Drive eastbound from Los Angeles on Interstate 10. Just beyond downtown, travel through a long stretch of the San Gabriel Valley suburbs. After passing Pomona, then crossing over the L.A. County line, the scenery takes a turn toward the exurban. Layered over the hardscrabble desert landscape like a carpet is a terrestrial sea of tract housing development that stretches to the San Bernardino Mountains and the western edge of the Mojave Desert.
Southern California's "Inland Empire" is comprised of two counties -- Riverside and San Bernardino -- that together contain a population larger than that of the state of Oregon. The region is a monument to the Southern California real estate construction boom that began in the 1980s, and to the housing market boom of the 1990s and 2000s. The spectacular population expansion of the Inland Empire during that time -- 66% during the 1980s, 26% in the 1990s and 2000s -- was driven in large measure by Los Angeles residents fleeing the city, in turn from crime and blight and then from outrageous housing prices, for the safety and affordability of the bedroom communities along the axis of the 10 and the 15 freeways. In the Inland Empire, real estate developers found a seemingly endless expanse of emptiness in which to reconstruct the California Dream whose façade had been stripped bare in L.A. by the polarization of endemic poverty and opulent wealth, crime rates, gang culture, failing public schools, and numerous other indices of a fading future for the urban middle class.
Until the housing bubble collapse, this renewed and transplanted California Dream fueled a construction boom in the Inland Empire that approached Chinese levels of expansion. From 2000 to 2006, homebuilders erected over 170,000 new single-family homes in Riverside County alone to meet the demand of an additional 500,000 new residents. As the demand for new homes grew, housing prices skyrocketed, more than doubling in the county from 2002 to 2006. Big homebuilders like KB Homes, D.R. Horton, Lennar and Pulte made a killing in Riverside and San Bernardino, the third and sixth fastest growing counties in the United States.
As in the rest of the country, the joy ride ended in a crash. As of February of this year, the two counties had, respectively, the fourth and the fifth largest total numbers of new foreclosures in the United States. To make matters worse, unlike in older metropolitan regions, in the Inland Empire, foreclosed houses are not scattered throughout various and varied communities. Like a non-diversified stock portfolio, each new subdivision was built all at once, and every carbon copied house within each subdivision sold at roughly the same time and under similar financing arrangements. Consequently, in the Inland Empire entire neighborhoods are now bank-owned. Endless miles of exurban sprawl in the region have become manicured ghost towns, with big plastic padlocks on every door and mosquito larvae hatching in every stagnant swimming pool.
The catastrophic collapse of the housing market in the Inland Empire was preceded by the same reckless subprime lending practices that infected the real estate industry in neighboring Los Angeles County, the foreclosure capital of the country, and every other high-octane housing market in America. But in the Inland Empire, developers added yet another lucrative conflict of interest to the usual venal arrangement: the companies that built and sold the houses were also the lenders that financed those very same sales.
Eighty-five percent of buyers of Lennar Homes, for example, received their financing from Universal American, Lennar's mortgage subsidiary. In some cases, the developers' salespersons simply told prospective buyers they had to take out their loan from the company's financing arm. In the case of the homebuilder D.R. Horton, buyers were required by contract to apply for financing through the developer's subsidiary, DHI Mortgage, within five days of entering into the purchase agreement. If a buyer chose instead to use outside financing and was not able to close on time, he was considered in default of his contractual agreement. At that point D.R. Horton would either cancel the transaction and keep the buyer's deposit, or extend the period before closing and charge the buyer $300 per day over the course of that time period. In other cases, buyers would be coaxed into relying on the homebuilder's mortgage subsidiary through enticements such as waiving closing costs or promised discount points that never actually materialized.
Not surprisingly, the loans the housing developers' subsidiaries offered were increasingly of the subprime variety. In 2004, 5.5% of the loans advanced by DHI Mortgage were subprime; by 2006, 35.8% were. Between 2004 and 2006, the number of subprime loans offered by Universal American increased by over 6,000 percent. The terms of these loans tell the familiar story of the housing bubble everywhere: adjustable mortgage rates, balloon payments, negative amortization, etc.
By advancing subprime loans to middle- and working-class families who could not afford them, Inland Empire homebuilders were able to generate new demand for their homes in a market that would otherwise have been saturated. There was, in effect, no actual market in Inland Empire real estate, at least in as far as a "market" is understood to include transparency, competing interests and price bargaining. Instead, there was merely the prospective buyer on the one hand, and a real estate conglomerate that monopolized the home buying process from construction through financing on the other. Entire communities in the Inland Empire succumbed to these complex financial traps, and have been left decimated in the aftermath.
Today, FHA loans are the homebuilders' new racket. With subprimes no longer in existence, builders are originating thousands more FHA loans in the Inland Empire than they were before the bubble burst. Of the two builders that originated the largest number of FHA loans during 2007 and 2008, default rates are higher than the national average. Even in the wake of the housing market collapse, the California Dream lives on in the Inland Empire, but so does the barren desert beneath the roll-out lawns of homes propped up by lies.