For San Diegans, so much of the home-buying economy is cockeyed. Our median income is about 3 percent below the state median, while the home prices are among the highest in the state. In San Francisco, where the home prices are also among the highest, the median income is about 15 percent above the state median. According to the housing affordability index -- a measure of whether a family's income qualifies them to buy a home -- only 9 percent of San Diegans have an income high enough to afford a home.
Enter the subprime loan. Contrary to conventional wisdom, these loans are typically not sought by borrowers. Rather, people are pressured to take subprime loans by brokers who stand to earn high fees on their sale. Subprime "credit products" are marketed to consumers as "choices." All sorts of varieties. Negative amortization. No down payment. Stated income. Self-employed, blemished or nonexistent credit, consumer debt, asset poor -- none of it matters. Only this: can you qualify? Even people like Mario, who had a low FICO score, qualified -- because the loan broker got him qualified. (A FICO score, the most widely used determinant of a person's creditworthiness, is considered good when it's 680 or over. The idea behind subprime loans is to give people with FICO scores in the 500s the "opportunity" to buy a home.)
In the last decade, prime loan interest rates have been in the 5 to 6 percent range, subprime loans in the 8 to 9 percent range. Subprime loans almost always come with adjustable rates. One popular subprime adjustable-rate mortgage is called the "2-28." This loan features a low two-year "teaser" rate that is fixed, for example at 5.35 percent, to get a borrower hooked in. After two years, however, the rate starts to adjust, or to reset, to 8, 10, even 11 percent.
Another form of credit is the negative amortization loan, which some are calling the "sicko" loan of the credit industry. Most bank loans are amortized. Every month the borrower pays part of the interest and the principal. According to Piccolomini, with a negative amortized loan, the borrower pays less than the full amount of interest each month. The catch is, the difference between the amount paid and the amount owed is added to the balance of the loan. Every month, the loan amount grows larger. A negatively amortized loan is designed for an upwardly moving real estate market.
"Essentially you are borrowing against future equity," Piccolomini says, "until your cash flow is such that you can afford to refinance the loan or pay" the full payment. "The problem is, brokers put people into homes" with a negative amortized loan "just to get the person qualified. And that was crazy." Depending on how the loan is written, the reduced monthly payment may last 1 month or 60 months. But, Piccolomini says, it can't last forever. He cites a contractual rule that once the balance of the loan gets to be 110 percent of the original loan amount, the loan must reset. When the loan resets, the monthly payment can rise as high as 50 percent.
Many subprime adjustable-rate loans -- following the boom in broker sales, the real estate market high, and the refinance craze of the mid-2000s -- are now resetting. Payments are leaping $300, $500, $1000 a month. Defaults are hitting new highs in Mira Mesa, Southeast San Diego, Spring Valley, Oceanside, Vista, Escondido, and Chula Vista, areas where minorities dominate. The number of default notices, auction notices, or foreclosures in June in San Diego County was, according to Realty Tree, 19,069. The highest concentrations are in Southeast San Diego (92114) and San Ysidro/Otay Mesa (92154).
In 2000, Inez (not her real name) decided she wanted to buy a home. It would be the third time she had bought a house, so she knew the ins and outs of financing and making payments. Her third was, she now admits, way too much house for one person. Just as she got ready to purchase, she changed jobs, lost her sister, and was facing sudden financial woes. She still wanted the home and found a real estate broker who, by speaking her native language, Spanish, shared a cultural identity with her. Inez trusted the broker, and the broker took her to World Savings.
Before Inez purchased her third home, she had saved $150,000 for a down payment on the $369,000 house. With 40 percent down, she believed her payments would be manageable. They were, temporarily. But with home prices rising steadily through the 2000s, Inez found that as her equity increased she could refinance her loan and get cash. On the advice of her broker, Inez, who needed money for bills, started a series of refi's. She calls this "my bad." She was digging her hole even deeper. The more she refinanced, the more fees she had to pay and the more her loan amount rose. With each refinance, World Savings would, she says, "put me back to an adjustable loan." Her monthly payments leapt, first by $700, then by $300 more.
Inez was astounded to discover that each time she read the new loan documents, World Savings was not accurately listing her income. (This is what's called a stated income loan.) The documents stated her income was $10,000 per month, "which is not true at all. This was to qualify me" for the refinance, "even though they knew I didn't make that much money. They kept pulling me back" to the same loan, one with an adjustable rate. She tried to go to another bank. But World Savings required a $9000 penalty for early payment of its loan. According to Inez's figures, in 2000 she financed some $219,000. As of this summer, the amount she owes the bank has grown to $500,000.
Today, she is angry that World Savings will not rewrite the whole loan at a fixed rate. Her savings have been depleted; she's advertising the house, but only by word of mouth and on craigslist. In late June she tells me that even though she continues to pay her mortgage, "July looks grim and August is looking very grim."
Thomas Larson is the author of The Memoir and the Memoirist: Reading and Writing Personal Narrative.