8:31 p.m. January 28, 2013

Back To Victorville, Part Five: A $200,000 House, For $850 Down

(Previously: Tim Donnelly, Weimar Republican)

Remember that blooming new subdivision on the edge of town I mentioned in a previous dispatch? The one springing up on a patch of desert in the shadow of Victorville's federal prison, across the street from a sea of foreclosed homes?

Well, I finally cruised by its sales office to see what kind of deals could be had around these parts on new homes.

A new home, you ask? Why bother?

The answer is simple: if you're a regular schmo in the market for a house in Victorville, you don't have much of a choice.

Sure, Victorville had one highest foreclosure rates in California when the bubble popped. And sure, there is still a huge inventory of empty foreclosed homes still sitting there dry-rotting and crumbling. But good luck getting your hands on one of them.

As I've mentioned before, banks have been keeping foreclosed properties off the market to restrict supply and boost home prices, and whatever foreclosure inventory appears for sale is immediately snapped up by greedy absentee investor-landlords. And that's even more true today than it was back when I lived here in 2009.

The absentee investor-landlord business has hit the big time, so much so that marquee-name Wall Street outfits are getting in on the action. Hedge funds and other big-time investors have been building up massive McTractHome rental empires with thousands of rental properties all across the nation—and Victorville is no exception.

Here's the Wall Street Journal:

Firms Flock to Foreclosure Auctions By ROBBIE WHELAN LITHONIA, Ga.—On a muggy morning earlier this month, Paul Fuhrman pried the screen off a window to get into a two-story house in this Atlanta suburb. Colony owns about 3,600 foreclosed homes, including 133 bought in the Atlanta area in one day, and officials hope to increase the firm's inventory to 10,000 by next spring. It was just another day's work for the 43-year-old executive at private-equity firm Colony Capital LLC, based in Santa Monica, Calif. After buying the house for $120,000 in a foreclosure auction, Mr. Furhman and his colleagues wanted to check out Colony's new investment—and broke in because they hadn't gotten the keys yet. Mr. Fuhrman's sweat and dirty hands show how the business of buying foreclosed homes, renovating and renting them out is morphing from a largely mom-and-pop business into the next big thing on Wall Street. Investors who once chased only big-ticket deals now are buying houses one at a time. . . According to investment bank Jefferies & Co., major financial firms led by Colony, Blackstone Group LP, Och-Ziff Capital Management and Oaktree Capital Group LLC have raised more than $8 billion to buy houses, largely in markets pummeled by the housing crisis.

A private equity firm in charge of renting out 10,000 homes—and that's in just one metro region? Well, 2013 seems like the year banksters reinvent themselves as America's McTractSlumlords...

Not surprisingly, regular homebuyers can't compete with the big boys who now dominate foreclosure auctions and pay in cash on the spot. The end result: they are pushed to buy newly built homes.

So, last Sunday, I put on my cleanest pair of jeans, donned a collared shirt and headed in the direction of the new "Serrano" subdivision to see what this home new market was all about.

It took me about 15 minutes to get to Serrano, located on the northern edge of Victorville, right next to the federal prison. The development was way out on its own, surrounded by empty desert lots littered with trash. There were just a few streets with houses and a couple of empty blocks beyond, paved and fitted out for homes. The area had an imitation quality to it. It looked like the 2000s version of those fake mini-towns the U.S. built in the desert to test atom bombs.

I pulled up in front of the subdivision's sales office, built into the garage of a model McTractHome. This was Sunday afternoon—prime house hunting time—but the street was deserted. I was the only house shopper in sight.

"Hi! Are you here to see the houses?” a woman pounced on me as soon as I walked inside.

"Ah, yes," I said, blinking, slightly startled. Inside, architectural diagrams and sketches hung on the walls showing various house configuration and floor plan options available. Printed out sheets of paper were stacked on a desk with breakdowns of various financing options.

"What are you looking for in a home?" she asked.

"My wife and are thinking of starting a family—actually, she's already pregnant," I lied, telling her that I was in the tech sector and frequently commuted to the area from the Inland Empire, making up my story as I went along. "We've decided that it's finally time for us to make the plunge and become homeowners."

"Wonderful. It is a pleasure to meet you," she beamed, and moved in to shake my hand. "One thing about Victorville is that it is probably, in all of Southern California, the most affordable place to live."

"Yes. That's exactly why we're looking at homes here. We want the space," I said

The real estate agent ran through the various floor plans. All of them were more or less the same: one story, three or four bedrooms, granite kitchen countertops and floor plans ranging from 1,500 to 2,000 square feet. That might sound like a lot if you're Brooklyn closet dweller, but 2,000 square feet isn't much to brag about out here. In fact, Serrano's square footage was downright modest compared to the beefy monstrosities churned out during the Bush Era.

I was informed that Serrano was nearly sold out of their current inventory. A few houses were coming online in the next few months, but that was it. Once they were sold off, Woodside Homes would start building a new sector. This was probably a sales tactic: making it seem like they about to run out of available properties to push people into buying. But sales tactic or not, Serrano clearly showed that Victorville was not in the grips of a house building boom. Homes were selling one by one, not block by block. No wonder Woodside Homes is now one of the area's few remaining developers still actively building.

"You can look at two of the layouts," she said. "One of them is the house we're in right now—we're in the garage now. The other house is next door."

The model homes were fully furnished, complete with all the mandatory home trinkets: candles, generic abstract paintings, vases of different sizes, beds piled up with rows of useless pillows. The furnishing looked like they came straight from a Target "Home Décor" catalogue, but I had to admit it was a bit cozy—especially compared to my own living quarters in Victorville, which currently consist of an inflatable mattress on ratty, stained carpet and a tiny computer desk with a folding chair.

Woodside Homes architects were smart to go with a single story layout for Serrano: it was difficult to get a straight line of sight to the federal prison complex from ground level, which considerably boosted Serrano's coziness factor.

"I like the fact that they are one story homes. I think that they are cheaper to heat and cool," I said, trying to play the part of an informed consumer.

"Yes, definitely. And when you're raising a family when you'll have kids, I've raised four kids, and it's much easier to stay on top of them," she laughed, and I laughed along with her. This was her little sales joke.

"We have a great community. Retirees, first time buyers, people who have college students. I actually have a lot of single young men and single women, people who make enough money, they want a home and they bought. It's a very interesting mixture. Very professional. Very quiet. A lot of firemen, a lot of policemen, military work at Ft. Irwin—got a lot of those in here."

Firemen, policemen, military types and retirees? Living in the shadow of a prison? What a neighborhood! So what's left of the housing industry is being sustained by government salaries and government pensions…

The other shocker: the price.

Serrano's smallest layout—3 bedrooms, 2 baths, 2 bay garage—was priced at $160,000. While the biggest option—3 bedrooms, den, 2 baths, 2-3 bay garage—was $191,090. With closing costs and assorted tacked-on fees, that would bring the price to over $200,000.

Paying $200,000 in new home in Victorville in 2013? Damn, and just a few years ago you could buy a similar foreclosed home for $75,000...

Sure the price was high, but the financing made it alright, I was assured by the nice real estate lady holding down the fort.

That's because Serrano homes were available with almost no money down. I didn't even need to have particularly good credit, just a more or less steady job.

"You're probably gonna want to go with an FHA loan," she said. "And we do have a platinum program in which you need only half a percent down to qualify."

"Half a percent?!" I gaped.

"Yes, that's about a $850 downpayment," she calculated. "It's financing that our lender provides. You only need a half a percent down, the other three percent are given to you."

Yep, their "finance partner" was offering a no-downpayment loan. The reason was simple: They couldn't lose. FHA loans are backed 100% by the federal government.

What's an FHA loan?

FHA (Federal Housing Administration) loans have been around since the Great Depression, helping working-class Americans buy their first homes by providing government insurance to banks and lenders guaranteeing certain types of loans. This was done strategically to provide disadvantaged groups of people access to affordable mortgages. Until recently, FHA loans have largely been a force for good. But like many government programs that were initially designed to help the American people, the FHA has been hijacked to serve banksters and big business.

Here's how the WSJ described it back in 2009:

The Next Housing Bust Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn’t well known is that a parallel subprime market has emerged over the past year — all made possible by the Federal Housing Administration. This also won’t end happily for taxpayers or the housing market. Last year, banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100 percent taxpayer guarantee. Many of these have the same characteristics as subprime loans: low down payment requirements, high-risk borrowers, and in many cases, shady mortgage originators. FHA now insures nearly 1 of every 3 new mortgages, up from 2 percent in 2006.

Put simply: a good portion of FHA loans are nothing but subprime loans, backed fully by the federal government.

A Forbes contributor/"full-time equity trader" summed up the FHA loan situation nicely:

A large part of the problem is that to qualify for a mortgage at FHA you need little more than an active “pulse”. Requirements have been repeatedly watered down. The down payment requirements are 3.5% with a credit score of 580. A score below 640 is considered subprime by the Federal Reserve. When you roll in the insurance fee into the loan balance you have a loan to value ratio that starts at over 98%. The paltry down payment may be funded by relatives or employers. It gets more bizarre. Borrowers can claim income from a roommate (to be found at a later date) to help qualify for the loan. Often no cash reserves are required to demonstrate ability handle repair bills and taxes and still meet mortgage obligations.

"The financing sounds really good," I told the nice real estate lady. "I'll tell my wife how much I liked your homes and we'll come back next weekend."

She tried to pin me down and extract my contact info by insisting I set up an appointment, but I managed to run away after promising repeatedly to come back. I walked briskly to my car, relieved, my arms loaded with all sorts of Serrano reading material.

On my drive back to my house, I realized that didn't matter if I carried on renting in Victorville or decided to come back and buy a house that I'd later default on. Either way, Wall Street still gets its money and Victorville is still fucked.