SONOMA COUNTY’S SUBPRIME CRISIS
The subprime loan crisis has hit Sonoma County harder than other parts of the Bay Area, California, or the rest of the United States. The number of subprime loans in parts of Santa Rosa are off the charts!
This has caused the median home price to drop over 12 percent across the board and as much as 35 percent in some distressed areas such as the Northpoint and Bellevue Ranch areas in Southwest Santa Rosa where they estimate that over 40% of the homes in this area were purchased with subprime loans. Other distressed areas include the Kawana Springs area in Southeast Santa Rosa and the Waltzer Lane area of Northwest Santa Rosa.
The median home price in Sonoma county has recently dropped to $473K, which is equivalent to 2003 levels and a far cry from $619K where the market peaked at in August 2005. Overall sales have dropped to a 16-year low. The inventory has spiked up to 2,597 homes for sale which is the highest level since October of 1992 which was the time of the last major decline in the area.
Sales are declining across the Bay Area, but Sonoma County has been one of the hardest hit places in the region.
“The housing downturn is worse in Sonoma County and other counties on the Bay Area’s edge largely because more homeowners relied on risky loans to purchase homes around the market’s peak and may be forced to sell. Soaring foreclosures have led to tightened lending requirements that push out some buyers. We’re still trying to work through the inventory and the bad loans.” said Rick Laws, Santa Rosa manager for Coldwell Banker.
Below is a map of the region which outlines the number of subprime loans taken out in different parts of Sonoma County:
Nearly one out of five homes sold in Sonoma County during the easy-money years of 2005 and 2006 was bought with a high-risk loan, which triggered a chain reaction of financial distress that has rippled through the county’s housing market. Most of those loans were made to middle and low-income families desperate to buy homes in newer more upscale neighborhoods of west Santa Rosa, Rohnert Park and Petaluma.
Rippling outward, hundreds of mortgage and real estate workers in Sonoma County are losing their jobs. One in five residents in Sonoma County work in some part of the housing industry, so this will have a devastating effect on the local job market. Dozens of lenders nationwide are bankrupt, or laying off thousands of people, and those that remain have stopped lending except to the most creditworthy borrowers. Meanwhile, pensions, 401(k) plans, mutual funds and banks are losing billions of dollars, as the mortgages they hold lose value.
Foreclosures in Sonoma County will reduce the area’s economic growth by $308 million in 2008, according to a report released Tuesday by the U.S. Conference of Mayors.
“Certainly, it’s going to have an economic impact and we’ve been seeing that. It’s probably going to get worse before it gets better.” said Vicki Vidak-Martinez, mayor of Rohnert Park.
HOW DID WE GET INTO THIS MESS?
The current turmoil in the Sonoma County housing market was caused by the speculative fever that gripped Sonoma County in 2005 and 2006, where prices jumped 69 percent in three years and multiple offers above the asking price were considered the norm. This caused many people, with good credit and bad, grabbed whatever loan terms they could get just to snag a house before prices and interest rates escalated beyond their reach.
Many took adjustable-rate loans, even though they were risky and interest rates were rising. Their plan was that home values would keep going up and they would refinance out of the high-rate loan in a couple of years.
They were helped by sales people who raked in six-figure incomes getting borrowers to accept high-rate loans, and by lenders who made a bundle selling the high-yield loans to Wall Street investors unaware of the risk. Interest rates on these loans have turned out to be 2 percent to 3 percent higher than a conventional loan.
Some buyers dearly wanted to own their own home. Others simply wanted to get rich quick. Some didn’t understand the terms of their loan or the risk they were taking. Others just hoped they could get in and get out before the bubble burst.
Many are living happily in houses they could never have afforded otherwise. But some are losing their life savings and everything else. The tools for this trade were loans that started out with low teaser rates, permitted 100 percent financing, didn’t require income or job verification and allowed negative amortization that defers a portion of the payment by increasing the size of the loan.
These loans were called “subprime,” because they were often, but not always, made to subprime borrowers who couldn’t get a conventional loan because they had bad credit or no credit history, unverifiable income or an unusual property.
Now these loans are hitting borrowers with sharply rising rates, balloon payments and punishing prepayment penalties.
The true cost of these high-rate loans is coming due just as home values have fallen 10 percent since their peak in 2005. The drop in home prices has wiped out the refinance option for borrowers who can’t refinance for enough money to pay off the problem loan. Thus, the same go-go financing that dangerously distended the housing bubble two years ago is now driving its deflation, and spooked lenders are slamming their doors on homeowners they embraced just months ago.
The unraveling of years of easy money, fueled by record low interest rates and promiscuous lending, has begun.
The end of the subprime bonanza began in June 2004, when the Federal Reserve, after 3½ years of easy money, started slowly raising short-term interest rates. By June 2006, the Fed had raised a key short term rate 17 times, from 1.25 percent to 5.25 percent. That drove adjustable rates for mortgages up 2 percent or more.
As the subprime market collapses, fingerpointing has begun. Borrowers are being accused of lying to lenders about their income. Mortgage brokers are being accused of lying to borrowers about the terms of the loan. Real estate agents are being accused of pressuring lenders to make the loan. Appraisers are being accused of inflating their estimates of home values. Lenders are being accused of predatory lending. State and federal legislators are threatening to crack down on them all. Lawsuits and prosecutions are likely. Wall Street investors want their money back.
In Sonoma County, real estate agents and mortgage brokers are fielding calls from borrowers fearful of losing their homes. While some lenders say they are trying to find ways to help their overextended borrowers, many homeowners cannot make their payments and will lose their homes.
LATINO HOMEOWNERS IN SONOMA COUNTY HIT HARDEST
The consequences have been especially severe for Latinos who bought into the promise that home ownership was within their grasp. A group of Latino real estate agents and lenders in Sonoma County (most notably Chris Nunez) made a killing selling homes to Latino buyers through risky subprime loans that were knowingly well above what they could afford. Almost half who purchased homes in 2005 and 2006 relied on these financially dangerous mortgages.
A LOCAL ANALYSIS ON SUBPRIME LOANS
To understand the forces that created the crisis, and the borrowers and neighborhoods that will be most affected, The Press Democrat analyzed three years of loans made in Sonoma County.
The analysis revealed the most prevalent use of high-risk loans — and likely the most damaging fallout — is concentrated in Santa Rosa’s Latino and lower-income neighborhoods. But many communities throughout the county, from Cloverdale to Petaluma, have large numbers of borrowers at all income levels who are stretched too thin.
Among the findings:
- Almost 20 percent of homes bought in 2005 and 2006 were funded with risky, high-rate loans, up sharply from 4 percent in 2004. In California, the rate was nearly 30 percent.
- In parts of west Santa Rosa, south Rohnert Park and east Petaluma, the rate was more than 40 percent.
- Latino home buyers were heavy users of the high-rate loans. In 2005 and 2006, more than 40 percent of Latino buyers relied on the risky loans, compared with 10 to 12 percent for non-Latino buyers. A decade ago, lenders were accused of denying loans to minorities, a practice called redlining. But as the housing market boomed and prices spiraled up, lenders were encouraged to make loans easier to get.
- Most high-rate borrowers in 2005 and 2006 said they had annual incomes between $100,000 and $200,000. However, many borrowers exaggerated their incomes to qualify for loans, sometimes at the direction of their brokers and lenders. During the housing boom, many lenders did not require borrowers to submit documents proving they earned enough to afford the monthly payments.
- Investors made 15 percent of the home purchases in Sonoma County in 2005 and 2006. They rarely used subprime loans; only 8 percent of the high-rate loans in the county were issued to investors who intended to become landlords.
- The average size of subprime second mortgages jumped almost 30 percent in two years, from $81,510 in 2004 to $103,881 in 2006. Most second-lien loans were the downpayment on a purchase made with a subprime first mortgage. Occasionally, homeowners used them to consolidate debt, take out cash or remodel.
- Subprime borrowers in Sonoma County extended themselves further than most Americans. In 2005, a Sonoma County loan was 3.4 times the income of the buyer, at the mid-point, or median. Nationwide, the median spread was 2.6.
- Most high-rate loans in 2005 and 2006 were used to buy mid- and lower-priced homes, but 14(cq) loans were for more than $1 million.
Almost $1.7 billion of debt issued to buy homes in Sonoma County is at risk, based on a Press Democrat analysis of 85,000 loans made in 2004 through 2006.
Let’s take a look at one small street in Southwest Santa Rosa where there are tons of distress properties in a relatively new upscale neighborhood that is predominantly Latino: Banjo Drive. The homes in this area are all 4-5 bedroom, 3 bath, 2-3 car garages, +2100 sq ft houses with nice yards.
Banjo Drive is in the distressed Bellevue Ranch neighborhood. It is believed that over 60 percent of the homes on Banjo drives were purchased through subprime loans taken out between 2004 and 2006.
The majority of the houses on this street are either currently for sale by owner, facing a short-sale, have been foreclosed on, or are temporarily off the market to be relisted at a lower price. Some of those families are just hanging onto their homes and others hope to sell and avoid foreclosure as mortgage payments rise and home prices fall.
“Once a symbol of Sonoma County’s housing boom, Bellevue Ranch is now emblematic of hard times in neighborhoods across the region.More than 20 of the 35 homes for sale in Bellevue Ranch are on the market either because banks took them back or owners must sell to avoid foreclosure.”
2021 Banjo Drive - purchased December 29, 2005 for $630,000.
The owners couldn’t sell after six months on the market this year at $599,900. The lender foreclosed on the house and it is set for public auction.
2077 Banjo Drive - purchased November 9, 2006 for $590,000.
On market as short sale for $440,000.
2081 Banjo Drive - purchased June 2, 2006 for $644,500.
Was for sale at $469,000. Taken off the market Oct. 30. Seller plans to relist the property at $425,000.
2085 Banjo Drive - purchased June 12, 2006 for $644,500.
Owner considering short sale to be listed at $499,000.
2089 Banjo Drive - purchased November 30, 2005 for $655,000.
Currently on market as short sale for $489,000.
Already, lenders have seized 630 Sonoma County homes this year, up from 129 in all of 2006, guaranteeing that 2007 will be the bitterest year for homeowners since the county began keeping computer records in 1964. Another 400 troubled properties are on the market, and lenders are threatening 300 homeowners a month with foreclosure if they can’t bring their loans current. Last year lenders averaged 93 foreclosure threats a month.
Prices will continue to fall and more homes will be on the market as more and more people run into financial trouble due to taking out risky loans and losing the leverage available to home owners in a rising market. People will be forced to sell their homes. And if they have to sell quickly, they are more likely to lower the price. Or even worse if the home goes into foreclosure and goes back to the bank, they will sell it at a discounted price.
Nor is there any hope that the shakeout will soon be over. Next year interest rates will adjust upward for the first time on over 1,148 Sonoma County properties bought with risky loans in 2006. One-fourth of these homeowners will most likely lose their homes according to the U.S. Department of Housing and Urban Development. Things are only going to get worse through out the year in 2008.
“We are going to have waves of foreclosures,” said economist Christopher Thornberg, who tracks the Sonoma County economy and predicted the current real estate crunch. “This thing has a long ways to go before it shakes out.”