Friday, April 13, 2007 | Rosa Gonzalez used to pay cash for everything. She passed up credit cards offered her at Sears. When she wanted to buy something, she saved up enough money and bought it, free and clear. She’d moved to the United States from Mexico as a teenager and, as an adult, rented the same apartment in National City for more than a decade.
A house cleaner, Gonzalez’s first foray into credit was for a car, which she’s still paying off. But when she was left $10,000 by two clients who passed away, she decided to invest it in a home. She found a two-bedroom, two-bathroom condo in Barrio Logan for $235,000. Because she hadn’t built a very thick credit file, she ended up with a loan geared toward those with bad credit. The two loans she got in September 2004 to cover the cost of her home were at interest rates of 7 and 11 percent. The standard mortgage rate at that time was just less than 6 percent.
Since then, she said she’s been paying only the interest on the loans, and even that, at $1,500, is $200 more than she’d told the broker she could afford each month. And that doesn’t account for taxes, insurance and homeowners’ association fees. She was intimidated by the fact that the loan papers, laden with technical and legal terms, were in her second language, English.
“You sign the papers, but it’s so hard to understand,” she said.
In September, she’ll have to start paying part of the loan’s principal, forcing her to either refinance or face much higher monthly payments. Her brother already lives with her to help with the mortgage. She said she doesn’t know what she’ll do if she can’t make the loan more manageable come September.
Borrowers like Gonzalez fall into the now-famous category known as subprime — borrowers whose low or poor credit leaves them with interest rates higher than those of standard, or prime, loans.
As the nation’s attention has been drawn recently to the fallout in subprime lending, advocates and real estate professionals say minority and immigrant populations are suffering disproportionately from the foreclosure wave sweeping through many states, as they were more likely to rely on risky loans as their ticket into the market. In San Diego, the communities hit hardest by foreclosure have larger-than-average Latino populations and tend to be closer to the U.S.-Mexico border.
“We’re seeing a huge amount of foreclosures and defaults, and unfortunately, a lot of those are going to be in the Hispanic market,” said Leo Simpser, managing director of the San Diego-based Hispanic National Mortgage Association.
This decade, a national push to increase homeownership among Latinos coincided with one of the longest, most dramatic periods of appreciation for home values. Latino mortgage and real estate professionals put forth aggressive outreach campaigns in the community, while lenders reached out to huge, untapped sections of the market by loosening qualifying standards.
Risky Loans and the Damage Done
Educational computer kiosks sprang up at malls and public places, mortgage advertisements bore Latino faces, and lenders and agents translated more brochures into Spanish. In some places, a mobile mortgage center complete with bilingual homeownership counselors rolled to soccer games, churches and public events.
Because a widened lending gate allowed many more Latinos and other minorities into the housing market than had entered previously, lawmakers and special interest groups championed the lenders’ efforts to extend homeownership to those groups. But the loans that largely propped that gate open were loans that have turned dangerous quickly as the market cools, sticking borrowers with skyrocketing mortgage payments and causing many to lose their homes.
Nearly half of the Latinos in California who purchased a home in 2005 did so using loans meant for consumers with poor or weak credit, according to the Center for Responsible Lending. Those loans usually featured low introductory rates but reset after a couple of years, pushing monthly mortgage payments to impossible heights for some borrowers, and increasingly resulting in foreclosure. Thousands of homeowners now face the jarring terms they’d figured they would avoid by refinancing or selling their home if finances were tight. Some say they understood little of the financial future they were setting up for themselves, others claim they were outright duped by their brokers.
Of the 84,000-some such loans made to the state’s Latinos in 2005, the center predicts nearly 17,000 will foreclose — nearly one in five. Following unprecedented gains on the Latino homeownership front, the current and impending foreclosures have some researchers fearing the Latino community will have sustained a net loss in homeownership when the foreclosure wave subsides. Some advocacy groups are calling for a federal bail-out for borrowers facing foreclosure.
“We want it to be the American Dream, not the American Nightmare,” said Aracely Panameño, director of Latino affairs for the Center for Responsible Lending.
Latinos account for about 30 percent of San Diego County’s 3 million residents, according to Sandag. Nine of the top 10 county ZIP codes where homeowners are currently having the most trouble making their mortgage payments have higher than average Latino populations. And as Latino and homeownership advocates alike examine those trends against each other, they worry that San Diego’s foreclosure woes are just beginning, especially for the region’s minority communities.
But not all analysts agree on what caused the propensity for Latinos to borrow such risky loans. Some say some consumers made bad choices based on greed and desperation to catch the housing train without really understanding the agreement they were signing first. Others believe consumers were preyed upon by loan brokers who knew that homeownership would prove a desirable symbol of “making it.” The Spanish-language barrier proved a huge obstacle for consumers forced to trust that their brokers would obtain the best deal possible for them.
“The promotion of homeownership is not, in and of itself, a particularly malignant force,” said Paul Leonard, California director of the Center for Responsible Lending. “But these products have, in many cases, been fundamentally flawed.”
The choice of loans for homebuyers from neighborhoods with low incomes and large minority populations were once even starker — either you qualified for a traditional loan, requiring a credit file much thicker than many such borrowers had, or you didn’t get any loan. Lenders actually used to draw red lines on maps around neighborhoods where they’d bar residents from getting mortgages, as recently as 10 or 15 years ago. In such “red-lined” neighborhoods, minorities were often rejected immediately in their applications for mortgages, Leonard said.
California Mortgage Comparisons
Source: Center for Responsible Lending
Leonard said foreclosures have exploded disproportionately in poor neighborhoods in historical housing downturns. That’s often because such families have less of a financial buffer in case their homes lose value. But what makes this foreclosure wave different is the dramatic way in which previously red-lined minority groups were targeted for loans with high interest rates, exacerbating the woes of those ethnic communities when the music of the housing boom stopped.
As analysts and real estate trend-watchers attempt to compile an obituary of the housing boom, lax lending standards are credited with a lion’s share of its life and death. They’re looking not just at the standards that allowed consumers to qualify for the loans, but also at the standards for becoming a loan officer, especially the ethics they say such an officer should possess. Certain loans garnered brokers higher commissions, and brokers often pushed consumers into them by citing the rapidly escalating market as a safety net — if the loan became too much to handle, the borrower could refinance or sell at a profit, no harm done.
“The lenders were motivated to get more people into the market,” said Gary Acosta, founder of the National Association of Hispanic Real Estate Professionals, based in San Diego. “A lot of these consumers really didn’t understand the nuances, the fine print.”
Of those top 10 San Diego ZIP codes with high foreclosure rates, four are in the South Bay region and another three are clustered near southeastern San Diego, according to RealtyTrac, a foreclosure tracker.
In three Chula Vista ZIP codes on the list, 91910, 91911 and 91913, Sandag estimates Latino populations of 49 percent, 62 percent and 36 percent respectively. The 92154 Otay Mesa ZIP code has a 57 percent Latino population. Encanto, the 92114 ZIP code in southeastern San Diego, has a 32 percent Latino population and a 26 percent black population, representing another minority group hit hard nationally by predatory lending.
Most Foreclosure Activity
ZIP codes with the most homes in some stage of foreclosure, from notice of default to bank repossession as of April 6
|Zip Code||Area||Total Activity||92114||San Diego (Encanto)||378||91977||Spring Valley||375||92057||Oceanside||356||91913||Chula Vista (Otay Ranch, Eastlake)||353||92154||Otay Mesa||322||91911||Chula Vista (South)||298||91910||Chula Vista (North)||272||92105||San Diego (City Heights)||262||92126||Mira Mesa||229||92027||Escondido||225|
|Zip Code||Area||Total Activity|
|92114||San Diego (Encanto)||378|
|91913||Chula Vista (Otay Ranch, Eastlake)||353|
|91911||Chula Vista (South)||298|
|91910||Chula Vista (North)||272|
|92105||San Diego (City Heights)||262|
And 92105, City Heights in San Diego, has a 51 percent Latino and 15 percent black population. In that ZIP code, nearly one in three people were living below the poverty line when the 2000 Census was taken.
Among minorities, the pull toward using an agent or a loan broker from the same minority group is strong. And any language barrier accentuates that necessity.
“People tend to go with a loan broker or officer that they know,” said Gabe del Rio, director of homeownership for Community HousingWorks, a nonprofit housing organization in San Diego. “Everybody’s got a cousin or a friend who’s in the business. And, especially in ethnic communities, there’s a propensity to stay with someone you know.”
But sometimes, the broker the borrowers know is also the broker who takes advantage of them, abusing the trust of their client by tacking on fees or inadequately explaining the terms of the contract they’re signing.
“We have a ton of people in the industry who are completely unprofessional and don’t know what they’re doing, who are taught to be predatory,” del Rio said. “You shouldn’t pick a loan based on who you know. It’s a purely financial decision.”
Acosta said nearly four in five Latino homebuyers are first-time homebuyers, making it imperative that they find a trustworthy loan broker because they’re new to the process. While he emphasized that the consumers still bear responsibility in the end for the documents they signed, there’s a lack of communal experience to draw from.
“They’ve not been through the process, and they don’t even have extended family who understands the process,” he said. “They have to trust the people who are navigating them through.”
Del Rio sees another disturbing trend in the neighborhoods experiencing high foreclosure levels. When homes go into foreclosure or are sold in short sales, the values in the surrounding neighborhood drop. That means more homeowners in the surrounding homes could find themselves upside-down — owing more than their house could sell for — very quickly.
“It all feeds into itself,” del Rio said.
Simpser said his company has developed a “third way” to the dichotomous choice faced by many Latino would-be homebuyers to finance a home with a subprime loan or to not buy a home at all. Instead of doing away with requirements that the borrower demonstrate income or credit scores, the association looks at alternative measures of financial responsibility and ability to repay a mortgage, such as regularly wiring money to family members in other countries, or paying monthly rent.
Bruce Norris hosts a real estate radio show in Riverside County. He said the impact of foreclosures will eventually be widespread among both rich and poor neighborhoods, even though it has been so far contained in some low-income neighborhoods in Southern California counties. He said the worst is yet to come.
“This certainly hasn’t played out yet,” Norris said. “It inevitably has to turn more ugly. More and more foreclosures being sold in the marketplace will depress prices even more.”