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Unreal Estate

How average Americans got caught in the mortgage racket

Memorial Day Weekend, 2005

“So, you kids have been engaged, what, two years now?” Travis asks. “That’s great. No rush to get married with the market the way it is. Who can afford to settle down in LA? I couldn’t. George Clooney can’t afford to get married in LA.”

You have this conversation each time you visit your future brother-in-law. He lives out in the Santa Clarita Valley, an hour or two north of West Los Angeles. You get on the 405 at Pico Blvd., head over Sepulveda Pass, down into the San Fernando Valley, onto the 5 and up through Newhall Pass into LA County’s northern exurbs.

You’re sitting on Travis’s deck, peering down into a canyon lined with sycamores. It’s hotter here than back in West LA, where your $1,600 per month one-bedroom apartment doesn’t have air conditioning because it seldom gets over 82.

“Still, isn’t it time to get a place of your own?” he continues. “I mean, West LA’s a great place to meet somebody, but are you going to entrust your kids—and I know how much my wife’s little sister wants some—to the Los Angeles United School District? I’d be all for you staying in LA if you were an entertainment lawyer, but you manage a drug store and Emma’s a nurse. People buy drugs and get sick everywhere.

“I bought this place in 2000 for $255,000,” Travis says, repeating a number you know by heart now. “Here we are, five years later, and the Schmidts next door just sold theirs for $810,000. So I’m up, what, five, six hundred thousand. The home equity loans have paid for some nice vacations, I’ll tell you. My house is my ATM.

“I know what you’re thinking,” says Travis, who generally does know what you’re thinking. “You’re wondering why I’m the lucky bastard who turned 32 in 2000 and decided it was the right time to get out of an apartment in LA and buy a house back when houses were cheap. Meanwhile, you’re 32 in 2005, when they’re expensive. Well, they seemed expensive then, too. But I took the plunge.

“I also know you’re thinking you don’t have $810,000. Who does? That’s what mortgages are for. And you’re good with numbers so you’ve already figured out what a 20 percent downpayment on $810,000 is. It’s like … a lot.

“Okay, coupla things you need to bear in mind. Emma told me about how your dad talks about saving up for the downpayment he made when he got that 30-year fixed rate on his little place in Sherman Oaks. That’s ancient history. Dude, nobody puts 20 percent down anymore.”

Travis’s voice has gone up a third of an octave. When he gets going on real estate, he lets his inner Dennis Hopper out.

“These days, somebody arrives in California from Guatelombia and wants to buy a house. Do you think they make him document his credit history? It’s in Spanish, and who knows how many million pesetas were worth a dollar in 1985, and besides, the courthouse in El Carrumbo collapsed in an earthquake, so he doesn’t have a paper trail. Documents? He’s undocumented. So he just pays some extra points on his rate, but that’s all on the backend. Everybody’s happy.

“Don’t you watch the news? The president says downpayments are un-American because they keep minorities from buying houses. But you don’t have to be diverse to get a zero-down loan. IndyMac is handing them out to everybody.

“Second thing, Santa Clarita seemed like a long way out when I moved from Venice in 2000. So maybe you got to move a little farther, like out to Palmdale, Lancaster. Antelope Valley’s the new Santa Clarita!”

You’re not quite sure how it happens, but ten minutes later, you’re standing in his driveway admiring the rims on his Lexus SUV, which are bigger than the tires on your Corolla. Soon you’re rolling northeast on the 14, past the slanting Vasquez Rocks where, according to Travis, lots of Westerns were filmed, but you only remember them from “Bill and Ted’s Bogus Journey.” The highway turns north away from the mountains through the high desert. A sign says you are heading toward “Edwards AFB.”

“Edwards Air Force Base!” exclaims Travis. “‘The Right Stuff,’ man! That’s where Chuck Taylor broke the speed barrier in 1957. This is all-American country out here,” he says, gesturing vaguely at the gray sagebrush. “Sure, it’s a haul from the jobs in LA, but with Iraq calming down now that they captured Saddam Insane, soon they’ll be pumping like crazy from those Iraqi oilwells and the price of gas will be back down to $1.50.”

You pass another sign. This one reads, “San Andreas Fault.” Travis doesn’t seem to notice.

Once off the highway, you see at least one person on every corner twirling a giant arrow pointing to an open house. “Human signs,” nods Travis, “like back in the Depression when guys would walk around wearing sandwich boards reading ‘Eat at Joe’s.’ But this is the opposite of a depression.” Real estate commissions are 6 percent—$20K on a $400K house. That pays for a lot of twirling.

Stretching off to the horizon are half-built houses and recently finished ones. You follow one particularly active arrow to Cypress Creek Estates. “Yeah, I know,” says Travis, “The nearest creek is 20 miles south and the nearest cypress tree is 100 miles west. But that’s not the point. Everybody in Guatelombia grew up watching ‘Baywatch’ and has wanted to move to California ever since. Do you know how many people there are in the world? Trust me, it’s a lot. There’s an endless supply of people who want to live in California. Do you think Bush is going to shut the borders? The president says, ‘Family values don’t stop at the Rio Loco.’”

Travis’s voice gets intense. “They’re coming, man, and nothing can stop them. It’s the American Dream!”

“Same with the money,” he continues. “When the Chinese get a check from Wal-Mart for a billion bucks for their latest boatload of plastic crud, they ask the smartest guy in Peking where to invest it. He calls up the smartest lad in London, who tells him, ‘Lend it to people buying California real estate. It’ll be safe as houses.’ Nobody cares where they lend in California, just so long as it’s in California. You should see the prices they’re getting this year for dumps in Hawaiian Gardens, Bakersfield, Pacoima, Compton. Compton.

“See, in Abu Dubai, nobody knows nothing about Hawaiian Gardens, other than it’s in California. Over in Arabia, Sheik Rattleandroll thinks, ‘It’s like Hawaii and it’s full of gardens, so how bad could it be?’

“Although, you’d figure,” muses Travis, shaking his head, “that by now, even an Arab would’ve heard of Compton.”

“There’s no stopping them. And the same with normal American people. Every year, kids move from mom and dad’s house in the boring burbs to an apartment in the sexy city. But after ten years or so, they’ve found somebody. The one. They start looking at the price on those cute little cottages around the corner from their favorite restaurant on San Vicente. The price has seven digits, and it doesn’t start with a ‘one.’ They wonder, ‘How does anybody buy in the city?’ They finally realize: people do it family style. If they’re American and they buy on the Westside, then you know that mom and dad gave them half a mil, at least. If they’re Armenian, they have mom and dad move in with them, along with cousin Aram and his uncle-in-law. But Americans can’t live with their relatives. We go nuts. So, it’s out to the exurban frontier for us. It’s a perpetual motion machine.”

You pull up in front of a Mediterranean-style model house. Two stories, 3,150 square feet, the sheet says. It seems enormous—both compared to your apartment and to its lot, with its miniature front yard consisting of a tiny sapling and a tinier sodded lawn. It’s hotter than in Santa Clarita, so the walk to the front door through the grit-laden wind has you sweating.

Then you’re hit by the blast of air conditioning, and you’re standing in the Great Room, with a 20-foot ceiling. “Sure, it seems kind of big, but that’s the crucial element,” explains Travis. “What are they asking, $450K? That’s not a cost to you, that’s an investment, like joining a country club. The sticker price keeps out the riff-raff. You don’t want every peon in Guatelombia moving in next door, do you?”

One stair creaks as you ascend to the lavish master suite. “The construction’s just settling in,” assures Travis. “This house is only, it says here, nine months old. The owner is flipping it. Probably moving to a 4,000 square-foot house with the $50K he’s going to make and do it again. With a no-downpayment mortgage and a low teaser rate for the first two years (which you deduct on your 1040, by the way), that’s about a million percent return on investment. Can you get that kind of interest on your CDs?”

“In fact, I think I’m going to pick up one of these babies, too, and sell it in six months. We’ll be neighbors! Sort of. The mortgage company gets a little snottier about downpayments and interest rates when you tell them it’s an investment, so I’ll just check the “owner-occupied” box. The broker doesn’t care. He gets his commission, then Countrywise bundles it up with a thousand other mortgages and sells it to Lemon Brothers. The Wall Street rocket scientists call this “secretization” because nobody can figure out what anything’s worth. It’s a secret.

“Lemon sells shares in the package all around the world. The Sultan of Brunhilde ends up owning a tenth of your mortgage. Do you think the sultan’s going to drive around Antelope Valley knocking on doors to see if you’re really living there? Maybe you’d like to come in on it, buy yourself a one-eighth share?”

Thanksgiving, 2005

The sky over Antelope Valley is blue, your Marathon Sod minilawn is green, and your bride and her sister are cooking the turkey in your new granite-counter-topped kitchen. You are standing in your driveway in Cypress Creek Estates with Travis, admiring the house you two own next door. “So that couple from Hermosa Beach counteroffered $477K. Nice people. They’d make good neighbors. But I’m going to wait for an even $500K. There’ll be no problem getting that next spring. It’s a nice neighborhood. Quiet.”

That it is. You don’t have many neighbors because about a third of the homes on the street appear to be unoccupied, owned by speculators waiting to flip them. And the people who live on your street tend to start their commutes to LA before dawn and get back after dark. It’s quiet, except on Sunday, when a stream of looky-loos pour through for the open houses.

Voice Mail, April 2006

“Hey, it’s Travis. My accountant was crunching the numbers, and he says I’ve got a slight cash flow problem, what with me paying for 7/8ths of an empty house and the market not quite hitting our target price yet. So he says that we should rent it out, just until we sell it. The thing is, what with everybody buying out there with no money down, there aren’t that many people left in the rental market. Most of the local jobs are in construction, building houses. Now, my accountant keeps the books for this contractor, who tells him he’s got some construction workers from this village down south who need a place to live. Real quiet hardworking types. You hablo un poco español, right? If you need to talk to them, talk to their leader, Juan. He speaks Spanish. The rest of them only speak Mixed-Up. It’s an Indian lingo. But you won’t need to talk to them. They’re very quiet.”

July 2006

It’s Sunday afternoon. Travis peers down as you pry a flattened disk of lead out of the miniature crater in your driveway. “Well, they are real quiet, hardworking types Monday through Friday. I guess they just want to relax on Saturday, have a little fiesta, drink some cerveza, shoot their pistolas in the air.”

“It’s their culture. What are you, prejudiced?”

You look at Travis.

“Okay, okay, I’ll go talk to Juan.”

He comes back 20 minutes later. “Juan is gone, man. That’s what they kept telling me: ‘Juan is gone.’ One of the fellows had his stomach bandaged up. He just got back from the emergency room. I couldn’t quite follow what they were saying, but I think Juan had a bottle of tequila on Saturday night and stabbed this dude. Nothing serious. C’mon, they aren’t gangbangers, they’re working men. But Juan is headed for the border like O.J. in his white Bronco—with the rent money they all owed us. Oh, man…”

Voice Mail, September 2006

“Hey, it’s Travis. I got good news. We’re not going to mess around anymore trying to get our rent from some mob of illegals. No way, Jose. We’re going to get paid on the first of each month straight from the U.S. Treasury! The Department of Housing and Urban Development. Section 8 rent vouchers. They’re tearing down a housing project in the, uh, LA-Long Beach area, in, uh, Compton, I guess, to be precise, and they’ve got this respectable elderly grandmother who needs a place to stay with her family. Really cute grandkids. A few daughters, too. She wants a safe place with good schools to raise them. Actually, she’s not all that elderly. The HUD man said she’s 39. A church lady, you know, pillar of the community, big hat, all that. You’ll like your new neighbors.”

Voice Mail, December 2006

“It’s Travis. Okay, I’ll admit that I hadn’t really thought about the daughters having boyfriends, or grandma either, for that matter. But I think this whole Bloods versus Crips thing is being blown way out of proportion. It’s just graffiti. And lots of kids wear red these days. It’s a very in color. And all the young people make those goofy signs with their hands. How can you know for sure that the Chevy that cruises by every night is full of gangbangers planning a drive-by? Are you sure you read the tattoos on their necks right? It’s nighttime. Maybe they just say ‘mom.’ Did you think about that?”

May 2007

Travis flinches when the 120-pound Presa Canario lunges at him. The steel chain securing the dog to the front of the house across the street from your house snaps taut and its massive jaws come up short. “Man,” says Travis, shaken, “That’s one of those dogs that the Aryan Nation prison gang breeds to guard meth labs, isn’t it? What’s in that house? No, don’t tell me. I don’t want to know.”

“Look at this neighborhood,” he said, his dismissive gesture taking in the empty liquor bottles on the curb, the wheelless car jacked up on a brown front lawn, and the knots of sullen youths playing hip-hop on boomboxes. “All these speculators buy houses, hit a little bump in the road, need some cash, then start renting them out to lowlifes to get by until they can cash in. Property values drop like a rock. It would be no problem if just one investor did that, but when all these speculator jerks do it, the whole hood is hosed.

“Oh, yeah, I came by to mention that in June the mortgage rates reset. Bush put this new guy in at the Fed, Ben Barnacle, and he’s raised interest rates. So that will push up the payment.”

Voice Mail, June 2007

“It’s Travis. Sorry to hear about you having to sell both your cars to make that new monthly nut. Taking the bus to work in that heat, man, that’s rough.

“But, that’s all history. I’ve got great news! I sold the house next door to the Section 8 grandma. I only got what we paid for it, but I figure that was the smart play. She didn’t think she could qualify for the mortgage, but I told her to add up the income of all the people who have ever stayed in her house and put that down as the household income. Did you think Washington Mutual would be so racist as to question how she could have an income of $160,000?

“Don’t thank me for getting you out of that monthly payment. It’s the least I could do for you, bro.”

Phone call, October 2008

“It’s me, Travis. Long time no hear! Hey, I’m sorry about house prices in your zip code being down 55 percent. Bummer.

“Anyway, I’ve been listening to Omama’s speeches about how he is going to invest hundreds of billions to make America energy independent in ten years. So I wanted to let you in on the next big thing. Alternative energy! It’s going to be bigger than houses. I’ve got great investments lined up with some start-ups like biodiesel trolleys. Al Gore is this close to making a big investment. I just need a little help making the minimum required investment. So, are you in or are you out? Remember, quitters never prosper.”

You say: “I quit.”  



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