City of a thousand foreclosures

FOR MOST of 2007, Stockton, Calif., topped all lists of the American cities worst hit by the housing crisis.

As of last summer, one out of every 27 homes in Stockton was in foreclosure--an increase of 256 percent over the previous year. The fact that Detroit--a rust-belt city well known for its long-term economic collapse--took the lead in foreclosures late last year only goes to show the depth of the crisis in Stockton.

But the foreclosure crisis in Stockton didn't come out of nowhere. It's only the latest chapter in the roller-coaster ride that the city has been through over the past decade.

I grew up in Stockton and lived there through the mid-1990s. When I left, the city was still struggling to revive after the early '90s recession, and was best known for its incredibly high crime rate. That hasn't changed--in 2005, Stockton had the highest violent crime rate in California, putting it ahead of Oakland, Los Angeles and San Francisco.

What did change, however, was a sense that the city was getting back on its feet and beginning to move forward.

In the late 1990s, the shopping malls often seemed desolate, with surprisingly few shoppers and storefronts closing faster than they were opening. More recently, though, business and development thrived with the arrival of more big box retailers, as well as a $500 million downtown revitalization project that included the construction of a new arena for live performances and a new stadium for the minor league baseball team.

Downtown Stockton went from being notorious as a center of crime and poverty to a place where families went for weekend entertainment.

But as it turns out, much of this resurgence was built on sand. Stockton's growth was based on the booming housing market, which was spurred large part by relocating Bay Area residents looking for a home they could afford.

WITH STOCKTON within a 90-minute drive of San Francisco--although it takes up to an hour longer during rush hour and bad weather--the city's relatively low cost of living, combined with the relatively high wages for Bay Area employees, made it seem ideal for relocation.

During the dot-com boom of the late 1990s, people from around the country flocked to the Bay Area to cash in on the new gold rush. But after the bubble burst, the early 2000s saw cities like San Francisco and Oakland shrink in size. Meanwhile, Stockton's population grew by 17 percent, from 243,000 to 285,000.

Considering that the median home price in San Francisco in 2000 was $566,000, but only $133,000 in San Joaquin County, where Stockton is located, the attraction was clear. According to Stockton's main newspaper, the Record, "By 2001, Stockton real-estate agents reported that eight out of 10 home buyers were coming from the Bay Area."

It's important to note that these Bay Area emigrants weren't necessarily millionaires. On the contrary, they were people who mostly couldn't afford a half-million-dollar mortgage in San Francisco.

For a generation of parents who don't expect to see their children to earn more than they do, home ownership means at least having something to pass on--so for many Bay Area workers, the hot summers of the Central Valley and the exhausting commute were worth it.

An increase in demand for housing due to an influx of higher-income homebuyers, along with an aggressive development plan aimed at attracting new buyers, caused a speculative bubble. By the end of 2006, the median home price in the county had nearly tripled since the beginning of the decade to $385,000.

According to a study from November of last year, the average family in San Joaquin County couldn't afford 95 percent of the homes on the market in the county. Home ownership became virtually unattainable for them.

Once prices maxed out and the bubble burst, there was a surge in defaults, and mortgage holders couldn't sell the homes they foreclosed on. Many homebuyers and developers are now thinking twice before getting into this mess, which puts Stockton's future growth plans in jeopardy.

BUT THIS is only part of the story. It wasn't only an influx of outsiders that created the housing bubble. The root of the problem in Stockton is the same as everywhere else--people were convinced to buy homes at inflated prices, reassured by a whole cast of unscrupulous characters that everything would work out.

The realtors, lenders and banks--and the corporate boards that oversaw the whole process and orchestrated massive profit margins out of it--are responsible for this debacle.

A recently retired escrow manager at a title company in Stockton related to me how the industry set up new homebuyers for failure. "Almost every single day, I would see a young couple in their late 20s or early 30s who were buying their first home and were in way over their head," she says. "When I went over their contract with them, I would invariably find something they hadn't agreed to, like a variable interest rate or hidden fees that hadn't been explained."

In fact, it wasn't uncommon for a homebuyer to have to unexpectedly come up with thousands of dollars in fees in order to close the deal--even when they had been told that no down payment was required for the mortgage.

Some of these were "garbage fees"--which included, for example, the lender charging hundreds of dollars for printing out the paperwork for the contract. But this was trivial compared to the unexpected rise in mortgage payments built into the contracts on variable rate loans.

The former escrow manager told me that when realtors or lenders were called on to explain the full implications of the contracts, they always found a way of convincing buyers that it would work out in their best interest. As she explained, "They would say, 'Interest rates are going down, the price on your home is going up, your salary is going to increase, so this will all work out. You can trust me.'"

Of course, none of these things about interest rates or rising salaries were actually going to happen. But for a lot of people, they were facing the final obstacle to getting their dream home and were therefore willing to believe the lenders--and in any case, they were already committed to buying and couldn't see how they could back out.

"The problem," the former escrow manager told me, "was always that it was a Tuesday or a Wednesday, and they had to be out of their apartment on Saturday or Sunday. So they were basically pressured into making a decision at the last minute that they weren't prepared for."

Once the variable interest rates started climbing, homebuyers could no longer pay their mortgages and defaults ensued.

Capitalist crises don't merely create wreckage in their immediate path. They also indirectly affect all sorts of people who never saw them coming.

So while the worst hit are people who are losing everything because they are stuck with a skyrocketing monthly mortgage payment, renters are also facing new difficulties. Increased demand is driving up the cost of renting, making it increasingly difficult, even for those with access to vouchers for low-income families, to find an affordable apartment.

There have also been stories about renters being evicted from foreclosed properties--with no power to stop the eviction, they face demands that they move within days, and may struggle to get a refund for paid rent and security deposits.

Beyond this, the growing number of mortgage defaults in places like Stockton are causing an even deeper financial crisis, which is having an effect on the world economy. The mortgage crisis will, thus, cause the coming recession to be that much worse--and the layoffs and wage cuts that are a product of the economic downturn will lead to further declines in home prices and put a strain on even more households struggling to pay off mortgages.

It is a vicious circle--and the culprit is the capitalist free market system.