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Housing Meltdown, Ground Zero

The American home-owning dream on life support.

| Mon Nov. 30, 2009 1:58 PM EST

II.  Housing Meltdown, Ground Zero

About a week before the "Save the Dream" event, I rented a car and headed east from San Francisco toward Ground Zero of the subprime mortgage meltdown. Visiting one of the hardest hit cities in the country would, I reasoned, offer another measure of whether the "green shoots" of "recovery" were truly pushing up through the overleveraged earth—better surely, when it came to ordinary Americans, than the rising price of AIG's stock or the Dow's ascent.  While many cities can contest for the title of "most devastated by the meltdown," including metropolitan hubs like Las Vegas and Fort Lauderdale or suburban areas like Bakersfield, California, or Mesa, Arizona, it turns out I didn't have far to drive.

After all, Stockton, California, an arid, unremarkable city in the San Joaquin Valley, was only 80 miles away.  A place for which "decimated" isn't hyperbole but a mathematical statement of fact, Stockton, with its population of around 300,000, recorded nearly one foreclosure for every 10 houses in 2008.  As other towns like to call themselves "the artichoke heart of America" or "America's Bread Basket," Stockton could call itself the heart of America's subprime meltdown. 

It's an hour-and-a-half drive from San Francisco to Stockton, up through the Altamont Pass with its rows of wind turbines, then down into the Central Valley's wide expanse and, via I-5, into the open streets of Stockton, a city that has often seemed to embody the vicissitudes of the housing crisis.  In February 2008, for instance, national media outlets latched onto the story of a local man who, struck by the entrepreneurial spirit, started a business called Greener Grass Co.  His service: Spray-painting the dead, burnt-out yards of foreclosed houses a hue of green so realistic that the local newspaper described the painted lawns as "good enough for a golf course or a professional football stadium."

When I pulled into Stockton last month, more than a year had passed since CNBC had pegged it the "Foreclosure Capital of the World"—and painting lawns green was still de rigueur. Local government workers had now taken up the job.  Dead lawns, the thinking went, signaled empty houses and so attracted trouble. Painting lawns, the city hoped, might dissuade people from breaking into deserted homes.

Around mid-morning, I pulled into the Little John Creek neighborhood near the airport on the city's southern outskirts, and one of the first things I saw was an abandoned house displaying their handiwork.  The green was, in fact, a sickly teal hue and had been laid down in bizarre stripes on a dead lawn on Togninali Lane.  It was, to say the least, a far cry from fairways, football stadiums, or even the perfectly real turf on neighboring lots where grass grew and people lived.

Here, the houses without occupants stood out like so many missing teeth in a wide smile.  On just about every street, foreclosures dotted the landscape:  stucco homes with sheriff's notices taped to front doors, FOR SALE signs askew in front yards, lawns burnt into suburban hay by the summer sun that had yet to receive their eerie coats of green.  I parked near foreclosed house after house and walked up front paths and driveways to peer through windows and over backyard fences.  Most of the homes were starkly empty, often gutted—"trashed out" in industry parlance—with not a trace of their former owners.

In a few, though, there were hints of lives lived and lost.  A deflated basketball, a toy truck, and a skateboard sat in the backyard of a tan house with a two-car garage in Little John Creek, the back porch light still unnervingly aglow in broad daylight. At a nearby house, the front flower bed was filled with foreclosure-crisis detritus, including the business cards of realtors and mortgage specialists.

The half-dozen neighborhoods I drove or walked through in various parts of Stockton proved but repeats of Little John Creek, still littered with empty homes—"decimated"—more than a year after the financial meltdown occurred.  Though Stockton's foreclosure rate has dropped from 9.5% of the city's houses in 2008 to 3.5% in the third quarter of 2009, that's nothing to brag about.  It remains the fourth-highest rate in U.S. metropolitan areas.

Before arriving, I had envisioned the foreclosure crisis as a somewhat localized event with the majority of such homes in a limited number of lifeless neighborhoods.  In Stockton, at least, the opposite was true:  foreclosed homes were salt-and-peppered around the city.  They often sat singly or in twos and threes among occupied homes in still lived-in neighborhoods, in cul-de-sacs where kids played basketball, on blocks where neighbors waxed their cars on a Sunday afternoon, or down streets where friends were barbecuing in open two-car garages.

The thought of an emptied-out neighborhood may pack a more visceral punch for a story, but from an economic or social standpoint, a mix of foreclosed and occupied properties is far more damaging to those still in their homes. A report from the Center for Responsible Lending estimates that foreclosures will cost neighbors $500 billion in home value in 2009, or an average of $7,200 for 69.5 million homes. A study by the Federal Reserve Bank of Chicago also found that when foreclosures increase, so, too, does violent crime in neighborhoods.

For those who have clung to their homes in hard-hit areas, the value of those investments has plummeted, while the ability to sell and so move elsewhere—to take a new job or live in a cheaper market—is now greatly hindered. In other words, a crisis like this one in a city like Stockton is not easily escaped.

III.  A Bubble Grafted onto Rubble

The billboards and roadside ads lining Stockton's streets like campaign signs repeatedly proclaim: "Mortgage Modification Works!" and "Call for Loan Modifications!"  I counted five of them on one block alone, and together they created the impression that help had arrived.  Yet I knew they were scams, with anonymous local phone numbers and little other identification, meant to relieve desperate homeowners in a city not lacking in desperation of whatever money they had left.  The subprime meltdown, as it turns out, has been a boon for crooks preying on the vulnerable.  (Not long ago, the FBI announced a nine-month mortgage fraud investigation in Florida involving 500 defendants and $400 million in loans.) 

Outnumbering the scams three to one along Stockton's main thoroughfares were glossier professional ads.  At almost every intersection they urged locals to take advantage of the federal government's recently extended $8,000 homebuyer tax credit.  Never mind that this tax credit has been criticized by economists and experts alike who say it could create a new housing bubble amid the devastation.  Even while the rubble of the subprime meltdown is still smoking, developers here in California's Central Valley are already dreaming again about speculation on new homes. 

At one point, I followed a succession of these tax-credit come-ons out to a subdivision called Cobblestone Bay.  There, at the city's edge, new homes with white picket fences are popping up at the edge of the undeveloped valley beyond.  It was hard, having spent much of the day in foreclosure-riddled neighborhoods, to walk around this new development without a sense of déjà vu.  I couldn't shake the feeling that Cobblestone Bay was already being prepared for future foreclosure.  All it lacked—for the time being—was the fake green lawns.

In fact, all the ad trails touting the $8,000 tax credit I followed led to subdivisions like this one, cookie-cutter communities lacking distinguishing characteristics that might remind you of California (rather than, say, Arizona or Florida).  These were, of course, the very kinds of neighborhoods that were thrown up wherever land was cheap in the California boom construction years of 2005 and 2006, and the kinds of neighborhoods now in subprime ruin. 

As my visit was ending and the sun disappearing behind the valley's edge, I made one last stop on the outskirts of town at the ornate entrance to a subdivision called Golden Eagle.  It included, as its centerpiece, an impressive five-tiered water fountain, while large wrought iron gates depicting eagles-in-flight separated Golden Eagle from the surrounding neighborhood.  Except there was no Golden Eagle—just a single unfinished house on the weedy, 15-acre property.  Construction equipment sat motionless on the dusty earth.  A placard outside the gated entrance trumpeted grand expectations, but the new neighborhood looked stillborn.

I took down a phone number from the entrance placard and, later that week, called Golden Eagle's developer, a man named Tom Ruemmler.  He told me that he had been on the project for more than three years, and envisioned it as a luxury, energy-efficient community for the green future.  Ruemmler was no rube when it came to mortgages and the housing market: in the mid-1990s, he won a multi-million dollar mortgage-fraud whistleblower suit involving a Sacramento bank whose Stockton loan office he once managed. 

Who, I asked him, would buy a custom, high-end, zero-energy, hypoallergenic home in a city leveled by foreclosures where housing prices have plummeted and nearly one in six people are unemployed?  "I'm dealing with a different clientele," he responded, bridling at the question.  "I'm dealing with probably one-fiftieth of one percent of the buying public."  Did he honestly think he could sell 30 of these lots to such a small percentage of people in a place like Stockton? "Now is the time to build a custom home," he insisted. "Somebody out there is going to have money that has somebody in the family that has allergies."  And out in the San Joaquin Valley, with a foreclosure on almost every block, he intended to find them.

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