s and Benzes.

  2. Pope John Peeps II says:

    I thought they paid banks to be not stupid with money. How are they this stupid?

  3. Zombietime says:

    The banks and the home owners deserve whatever they get.

  4. Pope John Peeps II says:

    @Zombietime: What THEY get is also what YOU get. A huge lack of credit and no bank lending for the next few years? Maybe a recession? Certainly a lot more national debt to foreign institutions.

    In Canada, one of our major banks is losing billions of dollars thank to their own investment stupidity. If I find out that my bank has done the same, I’m immediately transferring all my funds to another institution. One not crippled by retardation.

  5. howie_in_az says:

    Wait, I’m confused. The homeowners took out loans using their home as collateral, but they’re still responsible for paying off the loan… so why do the homeowners suddenly think this is free money? They still have to pay the loan off or risk losing their home, something their neighbors will surely gossip about, causing them to lose standing in their social circle (which seems to be the only way some learn responsibility).

  6. vliam says:

    The neighborhood shown in the Google Map:

    Zillow of neighborhood

    /hopefully, that link will work

  7. nutrigm says:

    Unbelieveable that banks in the US of A didn’t take a history lesson from Thailand (around 1997-98) regarding this exact same scenario which led to the crash of the entire south east asian economy (still recovering in a one step forward two steps back fashion) Just UNBELIEVABLE this crap keeps happening!

  8. CaptainConsumer says:

    Stop confusing this story with inconvenient FACTS and FIGURES BBC. Cut it out. Don’t you know ALL these poor people were victims of fraud, and scams and some even had guns held to their heads to sign these loan papers.

    There, that oughta clear things up.

  9. starrion says:

    @Howie_in_AZ

    Except that the loans that they got were ARMS that they had always been able to refi before they adjusted. Now that the loans HAVE adjusted and they can’t make the adjusted payments, they are losing the houses.

  10. hollerhither says:

    @vliam:
    Yeah, it works — wow. 26 of the 29 have been on the market more than 90 days…5 sold in the last 3 months.

  11. howie_in_az says:

    @starrion: So the homeowners went out and borrowed a bunch of money using their home as collateral and didn’t get a fixed interest rate?

    I still don’t understand how anyone could budget knowing that a huge chunk of change will cost more next year, but maybe I’m just stupid like that. Not to mention you’re buying something (e.g. a car) that will depreciate the second you drive it off the lot and using the roof over your head (which, until recently, “will only appreciate”) as collateral. DOES NOT COMPUTE.

    From the article: “Faced with crowds of a hundred buyers, bank loans in hand, all chasing the 20 houses he might have on offer, he organised bingo-style lotteries.”

    This is pretty lol, as a builder asked me to do this before I moved to Arizona. They would set up a lottery wherein one person “won” the ability to buy the home, but the terms of the lottery were such that all contestants had to be present. Living in Pennsylvania at the time, this was pretty unreasonable. I told the rep he was utterly insane, that life was not a reality show, and he called me a moron. Heh.

  12. doodaddy says:

    @howie_in_az: If you bought your house for $200K and a few years later it is worth $300K, then you can borrow the $100K that you are going to get when you sell…

    Then, if you can’t sell, or if the house drops back to $200K in price, oopsie!

  13. ratmonkey says:

    I grew up in Stockton, and was just back there for Christmas visiting family. It really doesn’t surprise me that it’s so bad there. The local gov’t has been beautifying the city for the last 10 years, but this last visit just reminded me of how ghetto most of the city really is. Everyone has the pimped out cars, and are now left with no way to pay for it. Glad my parents didn’t put 20’s on their Pontiac.

  14. artki says:

    Here are the key ‘graphs from the article

    >Loans held in SIVs were technically off banks’ balance sheets, …

    No-one knows how big the losses from investments based on American mortgages will eventually prove to be – estimates now range from $200bn upwards.

    … when losses appear on banks’ balance sheets, the regulator’s 10:1 rule comes back into play because losses reduce a banks’ shareholder capital.

    “If you have a $200bn loss, that reduced your capital by $200bn, you have to reduce your lending by 10 times as much,” he explains.

    “So you could have a reduction of total credit to the economy of two trillion dollars”.

    —————-

  15. itmustbeken says:

    I am sorry, but I find it very hard to feel sorry for people who spent all the equity in their home (more than once!) on adjustable rates loans and then lost it. They were not victims of fraud, they were victims of magical thinking. (Real Estate will never loose its value! Who cares how much I spend, I’ll just sell and pay it off and use the excess to buy a home in ______ !)

    Sounds like mother nature weeding out the sick and stupid from the home owning herd. Apparently a large part of that herd was located in the s-hole that is Stockton.

  16. gamehendge2000 says:

    I’m not worried so much about 2 trillion less in credit being available to the American economy. Since I pay my bills, someone will lend it to me when I need it. Although it may be at higher rates than I’d prefer, at least it will keep the unwashed masses out of the system to continue these problems in the future.

  17. weave says:

    Wow, simply wow…

    245 days on the market. Asking $635, “zestimate” of current value is $429. That has to hurt.

  18. TechnoDestructo says:

    @gamehendge2000:

    The problem is whether this will affect your ability to pay your bills.

  19. Rusted says:

    Very anecdotal story, not much hard data. Throw this one back.

  20. formatc says:
  21. osiris7 says:

    What really makes me angry is that while some people run off with piles of cash, the rest of us who had nothing to do with this debacle, will have to suffer for it economically. The money-men’s pyramid scheme shows itself once again.

  22. hollerhither says:

    @weave:
    Realtor Jeff says it’s “breath-taking.” (photo caption) Yeah, breathtakingly overpriced. The Zillow stuff is often way off (just looked up my new ‘hood) but, still.

  23. JayDeEm says:

    @howie_in_az: They would set up a lottery wherein one person “won” the ability to buy the home, but the terms of the lottery were such that all contestants had to be present.

    This sounds a lot like the builder I was working for when I moved here. It was insane but somewhat necessary to keep things fair. They also did a good job keeping the speculators out of their homes, which means that most of the homes actually have people living in them.

  24. ceejeemcbeegee is not here says:

    Here’s what I don’t get: why did all these people re-fi rather than get a HELOC?

  25. cerbie says:

    @ceejeemcbeegee: if you’re smart enough for that, you’d probably be smart enough to see that it wasn’t going to last forever.

    Now, I have a bit of a question: how damaging would it be to banking institutions, if regulations forbid them from selling off loans, except when in dire circumstances?

    I don’t think anyone who acted like the people in question should get any reprieve, but it would be nice to have the damage a bit more isolated, rather than spread out across various businesses and investments.

  26. FatLynn says:

    @ceejeemcbeegee: Depends on your goals…if you re-fi to a fixed, your rate is, well, fixed. If you get the HELOC, it is variable.

  27. Wormfather says:

    I feel bad for the employees.

  28. m4ximusprim3 says:

    Eh, all the truly rich people in Stockton moved to Lodi years ago.

    It reminds me of the dave chapelle skit about DC when crack was big: “The white people with binoculars are in VA looking across the river: ‘Not yet Bob, not yet'”

  29. isadora says:

    @gamehendge2000:

    The “unwashed masses”? Seriously, it must be amazing to be you.

    I know it might go without saying–since all of you pay your bills on time, are smart about finance, and have plenty of time and cash to surf websites–but everybody is not just like you. People with lower IQs and less life experience may just have figured that the bank wouldn’t give them loans they couldn’t afford.

    I’m not saying all homeowners are innocent but they’re not all guilty, either. People make mistakes. This was a systemic problem, not just some yokels trying to live large and beyond their means.

    Predatory lending–whether it comes to credit cards, mortgage houses, or payday lenders near party stores—has been on the rise in America for decades. Count yourself lucky–and not just a smarty-pants or part of the “washed” masses–if you haven’t been suckered here and there.

  30. mistersathingtonfroggleby says:

    The worlds collide, but all that we want is (to refi) a shady lane.

  31. Spooty says:

    @weave:

    You said, “245 days on the market. Asking $635, “zestimate” of current value is $429. That has to hurt.”

    I happen to be reading this thread almost 4 and a half months later. So I thought I’d check what’s happening to this house now. Apparently the owners are coming to their senses, at least a little bit, since the asking price is now $535,000, i.e., a $100,000, or almost a 16% drop.
    Unfortunately, the Zillow “Zestimate” has also slightly dropped, to $419,500 today. Zillow isn’t necessarily all that accurate, but I’ll bet that the owners are still either greedy, delusional, or both….