April 12, 2009

Updated: Ground Zero of the Mortgage Meltdown



This stacked graph shows that mortgage lending to Latinos in Southern California's huge Riverside and San Bernardino counties, the Inland Empire, arguably now the foreclosure capital of America, grew 782% from $1.5 billion in 1999 to $13.5 billion in 2006.

Last October, my reader "Tino" introduced me to the federal government's Home Mortgage Disclosure Act database, which was set up to ensure that minorities are getting enough mortgages. It doesn't measure whether they're paying the mortgages back, and it's rather awkward to work with, but it's very useful for understanding how we got the Housing Bubble, which set off the Mortgage Meltdown, which set off the Global Crash.

As you know, somewhere approaching 7/8ths of defaulted mortgage dollars at the time of the economic crash in the fall of 2008 were lost in just four rapidly Hispanicizing states: California, Arizona, Nevada, and Florida. Indeed, California accounted for a sizable majority of foreclosed mortgage dollars by itself.

The above graph focuses on what has been perhaps the Ground Zero of the foreclosure crisis, Southern California's exurban Inland Empire, the Riverside-San Bernardino Metropolitan Statistical Area (Riverside and San Bernardino Counties). In the "Inland Empire, there were 112,284 foreclosure filings in 2008. The Inland Empire accounted for 3.6% of America's foreclosure filings in 2008 and likely approaching 10% of America's defaulted dollars due to the much higher home prices there at the peak of the Housing Bubble.

That was the most foreclosure filings of any metropolitan area in the country, more than the metro areas of greater Phoenix, Las Vegas, Tampa-St. Pete, Miami, Atlanta, New York City, Detroit, or even the giant Los Angeles / Long Beach area. At 8.02% of housing units in foreclosure, Riverside-San Bernardino endured the third highest foreclosure percentage in 2008, trailing only the Stockton and Las Vegas MSAs.

The point of trying to understand what happened is not to pin the blame on somebody, but to understand what happened.

Why has so much money been lost on foreclosures in the Inland Empire?

Well, because so much money was loaned out from, say, 2004 to early 2007.

The above graph, drawn from numbers from the federal Home Mortgage Disclosure Act database, shows for 1999 to 2007 the aggregate of dollars of originations of both "conventional purchase" mortgages (HMDA's Table 4-2) as well as FHA, FSA/RHS, and VA loans (HMDA's Table 4-1).

(Caveats: The graph above doesn't include other types of loans such as nonoccupant, home improvement, or multi-occupant. Nor does it include refinancing. Refinancings are an important part of the Housing Bubble story, but the HMDA database doesn't seem to offer a way to distinguish between refinancings that make it likelier that the borrower will pay back -- e.g., refinancing from a higher variable rate to a lower fixed rate -- versus refinancings that make the loan more risky ... e.g., taking cash out of home equity and blowing it in Vegas. Moreover, Home Equity Lines of Credit are optional for the lender to report, so I don't know how useful HMDA's refinancing data are. Further, to simplify things, I've left off Asian, blacks, and other minorities, mixed couples, and mortgages where race is unknown.)

As over-simplifed as it is, the graphs still gives an informative overall picture of what went on in the Inland Empire that drove prices to absurd levels followed by foreclosures: a giant surge of lending to Hispanics, followed by a sobering up in 2007 (that no doubt accelerated in 2008).

The most obvious fact is that new mortgage dollars flowing to Hispanics in this sprawling California region increased 782% from $1.5 billion in 1999 to $13.5 billion in 2006. Is there a word in the English language for that? We have words like doubling for when something increases 100% and tripling for when it goes up 200%, but is "nontupling" even a word?

This huge increase in demand clearly had a big impact on home prices.

In contrast, the non-Hispanic white borrowing over 1999-2006 was up 134% (more than doubling). To be fair, white borrowing from 1999 to the white peak in 2005 was up 199% (a tripling), but white borrowing in the Inland Empire fell 22% from 2005 to 2006 as more prudent people ran for the hills.

In the Inland Empire in 1999, Hispanics received only 34% as much mortgage money as non-Hispanic whites did. By 2006, Hispanics received 127% as much as whites.

Clearly, there was a mortgage bubble among non-Hispanic whites, too, but white borrowing peaked earlier, in 2004-2005, when home prices weren't quite as ridiculous, and has declined in a somewhat less frantic fashion. In contrast, the Latino bubble peaked in 2005-2006 when home prices peaked, and then started to collapse in 2007. (The bursting of the subprime bubble is usually dated to about the beginning of August 2007, although there were major tremors in March 2007). In 2007, Hispanic borrowing crashed back down to $5.0 billion as financial institutions finally started to worry about loan quality. The dollars flowing to Hispanics fell 63% from 2006 to 2007, versus 38% among whites. In the more realistic atmosphere of 2007, Hispanic borrowing was back down to 75% of white borrowing.

By the way, black borrowing from 1999-2006 was up 464% and Asian/Pacific Islander borrowing was up 987% to $3.4 billion.

These increases in borrowing dollars may sound like some craziness restricted to one section of California, but last year Tino found similar patterns at the national level: mortgage lending for home purchases to Hispanics was up 691% nationally from 1999 to 2006. For blacks, the increase was 397%. For Asians 218%, and for whites about 100%.

So, the Inland Empire wasn't unique in the size of the growth in lending to Hispanics, it just had more to start with (40% in 2000, rising to 47% in 2006). Also, unlike Texas, the supply of homes in California is held back by lots of environmental regulations, so supply lags demand much more in California, making the state more susceptible to price spikes.

In short, as Yogi Berra might say, the Inland Empire is just like the whole country, only more so.

Using Ground Zero as an example, we can get a pretty good understanding of the causes of the Housing Bubble and subsequent Mortgage Meltdown.

What caused the increase in home prices?

First, population growth. The total population of the Riverside and San Bernardino Counties grew 22% from the Census on April 1, 2000 to 2006 (the Census Bureau's American Community Survey estimated population over the 2005-2007 time period). That 731,000 more people.

Hispanics accounted for 71% of the increase (or 521,000 additional people), Asians for 11%, whites for 10%, and blacks for 7%.

This population increase, largely driven by immigrant ethnicities, was seen as leading to every rising home prices, which were seen as as justifying ever riskier lending.

Second, and more important, as we see above, ever more lending was directed to ever more marginal borrowers.

Keep in mind that the Bush Administration was actively promoting riskier lending to minorities, such as by calling for the elimination of down payment requirements and the speeding up of the approval process, in the name of closing the "racial gap" in homeownership rates. Bush's speech at his October 15, 2002 White House Conference on Minority Homeowership was very similar to the speech Angelo Mozilo of Countrywide Financial gave in February 2003 at a Harvard conference.

Not surprisingly, first time homebuyers in California got zero downpayment mortgages less than 7% of the time in the late 1990s, but rocketed up to 33% in 2004 and 41% in 2006.

As late as 2002, the year that George W. Bush announced his goal of adding 5.5 million minority homeowners by 2010, Hispanics in the Inland Empire got only 42% as much in mortgage dollars as whites. From 2002 to 2006, however, lending to whites grew 42%, while lending to Hispanics grew 325% (more than a quadrupling).

A fraction of that growth in lending was of course due to population growth. The Hispanic population in the Inland Empire grew by 42% from the Census in 2000 to 2006, versus just 5% for whites, so let's look at mortgage dollars on a per capita basis to remove the population growth factor:

As you can see, in 2000, Hispanics in Riverside-San Bernardino received $1,417 per capita in mortgage dollars, 43% as much as whites, who got $3,324. In 2006, Hispanics got 117% as much as whites per capita: $7,725 per Hispanic versus $6,612 per white. Lending per capita to Hispanics in the Inland Empire was 5.5 times larger in 2006 than in 2000. Even more bizarrely, the rate at which mortgage money flowed per capita to Hispanics relative whites was 2.7 times greater in 2006 than in 2000.

Relative to whites, were Hispanics really 2.7 times more credit-worthy in 2006 than in 2000? No doubt there was some improvement in Inland Empire Latinos' incomes between 2000 and 2006, as they got more jobs and more pay as, say, mortgage brokers, real estate agents, home construction workers, furniture movers, and ... hey, do you notice the pattern here? Circular logic ...

Yet, Hispanics' ability to repay big mortgages certainly didn't improve 2.7 times relative to their white neighbors' ability to repay in just six years.

One might think that investors might have realized that Hispanics hadn't suddenly become a safe bet to repay huge mortgages. But, mortgage-backed securities hawkers like Angelo Mozilo of Countrywide Financial had a popular answer to doubts: that's just the redlining racist old way of thinking that kept Hispanics and blacks from owning homes at the same rate as whites.

If you wanted to be a big player in modern mortgage finance, like the much honored financial statesman Mr. Mozilo, you constantly repeated the Community Reinvestment Act cant about how America needs to loan more money to lower income and minority communities. In fact, the more you trumpeted how much you were lending to minorities, the more "regulatory cover" you enjoyed from pesky regulators asking questions about your high pressure boiler room operations.

If you wanted to make it big in the mortgage world but had politically incorrect doubts about all this, well, you kept them to yourself.

As Henry Canaday has pointed out:
Is it a coincidence that the biggest purely financial crisis in 75 years, which has cratered the world economy, is occurring because of massive losses in the one financing sector that is most heavily and obviously influenced by government pressure? The investment banks could have used their sophisticated models to underestimate the risks of all sorts of assets, but apparently these models only blew up when used on mortgage-backed securities.

Thanks for reading all this. If you found it useful, please feel free to send it around.

(Boring methodological note: Why I am I using 2000 in this graph and 1999 in the other one? 1999 is the earliest year offered in the federal HMDA database, so I use that. Unfortunately, we don't have detailed population breakdowns for 1999, but we do have them for April 1, 2000 -- the Census -- and for 2005-2007 -- the Census Bureau's American Community Survey.)

Second Boring Note: This is revised from the graph I had up on Sunday that showed just conventional private borrowing but not FHA and other government-aided lending. FHA lending was moderately important back in 1999, so I decided to include it.

My published articles are archived at iSteve.com -- Steve Sailer

32 comments:

Anonymous said...

Your article cuts off in the middle

Anonymous said...

When did we all become "non-Hispanic whites?" Can I still use just plain "white?"

susan@spinning

Jim Bowery said...

A high school classmate of Paulson's (Christian Scientist) I know believes it was retirees buying second homes in sunbelt states rather than Hispanics. My impression is this is the lie the political class is telling itself behind closed doors so it is never subjected to much scrutiny.

Captain Jack Aubrey said...

When did we all become "non-Hispanic whites?" Can I still use just plain "white?"

Agreed. Most of the people we're referring to aren't "white," but a mixed race group that is at best part white and part American Indian - or Asian, if American Indians aren't considered to be their own race.

I like the term Mestizo. It's the most accurate and least confusing term we have.

Keep in mind that the Bush Administration was actively promoting riskier lending to minorities, such as by calling for the elimination of down payment requirements.

We will never, never, ever hear that from the MSM. Never. As much as they hate Bush they will never blame his immigration/AA policies for the debacle, partly because that would also be blaming the left.

Remember, it's those damn xenophobic, conservative pro-life Christians who are responsible for this mess, not the socialists and neofedualists!

A high school classmate of Paulson's (Christian Scientist) I know believes it was retirees buying second homes in sunbelt states rather than Hispanics.

Thus all the stories of homeless retirees.

Wait - there are no such stories

Bob said...

Great work, especially producing graphs like this.

The easy lending, which was often followed by huge cash-out refinancing, likely increased the number of immigrants further, not to mention all the construction jobs.

You need to hit the GOP interest groups behind this more however. Sure the minority activists were happy and gave their blessing to this massive fraud, but the people with serious money and political muscle behind this were GOP interest groups, especially the real estate developers, realtors, and independent mortgage bankers. Between them, these three groups control the Republican parties of every Western state.

Jim: Eastern LA suburbs are NOT a retirement destinations. It is more polluted, expensive, crowded, and crime-ridden compared to FL, AZ, and coastal California. The only people that retire to the LA area from Illinois, etc, are those with kids in the area.

Retired UAW couples with a modest pension and social security could not afford to retire there during the bubble there even if they wanted to. Basic 4-bedroom houses with 1/6 acre yards were going for $750,000 at one point.

Now there is so much empty housing and prices have fallen as much as 75% this area might be an OK retirement spot, but it is still less desirable than Phoenix and Florida.

testing99 said...

The dollar amount of the Mortgage crisis is approximately 3 trillion dollars lost.

In the Dot-Com implosion, it was 10 trillion.

Last time I looked, 10 Trillion > 3 Trillion.

So why is the sub-prime mortgage so much more harmful than the Dot-Com implosion?

Answer: the sub-prime Mortgage crisis was global, from Iceland to Hungary to San Bernadino, and it had lots of insurance written against it.

The real liabilities likely far exceed 10 trillion. Who knows what they are?

But blaming just the Hispanic sub-prime is not particularly accurate. They didn't help, but by their own measure they don't measure up to even the Dot-Com crisis.

Unless 3 > 10. I must have missed that math class.

Anonymous said...

You picked one of the most Hispanic metros of one of the most Hispanic states in the country, and it still shows whites accounting for half the mortgage activity at the peak. That's not terribly convincing.

Anonymous said...

t99,

The only way to provide an aftermarket for all the high-risk mortgages to Hispanics was to bundle them with other mortgages and that's the heart of the problem: with all the different layers of risk in one instrument, nobody knows what it's worth. The bad apples spoil the whole barrel.

There is also a qualitative difference between schleps ruining their own credit in day trading and multi-national investment banks pyramiding loans on top of toxic assets. That's why the dot-com/day trading bubble didn't explode into a global crisis.

Steve explained this as well, but you were likely pre-occupied with figuring out how to get Mestizos to vote for Sarah Palin.

--Senor Doug

Anonymous said...

.. it still shows whites accounting for half the mortgage activity at the peak. That's not terribly convincing.

It's convincing if they were defaulting at a much higher rate than the whites. There is no data available on that one, but it's a very reasonable assumption.

Dennis Mangan said...

Spain had one of the bigger housing bubbles and it also had loads of Latin American immigration. Coincidence?

ironrailsironweights said...

I like the term Mestizo. It's the most accurate and least confusing term we have.

It wouldn't apply to the Puerto Rican and Dominican Hispanics in the east, who are predominately mulatto.

Peter

Roger Chaillet said...

The facts about "whites" and "Hispanics" are all wrong.

I worked as a loan officer in the sub-prime mortgage field for over two years. I used to have to ask prospective clients about their race and ethnicity. I did so because the law dictated it. I originated loans largely in Texas, Oklahoma, and New Mexico. Many times Hispanics would answer "white" in response to the question about race and ethnicity.

If mestizos like Jeb Bush's kids are "white" then I'm the king of England.

Look at the Most Wanted posters for major Sunbelt cities such as Los Angeles and Phoenix. Hispanic perps are always labeled as "Hispanic" for ethnicity and "white" for race.

It's all a joke.

Anonymous said...

Unless 3 > 10. I must have missed that math class.

If someone is worth $2 million today and is only worth $1 million tomorrow, he has a problem. If you've loaned someone $500,000 to buy a house today that tomorrow is only worth $200,000, you have a problem.

That's the essence of the current crisis. That part's not hard to fathom. Suddenly a business that is central to global economic exchange is sitting on a lot of bad loans.

But blaming just the Hispanic sub-prime is not particularly accurate. They didn't help, but by their own measure they don't measure up to even the Dot-Com crisis.

You ever bake cookies or bread and forget to include the baking soda? It's usually only a teaspoon or so but forget it and the product isn't just less tasty - it's ruined. Hispanics were the necessary ingredient in this bubble. Easy loans, cheap labor, greater demand - without Hispanics you have none of those; with them you have them all.

Captain Jack Aubrey said...

Off topic, but what's not to despise about this New york Times article on Ruth Bader Ginsburg? It has all the necessary Jewish obsessions: Israel, the holocaust, internationalism, group underrepresentation (!!!), you name it.

Observes the august justice: "There I am all alone [as a woman]," she said, "and it doesn’t look right."

I always chuckle a little when I hear a Jew obsessing about group underrepresentation.

But we the people owe Ruth a great debt: She helped introduce the term "gender discrimination" as a synonym for "sex discrimination," she said.

The world trembles in awe at it's debt.

Lugash said...

I am Lugash.

You picked one of the most Hispanic metros of one of the most Hispanic states in the country, and it still shows whites accounting for half the mortgage activity at the peak. That's not terribly convincing.

I sort of agree with this. On one hand you need to calculate the lending per capita for each race. I'm not familiar with Riverside and San Bernardino counties, but I would expect the percentage of whites decreased and Hispanics decreased. The demographic changes would inflate the Hispanic numbers relative to the white numbers.

On the other hand, unadjusted it shows what massive changes we have had in the makeup of our society.

I am Lugash.

eh said...

A small price to pay for diversity, which as we all know is the best of all good things.

Anonymous said...

"Steve explained this as well, but you were likely pre-occupied with figuring out how to get Mestizos to vote for Sarah Palin.

--Senor Doug"

Nah, he was chasing the leggy blond schicksas who refuse to satisfy his feral urges but instead are looking out for the alpha males.

Robert said...

"7/8ths of defaulted mortgage dollars at the time of the economic crash in the fall of 2008 were lost in just four rapidly Hispanicizing states"

Just four out of the fifty rapidly Hispanicizing states?

Truth said...

"Nah, he was chasing the leggy blond schicksas who refuse to satisfy his feral urges but instead are looking out for the alpha males."

Someone's rapidly turning into a parody.

Jim O said...

First, a pet peeve: 10 >3 is arithmetic. Calling it "math" is like calling a roller skate a vehicle. True, but unnecessarily vague and pretentious.

Another one: "Gender" is (or was, till the occupant of the ACLU seat on the Supreme Court her hands on it) a grammatical term, not a biological one. Why the need for a euphemism?

And as for how the Supreme Court looks with Ginsburg: sometimes it looks like this.

Anonymous said...

it still shows whites accounting for half the mortgage activity at the peak. That's not terribly convincing.

Yeah, and I know a white couple who got a subprime loan, so it's whites, too! It's whites, too! Stop pointing the bony finger of blame, Steve!

Fernandinande said...

Related, from 'Science Daily':
"Government Involvement In The Economy Increases Ethnic Rebellion"
"A new study in the journal International Studies Quarterly reveals that ethnic violence is actually much less likely in countries where the free market predominates than it is in countries where the government plays an extensive role in the economy."

Anonymous said...

Skim the cream and run!

Captain Jack Aubrey said...

Steve: Slightly off topic, but any take on the ongoing discussion/spat between Richard Nadler and Mark Krikorian over at The Corner?

Captain Jack Aubrey said...

"Government Involvement In The Economy Increases Ethnic Rebellion"

Correlation or caustion? Symptom or cause?

Just four out of the fifty rapidly Hispanicizing states?

Hispanicized. In the 4 states in question it's a done deal, especially in CA.

AmericanGoy said...

"You need to hit the GOP interest groups behind this more however. Sure the minority activists were happy and gave their blessing to this massive fraud, but the people with serious money and political muscle behind this were GOP interest groups, especially the real estate developers, realtors, and independent mortgage bankers. Between them, these three groups control the Republican parties of every Western state."

Replace GOP with the word "elite" and we have a winner.

This housing bubble was promoted, nournished, fed, protected by BOTH parties.

It simple served the elite's, and America's bull**** based economy (70%+ service, which is banking, insurance and of course finance) best - it was a best policy to promote the de facto American economic system.

Svigor said...

Someone's rapidly turning into a parody.Yes, anonymous' name will soon be mud around here. Or are you able to track him with your sophisticated tracking of his misspelled Yiddish?

Anonymous said...

"Government Involvement In The Economy Increases Ethnic Rebellion"

Correlation or caustion? Symptom or cause?
Social democracy is the salient political philosophy of ethnic nation-states: you take care of everybody, because everybody's family. Social democracy encourages spoils-based political economy, with various ethnic tribes jostling for their family's share. Social democracy encourages net tax consumption, so peoples have to be imported to try and keep the Ponzi scheme going. Lather, rinse, repeat.

So to answer your question, it would appear we are encouraging more of both.

Have a great day.

--Senor Doug

Captain Jack Aubrey said...

It simple served the elite's, and America's bull**** based economy (70%+ service, which is banking, insurance and of course finance) best - it was a best policy to promote the de facto American economic system.A useful graphic from an article in the May Atlantic. Quote: From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.What does it say about an economy that the guys who simply move the money around pocket 41 cents out of every dollar earned by business?

Anonymous said...

Truth said...
"Nah, he was chasing the leggy blond schicksas who refuse to satisfy his feral urges but instead are looking out for the alpha males."

Someone's rapidly turning into a parody


You bet they are...

Anonymous said...

Sure the minority activists were happy and gave their blessing to this massive fraud, but the people with serious money and political muscle behind this were GOP interest groups, especially the real estate developers, realtors, and independent mortgage bankers.These people do have a disturbng degree of influence in the GOP, but they are no Republicans or conservaives, and they have equal or greater influence in the Democratic party. The myth that the wealthy are conservatve and Republican is long past due for retirement.

none of the above said...

Re "non-hispanic whites"

"Hispanic" basically means spanish-speaking, I think. I know hispanics who you'd call white or black till you heard the accent, as well as hispanics who look mestizo or Indian or whatever racial category you'd call folks descended mostly from central/south American Indians. I even know one Peruvian who is Japanese by most of his ancestry, looks Japanese, but his native language is Spanish.

So we get this oddball set of categories: Race is white, black, Asian (even broader and more meaningless than Hispanic), American Indian, and probably some others. Then we get a secondary category of "Hispanic" or "Latino" or whatever.

If you care about language, Hispanic is important. (Though quite a few of us gringos hablamos español también.) If you care about culture, it tells you something, but Guatemalans and Cubans don't really have all that much in common. If you care about genes, you care more about racial group.

In this article, I suspect we mainly care about history. It's probably not the nth generation Mexicans who speak perfect English who were getting roped into these awful mortgages they didn't understand. But obviously, that's a guess--more data would make it easier to see what's really going on.