Report blames financial institutions for home-buyer defaults

Gregg Reese | 9/28/2011, 5 p.m.

In the wake of another swell in the number of foreclosures in California (as conveyed by RealtyTrac, the online foreclosure listing), a recent report declared that the plight of home-buyer defaults has cost the state in excess of $130 billion, with an estimated $78 billion lost in homeowner equity just in Los Angeles.

Provocatively titled "The Wall Street Wrecking Ball," the report gives an account of lost home and property values, tax revenues, and additional punitive costs at the government level. It lays the blame squarely at the feet of financial institutions overly concerned with profit margins, and the desire to write questionable loans for short-term earnings, with little regard for long-term ramifications. The report was released two weeks ago, on Sept. 15.

Kevin Stein of the California Reinvestment Coalition (sponsors of the report in tandem with the Alliance of Californians for Community Empowerment, also known as ACCE), a contributing writer to the report, said that the data was compiled from a variety of sources, including the U.S. Census, the U.S. Joint Economic Committee, and educational institutions including the Georgia Institute of Technology and Marquette University.

Stein traces the beginnings of the current misfortune to the practice of bad loan writing. More specifically he says, " ... people got stuck with loans they could not afford, did not deserve, and in some cases couldn't even understand."

The report concentrated on five major cities (Los Angeles, Oakland, Sacramento, San Jose and San Francisco), but the actual losses in property value across the state may be substantially higher. Among the factors contributing to this calamity, the report states, is the fact that California has been hardest hit, with one in five foreclosed homes located in the Golden State; and a third of mortgage-holders owing more than the actual worth of their homes (also known as negative equity or "underwater" or "upside down" mortgages).

On top of the devastating effect on an individual household, a single foreclosure negatively impacts the property value of other homes in the immediate vicinity, and tears away taxes and revenues for public services. Finally, foreclosed homes lie empty often without proper maintenance, further eroding property values and attracting "squatters," and potential lawbreakers.

All in all, this inhibits the ability of the economy as a whole to regain solvency and recover from the depression/recession, and perpetuates a vicious cycle. Stein remains skeptical about efforts to rectify the situation.

"Now, banks are supposed to be modifying loans and helping people avoid foreclosure, but we know this isn't happening as it should," he said.

At the grassroots level, harsh economic times have served to politicize working-class homeowners who've borne the brunt of this real estate turmoil. Peggy Mears is a prime example.

Having worked a variety of vocations, including in the healthcare and financial industries, she began to experience problems meeting financial obligations with her mortgage carrier, One West Bank, in October of 2010, after 20 years of faithfully paying her house notes in a timely manner.

In particular, Mears takes issue with the process of "dual tracking," in which banks dutifully go through the motions of loan modification while simultaneously filing foreclosure paperwork.