There is historical synchronicity to be mined from Wachovia's stunning announcement on Tuesday of an incredible $23.7 billion loss for the third quarter of 2008. The figure matches almost exactly what Wachovia paid for the Oakland, Calif.-based mortgage lender Golden West in 2006. And if any single financial institution can be said to reside at ground zero of the housing bust, it was Golden West.
Golden West pioneered the "Option ARM" mortgage -- that now infamous lending product that allowed homeowners to pay pretty much whatever they felt like paying in the initial years of the loan. Of course, if you make minimum payments that don't even cover the interest accruing on your loan, you end up with bigger unpaid balances than you started with -- negative amortization territory -- which puts you at tremendous risk if home values should happen to fall, instead of relentlessly appreciate. Golden West built its empire by almost exclusively selling option ARM mortgages, mostly to Californians. It was an empire built on quicksand.
Thanks to a nifty new interactive map from the New York Federal Reserve Bank, we can trace the trail of wreckage left by Golden West county-by-county through California. Click on any county and you can learn both the current rate of mortgage and credit card delinquency in that county.
The primary lesson to be learned from the map is that credit card delinquencies are rising fastest in exactly those counties that have suffered the worst from the housing bust. In California that would be the counties that make up the Central Valley and the "Inland Empire" of Riverside and San Bernardino counties. This was Golden West's playground, but no one is having any fun there anymore. The story is simple: A resident of Fresno or Merced county took out an option ARM loan (or refinanced into one) for a house at an inflated price, got burned by the housing bust, started paying for life's necessities with credit cards, and now can't make the credit card payments. Consumer spending falls across the board: Voilà, recession.
There is some good news: According to an excellent Wall Street Journal story published on Wednesday by Michael Corkery and Jonathan Karp, "California Home Sales Revive, But Not Without Intense Pain," home sales are up all over California by 65 percent as measured against a year ago. But the pain here is no gain: Home prices fell 34 percent over the same time period.
Corkery and Karp observe:
Those woes weigh on the financial system. Though California represents about 12 percent of the nation's population, its homes account for 34 percent of the loans in a typical mortgage-backed security, according to Fitch Ratings. "California doesn't have a Wall Street problem. Wall Street has a California problem," says Christopher Thornberg, principal at Los-Angeles based Beacon Economics and member of the California Controller's Council of Economic Advisors.
One more interesting side note. Herb and Marion Sandler, the married couple who built Golden West from a two-branch S&L in Oakland into an option-ARM colossus, are pouring the $2.4 billion that they cleared from the sale of their company into liberal philanthropy. The New York Times' Joe Nocera wrote a long piece on their laudable efforts in March, about a month before the credit crunch really started getting serious with the bailout of Bear Stearns.
Option ARMs don't get a single mention in Nocera's story. But in the course of discussing how the Sandlers funded the creation of the nonprofit center for investigative journalism, ProPublica, we come to the following passage:
Even among the philanthrocapitalists, though, the Sandlers stand out. Herb, in particular, can sound nearly contemptuous about how other philanthropies go about their business. Mainly, it seems, they don't do it the way he and Marion do.
But what makes them so sure their way is better?
"It starts with outrage," Herb Sandler said. "You go a little crazy when power takes advantage of those without power. It could be political corruption -- "
"Or subprime lending," Marion interrupted.
"The story of subprime is worse than anyone has written so far," Herb said, shaking his head in dismay.
"It is," Marion said, nodding in agreement.
An option ARM loan is not by definition a "subprime" loan, although in many cases the categories overlapped. So when the full "story of subprime" does get written, Herb and Marion Sandler might deserve a whole chapter for themselves.