Las Urbanistas

Perhaps the American dream of homeownership is not for everyone.

That may sound at odds with a bedrock notion of society promoted by presidents for decades. But many experts say it is a message that can be drawn from the rising troubles with mortgages provided to home buyers with weak credit.

 

Several large mortgage companies have stopped making new loans, and others have tightened lending standards.

Hundreds of thousands of families who bought houses in the last two years — using loans with low teaser interest rates and no down payments — are now losing them.

Their short tenure as homeowners calls into question whether the nation’s long drive to increase homeownership — pushed by both public policy and financial innovations — has overstepped some boundary of demographic and economic sense.

“Clearly we went too far,” said Joseph E. Gyourko, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. “It’s not the case that high homeownership is always good.”

Consider Nathaniel Shields, who expects to lose his four-bedroom Cape Cod house in southwest Chicago to a foreclosure in May.

He cannot afford his mortgage payment, which jumped to $1,300 a month from about $1,000 after his loan reset to a higher interest rate last summer. A divorce and the loss of his county government clerical job, which paid $14.80 an hour, have also hurt.

In 2004, Mr. Shields took out a popular hybrid mortgage that carried a fixed interest rate for two years before becoming an adjustable-rate loan for the remaining 28 years. In August, his loan’s interest rate rose from 6.6 percent to 8.1 percent, and to 9.6 percent now. “I love the house,” said Mr. Shields, 47, who now works in a custodial job with the Chicago school district that pays $10.40 an hour. “I put a lot of money in the house — a deck and a new garage — and they are just going to take the house.”

Kathleen Van Tiem, a counselor at Neighborhood Housing Services of Chicago, has been trying to help him, but says that his weak credit and low income make him ineligible to refinance or modify his loan. Mr. Shields has put his house up for sale, but in a market with many homes available, he has found no takers.

There were surges in homeownership rates last century, but further gains have been slow going more recently, despite the hoopla of the housing bubble and the surge in home building.

The nation’s homeownership rate has increased by only about 1.4 percentage points since 2000, to almost 69 percent last year.

But subprime mortgages — granted to borrowers like Mr. Shields with weak, or subprime, credit histories — played a big role in achieving those levels.

This push, however, has meant intense financial strain for many families. Subprime borrowers will spend nearly 37 percent of their after-tax income on mortgage payments, insurance and property taxes this year, according to estimates by Mark Zandi, chief economist of Moody’s Economy.com, drawn from Federal Reserve data.

This is about 20 percentage points more than prime borrowers and 10 points more than what subprime borrowers paid in 2000.

And their payments will get higher, Mr. Zandi estimates, as low teaser rates used to lure them into the market adjust upward after a few years.

When the housing market started weakening, subprime borrowers were the first to feel the squeeze. Almost 8 percent of subprime mortgages — more than 450,000 loans — were either in foreclosure or in arrears of more than three months in the fourth quarter of last year, according to the mortgage bankers.

Their unraveling means not only a string of failed lenders. Homeownership rates have slipped, and many low-income families, who dedicated meager savings toward a stake in their first homes, are facing foreclosure.

“I worry that people are overexposed to risk,” said Stuart S. Rosenthal, an economics professor at Syracuse University. “We wouldn’t encourage people to buy risky stocks, so why do we encourage low-income families to invest in this risky asset, especially in tight markets?”

But politicians have long encouraged the idea of homeownership. “A nation of homeowners is unconquerable,” Franklin D. Roosevelt said. Promoting homeownership has been a cornerstone of President Bush’s “ownership society.” He has declared June to be National Homeownership Month.

And government has played a substantial role in fostering homeownership — including offering mortgage insurance and creating Fannie Mae and Freddie Mac to buy mortgages from lenders and repackage them for sale to investors.

Moreover, the government has provided an ever-growing pile of subsidies to the buyers of homes.

The mortgage interest deduction, the biggest single subsidy to homeowners, will cost the federal budget about $80 billion this year, according to the administration’s projections. Deductions for state and local property taxes will cost $15.5 billion.

Allowing homeowners to pocket tax-free much of the profit from selling their homes is expected to cost $37 billion more. Altogether, this amounts to almost 5 percent of the federal government’s total tax revenue, and almost three times HUD’s entire $42 billion budget. Now even some in Washington are questioning the soundness of pushing homeownership so broadly.

United States policies in recent years promoted the idea of homeownership too hard and at the expense of rental housing, said Representative Barney Frank, Democrat of Massachusetts. “I wish people could own more homes,” he said in an interview yesterday. “But I also wish I could eat and not gain weight.”

And the government’s efforts to promote homeownership are far from an unqualified success. From 2000 to 2005, homeownership rates increased significantly only among households in the top two-fifths of the income distribution, those earning more than $46,883, according to the Census Bureau’s American Community Survey.

Homeownership declined for families in the bottom two-fifths of the income scale. In the lowest fifth — where families make less than $20,180 — homeownership was only 42.4 percent in 2005, which was 3 percentage points less than it was 25 years earlier and 26 percentage points below the national average.

Part of the reason is the structure of government subsidies, which are worth very little to low-income families but quite a bit to families with big incomes. Those well-off families typically do not need government support to buy a home but use it to buy bigger places than they would otherwise purchase.

The mortgage interest deduction alone is worth about $21,000 to a taxpayer in the highest bracket of income with a $1 million mortgage. But for a typical family that bought, say, a $220,000 house with 20 percent down, the break is worth about $1,600.

Some economists question whether the government should be subsidizing homeownership in the first place.

Edward L. Glaeser, a professor of economics at Harvard, said he could understand government “giving a slight push to increase homeownership, but the current incentives are much more than a slight push.”

Economic studies do suggest that homeowners try to maintain the value of their properties — tending to their gardens and investing in their communities. But it is not clear that homeownership itself fosters these behaviors; it could be that people who invest in their communities prefer to own their own homes.

Homeownership also has a more problematic side: it locks people into an asset and ties them to a place. “Too much homeownership might restrict mobility, and that may not be a good thing,” Professor Gyourko said.

Take Adam Gardner, a 29-year-old appraiser who bought a three-bedroom, two-bath house 20 miles north of Reno, Nev., for about $255,000 two years ago. His wife is pining to move closer to town, but with housing prices falling all around him, Mr. Gardner doubts they can pull it off. “I’m not sure we can sell the place we are in,” Mr. Gardner said.

Some people can bear tying up much of their wealth in a house — those with a secure, well-paid job in a stable labor market, for instance. But others might need more freedom to move: the young in pursuit of love or careers, say, or workers in declining job markets.

The American dream of homeownership may continue to grow over coming decades, if only because the population is aging and older people are more likely to own their own home. But for now, even industry insiders acknowledge that, at the very least, it is going to take a breather.

Ted J. Grose, a mortgage broker in Los Angeles, said, “For the moment we may have plateaued.” For all the concerns about low-income families facing foreclosure, some economists believe that the development of the subprime credit market has, over all, been a boon for people with low income.

Harvey S. Rosen, a professor of economics at Princeton who was a former economic adviser to President Bush, put it this way: “Ultimately the public policy choice is going to be whether to make it harder for people to get these loans, and just shut people out, or let people make the choice and know that sometimes they will make mistakes.”

Stephen Labaton contributed reporting from Washington.

Developers who purchase the “air rights” for unused space above the Convention Center and transfer them to their own projects could build structures significantly taller than current zoning codes allow. But city officials said they did not study where the extra-tall buildings would be located or even how many people they would bring downtown.

City Councilwoman Jan Perry, who represents downtown, said she doesn’t think such planning is needed, because the downtown general plan already accounts for the density.

But several top outside planners expressed concern that L.A. would allow so much additional development — roughly the equivalent of Century City — without assessing the effects.

“There’s no vision or larger plan about where to put high-density corridors, or what is going to be the impact of this density on traffic,” said Anastasia Loukaitou-Sideris, chairwoman of UCLA’s urban planning department.

Steven P. Erie, director of the Urban Studies Program at UC San Diego, said the city’s projections for sewer, transportation, public safety and other needs would have to change to accommodate the crush of people in a small area that would result from the construction of very high condominium or apartment towers.

Using a rule of thumb of 1,200 square feet per apartment, the 9 million square feet of allowable air transfer rights could result in about 7,500 units. That means 15,000 people could be concentrated in a few buildings.

Using the city’s guidelines for assessing sewer needs, the addition of 15,000 residents would require enough capacity to move 1.35 million more gallons of water and waste each day.

City officials hope to raise $200 million by selling the unused rights above the Convention Center, which is zoned for high-rise construction but is only a few stories tall.

Los Angeles Planning Director Gail Goldberg said she was confident that the needs of a denser downtown were already considered in the area’s general plan and that any extra building won’t cause major problems.

Part of the reason to sell the air rights in the first place is to raise funds that would be used to make downtown more appealing as a place to live, she said.

“Part of this whole transfer of development rights is to generate money that can be reinvested into the downtown to make it a better living environment,” Goldberg said.

Although the city did not analyze the effect of the air rights sale as a whole, each project would be evaluated on a case-by-case basis. Any unanticipated results, such as increased congestion, would be addressed at that time.

Goldberg said she did not expect a big increase in infrastructure needs for downtown, in part because she is skeptical that much of the available 9 million square feet in possible air rights would be sold any time soon.

At most, Goldberg said, downtown will see “a few buildings” come on line as a result of the plan in the next five years.

If the resulting construction is more dense than anticipated, or if the new neighborhoods need more services, she said, the city would reevaluate its plan.

Mayor Antonio Villaraigosa agreed, saying L.A. is simply managing its air rights in much the same way New York and other cities have for years.

“So I’m not as concerned. Obviously, there will have to be some traffic mitigations as well. But folks, we’re growing already. We could close our eyes, put our head in the sand and say, ‘Oh, we’re going to stop growth,’ ” the mayor said in an interview. “What we want is responsible growth.”

Backers note that downtown has L.A.’s best network of rail and bus services, though surveys have found that relatively few downtown residents rely on mass transit.

Unlike previous air rights deals, in which the transfer was made from one building in an already dense area to another very close by, the city’s plan would allow developers throughout the central business district and the city center redevelopment project area to build higher than current limits allow as long as they purchase the rights and win approval from the city.

In the parts of downtown earmarked for residential construction, the general plan uses a formula that generally keeps some buildings not more than about three to six stories high and most others to be about six to 10 stories. That means already congested areas could become even more crowded as land earmarked for low-slung buildings is used for skyscrapers, said Nick Patsaouras, a transportation and infrastructure expert who is on the board of the Department of Water and Power.

“They can put them right where there is already congestion,” Patsaouras said.

Some downtown boosters say the district actually needs more congestion — and more people. As it becomes harder to get around using a car, the thinking goes, more people will walk and take transit, fostering the kind of urban lifestyle that has long been lacking in L.A. In the last five years, downtown has seen a loft and luxury condo boom, bringing the population to about 26,000.

Retailers have been slow to move downtown, saying they want a larger population to ensure their businesses are successful.

UCLA’s Loukaitou-Sideris said that overall, adding density downtown could be a useful tool and is “something that is much needed.”

But she said she had several concerns about “how this will all come together, how we will use the money and if we have a plan.”

Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy at USC, said new residents would probably bring cars with them, despite the presence of public transportation. Yet most developers downtown have been allowed to build their structures with fewer than the typical number of parking spaces per unit as a way to discourage auto use and decrease the cost of construction, he said.

That means some residents will need street parking or to park in nearby structures, Little said. He urged the city to set up a panel to review the air transfer rights and attendant proposals and make recommendations on how the switch to taller buildings should be handled.

“It doesn’t take an enormous amount of analysis, but you do need to think through all of this,” Little said.

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sharon.bernstein@latimes.com

Times staff writers Cara Mia DiMassa, Duke Helfand and Steve Hymon contributed to this report.

Oscar De Leon was washing his car a few weeks ago when he noticed a piece of paper stuck to the front door of the house across the street. He strolled over to check it out.

“You are in default,” the paper proclaimed. “Unless you take action to protect your property, it may be sold at a public sale.”

De Leon, who lives in the Riverside County town of Perris, knew this official notice of foreclosure was bad news. Not just for the home’s owners, who tried to sell for months, failed and quit town for parts unknown.

It was bad for De Leon too, a 28-year-old employee of a food service distribution company. He and his wife, Sandra, pay their mortgage every month, happy they can raise their three children far from the urban problems of Los Angeles.

Two years ago, this neighborhood didn’t exist. De Leon, who bought in June 2005 for $324,000, got the first home on the street, the first house he had bought anywhere.

“I like it here,” he says, “They could offer me a house for free in L.A. I’d take it and sell it, but I’d never live there.”

It’s the age-old dream of the suburbs. Now, it’s at risk in communities throughout the country, thanks to lenders too eager to lend and borrowers who thought houses would dispense money forever, like magical ATMs.

In California, Perris is at the epicenter of mortgage problems. From November to January, 177 homes in Perris’ central ZIP Code have received notices of default, the first step toward foreclosure.

That’s about 1 of 53 houses, the highest level of any ZIP Code in California, according to a Times analysis of statistics provided by DataQuick Information Systems. The neighboring towns of Lake Elsinore and Moreno Valley came in second and third.

A few doors away from De Leon’s house sits a second empty property foreclosed on by its lender. “A divorce,” he explains. “The husband couldn’t afford it alone. He was paying $2,500 a month. Ridiculous.”

A few blocks away is a third foreclosure, this one only a frame skeleton abandoned by its builder. A young woman who answers the bell at a fourth house says through the screen door that she doesn’t know anything about the place’s being in default. She pays rent to someone who pays the owner, she says; please go away.

Risky loans

The trouble stems partly from a proliferation in recent years of so-called sub-prime loans to borrowers with shaky credit or erratic income, borrowers who are more likely to miss payments and not catch up. Such defaults are typically in communities like this one — a long way from the high-priced and built-out coast. The Inland Empire is full of new and almost-new homes and commuters who often travel great distances to jobs to pay for them.

The default rate in Perris compares with 1 in 105 homes in Palmdale, 1 in 150 in Van Nuys, 1 in 189 in Northridge and 1 in 283 in Altadena. Many coastal communities have so few default notices they don’t even place in the top 400 ZIP Codes.

There are other signs of distress. De Leon’s development, called the Villages of Avalon, has an unusual number of homes for sale, considering it’s so new that the Google Earth satellite scan still shows much of it as dirt.

At the top of his street, next to the charred shell of a house that mysteriously burned a few months ago, is a house for sale. The house immediately next door is on the market too. A few doors away from De Leon’s home in the other direction is a third house looking for a buyer. Some owners are trying to rent their places out, advertising with little signs on the front lawn.

De Leon fears what will become of his neighborhood if it becomes dominated by renters.

“You get people who don’t care about the neighborhood and don’t take pride in it,” he says.

He’s hardly alone in that view.

“If people start to rent, that’s when you start to worry,” says De Leon’s next-door neighbor, Jose Serrano.

Serrano, 34, grew up in Long Beach. He saw friends die in Long Beach. He still commutes there every day to work on the docks for Toyota Motor Corp. It’s an hour in the morning and two hours coming home, a grind he suffers for the sake of his three young kids.

Like De Leon, this is Serrano’s first house. Like his friend, he is bracing for the future, hoping that even if things get worse now, they’ll get better later.

“A lot of people got in over their heads. They are going to lose their homes,” Serrano says. “The market goes up and down. You have to look at it for the long term, ride it out.”

Good advice, but Perris could be in for a rough trip. Named after a railroad engineer, it began in the late 19th century as a stop on the Barstow-San Diego line. For most of the next century, it was a farming town — sugar beets, potatoes, alfalfa.

Hustle and gloom

Cheap land drew the developers, and cheap houses drew buyers. The market may have slid over the last year, but the hustle remains. The billboards on the way into town extol 11 active developments. Signs on the city streets point visitors to them. So do curbside salespeople holding oversized arrows, and balloons floating over sales offices.

But many intersections tell a more downbeat story. Telephone poles are festooned with signs that say, “Behind in payments? We can help” or “Foreclosure loan specialist” or “We’ll buy your house in nine days or less.”

Lily Quinlan is thoroughly exhausted and a lot smarter about real estate than she used to be. Quinlan, 30, just sold her three-bedroom house on a cul-de-sac in one of Perris’ older developments.

It went on the market last June, for $395,000. Her first agent reduced it to $383,000, then $375,000, then $369,900. Her second agent dropped it all the way to $333,000, where it finally found a buyer.

While the price was descending, Quinlan’s ability to pay the mortgage was becoming intermittent. Her husband left the Navy to start a new job in Florida at a lower salary. World Savings, their mortgage company, started sending default notices.

The couple bought in 2002, as the boom was beginning. At its peak, the house was worth more than three times what they paid for it. But they refinanced and took cash out to do upgrades on the house, and then they refinanced again because — well, Quinlan isn’t sure why.

She’s learned this about lenders and loan agents: “They make it look like they are trying to do all this for you, but the reality is that it was mainly for them. They got their chunks out of you, and then they put you out to the wolves.”

Even when she was in default over the last few months, the offers continued. “They kept calling and calling, saying, ‘You won’t have any payments for two months.’ And I’m like, ‘Dude, the last thing I need is another refinance.’ “

She’s sorry to be leaving for Florida. If their house had not increased in value, if it was still worth exactly what they had paid for it four years ago, they could afford to stay. But the boom ruined everything, and so Quinlan was selling what she could at a yard sale before packing for the movers.

Some of the clothing and dishware spread on the driveway belonged to her neighbors, Ron and Dawn Blacic. Their house went on the market this week for $369,900.

“The price you got is going to drag down our price,” Ron tells Quinlan.

“Thanks, Lily,” cries Dawn as she pretends to punch her.

The Blacics, who are moving to Yucca Valley, owe $372,000. They refinanced once, taking out cash to pay for their wedding and other bills. “We figured the value would go up and up, and it didn’t,” says Ron.

After the agent’s cut, the couple will need to bring a check to the table for $22,000 or so to avoid destroying their credit. They’re counting on a loan from Dawn’s parents.

“We want to purchase another home,” explains Ron, who works for a sanitation supply company. “We don’t want to wait 10 years until our record is clean again.”

If the house sells for their asking price, the Blacics will come out about even on their first real estate venture: First the house dispensed money, then they had to give it back. For them, it will be as if the boom never happened.

On the other hand, if the house doesn’t sell immediately, they’ll have to rethink their plan. They can borrow only so much.

The onset of the spring home-buying season is a matter of acute concern to the Blacics, as it will be to many others.

On Tuesday, the house in foreclosure across from Oscar De Leon’s home will go up for auction.

Public records show the mortgage was held by New Century Financial Corp., the Irvine-based sub-prime lender that collapsed this week amid rising defaults.

De Leon doesn’t remember much about the former owners. They had two young kids. The father might have been in construction. They put the house up for sale last fall, barely a year after moving in.

In November, a moving van showed up and the family quietly left. The house stayed on the market; the agent watered the lawn to keep it presentable. Then one day he quit too. The lawn is starting to brown.

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david.streitfeld@latimes.com

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Where the defaults are

California ZIP Codes with the highest number of notices of default per 1,000 homes from November to January

ZIP			Default		Notices per
Code	County	Community	notices	Homes	1,000 homes
92571	Riverside	Perris	177	9,405	18.8
92532	Riverside	Lake Elsinore	55	3,092	17.8
92551	Riverside	Moreno Valley	121	7,101	17.0
95832	Sacramento	Sacramento	43	2,548	16.9
92596	Riverside	Winchester	76	4,734	16.1
95838	Sacramento	Sacramento	127	8,326	15.3
93591	Los Angeles	Palmdale	30	2,028	14.8
92563	Riverside	Murrieta	212	14,394	14.7
95817	Sacramento	Sacramento	56	3,822	14.7
92555	Riverside	Moreno Valley	128	8,818	14.5