On the surface nothing has changed. A relentless Southern California sun continues to battle omnipresent smog for control of surrounding mountain vistas. The waves still lap the beaches of Malibu with rhythms of eons past.
But just ask Leland and Sherry Conner of San Bernardino County if things have changed. They are now living in rented quarters, $15,000 poorer for having dreamed the impossible American dream. Two years ago in June, the young couple, with a joint income of $25,000, bought their first house. The price was $85,500. Their real estate broker arranged for a $5,000 down payment, a first mortgage of $45,000 at 8 3/4 percent interest from a mortgage company, and a one-year balloon loan of $35,000 at 11 percent. Their monthly payments totaled $750.
According to the Conners, the broker assured the couple they could refinance the second trust with only a small increase in monthly payments. As it turned out, three lenders rebuffed the Conners, they said, before they were able to obtain a $27,000 loan for five years at 20 percent from Beneficial Finance. The seller took back a third mortgage at 18 percent for the $8,000 difference. The couple's payments escalated to $1,200 a month.
They let all their other bills go to pay the mortgage. The utilities were turned off and a leak in the roof needed $3,000 to be fixed. The Conners made three mortgage payments before they gave up. "There was nothing we could do to meet the payments," said Sherry Conner in an interview.
They put the house on the market at $99,000, but there were no takers. They could not declare bankruptcy because Leland, a bonded armored car company employe, would have been fired. So Beneficial foreclosed last August and took over the house.
The couple appealed their case to the local board of realtors and lost. They then consulted a half dozen attorneys before one would accept their case for a retainer of less than $500. In a suit their lawyer said would be filed next week,, Sherry Conner contends the broker promised them they would have no trouble qualifying for a loan after the first year and that the house would appreciate by 8 to 10 percent a year so they could always get their money out.
While agreeing it was a very unfortunate situation, the owner of the brokerage insisted the couple's agent had done nothing wrong and pointed out that the firm had been upheld in arbitration.
The Conners' story is being repeated with increasing frequency here as California's real estate boom turns to bust. "Tremendous confusion," "stagnant market," "terrible times," "ticking bomb" are some of the phrases used by professionals to describe the situation. The reality of realty these days means:
* A 173 percent increase in foreclosure sales during the first six months of 1982 over the same time last year, according to the Real Estate Research Council of Southern California. By extension, approximately 19,000 properties statewide will be sold in foreclosure proceedings this year, still short of the 22,000 record in 1967. Twice that number will be declared in default. The default rate doubled in the first half of this year to 67 per 10,000 loans, according to the Mortgage Bankers Association.
* An estimated 10 to 15 percent drop in some areas in the prices of residential real estate, which was appreciating at an annual rate of 18 percent four years ago. More than 600,000 existing houses were sold that year, compared with an estimated 150,000 this year. Housing starts are down 70 percent from 1977. There are 70,000 unsold new houses, says Builder magazine.
* A growing, but untallied number of lawsuits filed by owners against sellers, real estate brokers, institutional lenders, and even lawyers, as well as by lenders against owners. Lenders and real estate brokers each blame the other for the mess. There also is a growing number of personal bankruptcies to stave off foreclosure temporarily.
A University of California study by economist Kenneth Rosen blames four out of every five foreclosures on the troubled economy. Others would lay more of the responsibility on local factors such as the speculative fever of the late 1970s; prices here tripled to an average of $124,000 while the national average doubled to $80,000. Add the controversies over due-on-sale clauses and creative financing, and the smog thickens.
A U.S. Supreme Court decision last June and the Garn-St Germain Depository Institutions Act of 1982, enacted earlier this month, have left California, more than any other state, in legal limbo. To homeowners Donna and Walter Arnstein and Sanford and Deanna Halter, it's more like purgatory. The couples filed separate suits against World Savings and Loan Association in Oakland after the S&L refused to allow their prospective buyers to assume existing low interest mortgages -- which the owners had themselves assumed years before unbeknownst to World -- without a large increase in the interest rates. In each case the deal fell through and, without the favorable financing, there was no ready market for the houses.
The suits are grounded on the fact that World was a state-chartered S&L before it converted to a federal charter in 1981. In 1978, the California Supreme court ruled that state-chartered S&Ls generally could not prevent assumptions of mortgages. In June, the U.S. Supreme Court held that federally chartered S&Ls could prevent assumptions by calling loans. The new Depository Institutions Act states that loans made between 1978 and 1982 by state-chartered S&Ls that later converted to federal charters could be assumed for three more years unless state courts or legislatures decided otherwise. Most major S&Ls in this state converted during that period in question.
An attorney for World said the legislation would not alter its defense in the Arnstein and Halter cases. Two weeks ago, an Orange County judge ruled that loans by converted S&Ls were assumable. But most attorneys agree that more litigation will occur before the issue is resolved.
Meanwhile, most S&Ls that always held federal charters have begun asking homeowners who assumed low interest mortgages as long as four years ago to agree to raise the interest on their loans to a "blended" rate somewhat below market but often well above the original one. Sometimes retroactive interest payments, loan-takeover and broker fees are added, and a 30-year fixed-rate mortgage is converted to a five-year loan. At least two S&Ls have elected to call their loans rather than negotiate blended rates. S&L executives report most people go along, but a few have chosen to contest the actions.
The real estate industry faults the lending industry, which denies assumptions, for the stagnant market; whereas the lenders blame the brokers for the problems of creative financing. The California Association of Realtors reports that 77 percent of residential sales in the first half of 1981 were "creatively" financed, usually through the use of so-called balloon payments -- interest-only notes whose principal is due in anywhere from six months to three years. Now balloons are bursting all over the state. Half a billion dollars in short-term notes comes due this year in California alone, and $2 billion in notes will mature next year, according to the California Savings and Loan League.
Like the Conners, Terry and Judy Goddard of Sierra Madre were a young couple in the mobile home supply business who became embroiled in an even more complicated saga of creative financing. According to their lawsuit against their real estate broker, they bought a house in February 1980 for $93,500 with an $11,700 down payment, a second trust of $7,000, and a balloon note for $74,800 payable to the sellers in nine months. In July they borrowed an additional $25,000 from the broker, a note payable in six months, to fix up the house.
In December 1980, they put the house on the market for $130,000. Meanwhile, their $74,800 note became due, and in May 1981, they received a foreclosure notice. But they said the real estate broker who had lent them the $25,000 for repairs told them not to worry, that he would get them new financing.
They said they found a prospective buyer on Oct. 3, 1981. About the same time, the lawsuit alleges, the broker got the holder of the $74,800 balloon to hold off foreclosure for 30 more days, but did not inform the Goddards of this.
The Goddards said they learned on Friday, Oct. 16 that they could not get new financing, and the foreclosure sale was held the following Monday. The buyer at $71,200 was the broker. The next month he sold the house on schedule to the buyers the Goddards said they had found. They estimated the net profit to the broker at $33,000 plus his $5,600 original commission. The Goddards, who admit they got in over their heads, are asking for punitive damages of $350,000 in an action accusing the broker of fraud, deceit and intentional misrepresentation.
The Goddards' broker denied the allegations. He said the Goddards were speculators who had recently made a significant profit on turning over a house. "They were looking to do the same thing with this house so they could buy something in Northern California. They were interested in greater profits than they should have expected in a short time." He added that he bought the house to protect his own investment, which was larger than the Goddards.'
There are many losers in this market, but who are the winners? There are reports of investor syndicates that buy up distressed properties at a discount. Banks and savings and loans seek to avoid not only the bad publicity foreclosures cause, but also the burden of real estate for which there is no market.
Few residences are actually sold on the courthouse steps, says D. Gene Phillips, a Pasadena attorney who has been involved in several dozen suits arising from creative financing. Rarely do these cases go to trial. Instead, they are settled with minimal, if any, damages. Usually, the previous owner who has taken back a balloon mortgage loan from the buyer winds up taking the property back at close to the sale price, thus forfeiting his anticipated profit.