Wednesday, March 21, 2007

L.A. Business Journal: Subprime Loans Concentrated in Low-Income Areas

This story by Jabulani Leffall in the March 19-25 edition (registration or subscription required) of the L.A Business Journal caught my eye this morning.

Subprime loans constitute at least 20% of all mortgages in almost 30 Los Angeles county zip codes over 2005 and 2006, and at least 10% for another 107 areas. The subprime loans are concentrated in lower income areas of South Central Los Angeles, Latino neighborhoods such as Pacoima, and high desert communities like Palmdale and Lancaster. According to the article these numbers are conservative because the study was not able to review all subprime loans.

These are the communities with the highest percentages of subprime loans in 2005 and 2006 home sales:

ZIP    Community        Home Sales  Subprime   Percent
90059  Willowbrook       1,174        319       27.3%
91340  San Fernando        690        186       27.0%
91331  Pacoima           2,250        583       25.9%
90002  Watts             1,348        346       25.7%
90043  Windsor Hills     1,050        247       23.5%
90062  South L.A.          701        164       23.4%
90037  Exposition Park     969        225       23.2%
91402  Panorama City     1,524        352       23.1%

Economists like Chris Thornberg at Beacon Economics point out that real estate trends tend to be localized, however, if prices dive in places like Watts, it could stir a dive in places like Venice, Palms, the Valley, etc. And there could be major price volatility in the middle, where the bulk of buyers are. He and other analysts theorize that the "trade up" trend could be affected.

The L.A. Business Journal study revealed "surprising" numbers of subprime loans in working clas and middle-income neighborhoods throughout Los Angeles county. Subprime lending at a saturation level of at least 10% has penetrated about half of the county neighborhoods (I am assuming they are equating "neighborhood" with "zip code" here.) This includes places like Pasadena, Whittier, and Woodland Hills. Throughout the county, subprime loans have penetrated the 2005-2006 markets by at least 13%.

Mortgage defaults more than doubled in Los Angeles county YOY in Q4 2006,, from 3,480 to 7,445, according to information from DataQuick. Even analysts at the perennially optimistic Lusk Center for Real Estate at USC state, "the whole market can eventually be dampened by this."

The study only took into account loans issued by Fremont Investments and Loans, WMC Mortgage, and New Century Financial Corp. It did not consider subprime loans issued by Countrywide Financial Corp and Wells Fargo so the numbers understate the extent of penetration.

The lower-income neighborhoods (what the L.A. Times at one point called the "bright spot" of the county housing market) definitely seem to be the focus of the study. 90059 (Willowbrook) had more subprime loans than all of the zip codes of Santa Monica, Beverly Hills, Malibu, BelAir, Palos Verdes, Pacific Palisades, San Marino, and Manhattan Beach in aggregate.

Here are the zip codes with the fewest pecentage of subprime loans issued during the 2005-2006 market:

ZIP    Community         Home Sales  Subprime   Percent
90401  Santa Monica          71        0         0.0%
90071  Downtown L.A.         11        0         0.0%
90402  Santa Monida         237        1         0.4%
90274  Palos Verdes         638        3         0.5%
90272  Pacific Palisades    488        4         0.8%
90077  BelAir               228        2         0.9%
90266  Manhattan Beach    1,050       10         1.0%
90265  Malibu               545        7         1.3%
91108  San Marino           338        5         1.5%
90403  Santa Monica         519        8         1.5%

I don't know if this story reflects a classic rationalization to minimize a problem to make it appear smaller than it is, but I am glad that somebody has at least attempted to analyze how subprime lending will affect L.A. County. The article also does not look at negative amortization loans, HELOCs, and the like, so we still don't know how deeply these other kinds of loans have penetrated individual neighborhoods.

4 Comments:

Blogger wannabuy said...

Great information.

I was really hoping for a surprise in Palos Verdes. sigh... But I know the HELOCs up there paid for a lot of Ferrari's, Masarati's, Bently's, and other luxury cars. Oh, no doubt half were bought by people who could afford them. But my experience has been that about half are bought by people who are trying to look like they can afford them.

PV is going to be hit hard. But this is probably goign to be like most downturns; it tends to get hit late but with a steeper slope.

Thanks for the good information as always.

Got popcorn?
Neil

8:27 AM, March 21, 2007  
Blogger bearmaster said...

I think Washington Mutual is also a big player in the low quality loan department. The article did not even mention WAMU in passing!

9:02 AM, March 21, 2007  
Blogger Mike said...

i think that it's more useful to look at the types of loans (fixed, arm, interest-only arm, neg-am option arm, etc.) rather than the credit profile (subprime, prime, alt-a, etc.).

the main difference between subprime, alt-a, and prime are fico scores. from what i understand neg-am loans are much more prevalent in the alt-a tranches than in subprime. the thing is, regardless of your fico score, if you got a loan that is going to reset/recast to a payment higher than you can afford, and you can't refi, you're screwed.

you would expect to see a much higher presence of subprime loans in the poorer areas, because they are the ones w/ poor credit. but there are plenty of people in all socio-economic levels who are going to have their mortgage payments recast and eat them alive in the next few years. a high fico score won't help you bridge the gap when your housing costs go to 60%+ of your income.

1:25 PM, March 21, 2007  
Blogger Judy said...

When hubby and I spent a month house shopping in May 2004 (at which point his obvious lack of enthusiasm forced me to back off), we were told by a Platinum (?) mortgage broker in Manhattan Beach that 70 % of the loans in the beaches area were non-conventional (not 30 year fixed).
If true, that seems like there ought to be a lot of ARMs resetting in this area.

4:46 PM, March 23, 2007  

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