http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/16/MNT0TM9V4.DTL
Israel Medina admits he got too gung ho about the idea of getting rich by flipping Bay Area real estate.
Medina, a Concord resident who ran a limousine company before wading neck-deep into the housing market, has seen not one, but 11, of his Northern California properties move into foreclosure in the past year, he said.
"I was a real estate tycoon; I had everything," said Medina. "Now I have nothing."
A Chronicle analysis of public records shows that speculators like Medina played a significant role in the region's subprime loan meltdown.
These real estate gamblers are hardly the struggling home buyers often portrayed as victims of the Bay Area's and nation's foreclosure crisis. Some bought houses as often as other people buy shoes, rarely putting down any money. The speculators were betting that home prices would continue to shoot up. Instead, when the market started softening and prices sagged, many of their properties ended up as foreclosures.
More than one-fifth of 6,557 Bay Area properties that fell into foreclosure from January through September this year were owned by investors, according to a Chronicle analysis of public records compiled by DataQuick Information Systems. Of properties repossessed by lenders, 1 in 6 had been owned by people who had two or more foreclosures in their names. Eighteen Bay Area investors had five or more foreclosures.
"During the frenzied period, you got people rolling the dice and buying as many properties as they could," said Andrew LePage, an analyst with DataQuick of La Jolla, San Diego County.
Easy money through no-questions-asked subprime mortgages allowed almost anyone to become a real estate speculator. The flood of investors and first-time home buyers into the market helped to fuel the Bay Area's double-digit price appreciation in recent years.
And while lenders are left holding the unpaid loans for these investments gone bad, experts say the region's homeowners and the public at large share the pain.
"All of us end up paying in some way for the losses incurred by the lenders," said Hans Johnson, associate director of the Public Policy Institute of California, who is an expert on housing issues. "And anyone living next to one of these foreclosures would certainly say it affects them."
The Chronicle's investigation showed those with multiple foreclosures ranged from naive investors to people who may have been victims of fraud - or committed it themselves. What they all had in common was the hope for a payday.
A working-class Livermore couple bought four investment properties, believing the real estate would finance their children's college educations; one has gone through foreclosure and others are on the verge. A Marin resident invested $1 million in four properties that a construction company owner told her he would fix up and flip; she lost all the money, her good credit and her own home.
The Marin resident, Rose Hodges, said she attended Marin investment clubs and met many people like herself who wanted to learn how to invest in real estate.
"All these Baby Boomers started inheriting money from their parents and looking for ways to invest it. And the real estate market was booming," said Hodges, who learned the hard way that such investments can have a big downside. "It's crazy out there and people ought to know."
Medina, who got a real estate license early this year, said he dabbled in real estate for years and made some money before gambling too big and buying 11 properties at virtually the same time in early 2006.
He said he lost the luxurious, six-bedroom house he was occupying in addition to 10 others he was trying to sell, plus most of the limousine business he had been running for years. He said the financial mess has left him penniless, facing bankruptcy and lawsuits, and saddled with a $3.6 million tax bill.
"It was a really, really bad investment," said Medina, who said he lost hundreds of thousands of dollars of his own money that he had invested in the homes. "I should have bought fewer homes. I never should have gone so crazy."
The Chronicle analyzed ownership information for 6,557 Bay Area homes and condos repossessed by lenders in the first nine months of this year. Those represented 94 percent of all Bay Area foreclosures during the time period; full records of past ownership were not available for the remaining foreclosures.
Of these, just under 1,000 were owned by 439 people who had multiple properties foreclosed upon from January to September. An additional 349 foreclosures were owned by people who listed mailing ZIP codes different from their property's address at the time of purchase - suggesting the properties were an investment, not a primary residence.
The vast majority of these properties were bought with little or no money down, according to an analysis of DataQuick's loan information. About 69 percent of the investors got 100 percent financing, meaning they did not put down a dime of their own money toward the purchase prices. An additional 12 percent made down payments that were less than 5 percent of the purchase price. Only 10 percent of investors put down the standard 20 percent.
Some 80 percent of the investor-owned Bay Area foreclosures were purchased at the height of the real estate market in 2005 and 2006, public records show.
The majority (80 percent) of people who had multiple foreclosures in the nine-month period had just two. However, 56 people had three, 13 had four and 18 had five or more.
It's widely known that get-rich-quick real estate speculators flooded markets such as Las Vegas or Miami over the past few years. The Bay Area was presumed to have been relatively free of speculation because real estate here is so expensive. Indeed, the percentage of Bay Area speculators is modest compared with Las Vegas, where a Las Vegas Sun analysis found that 74 percent of single-family homes in foreclosure during a six-month period this year were owned by investors who did not live there.
Why would investors buy multiple properties in a pricey market where their carrying costs - mortgage payments, taxes, insurance - would certainly eclipse the potential rents?
Flipping and fraud appear to be the primary motives.
Flipping, which is legal, involves counting on rapid market appreciation to inflate a property's value, so it could be sold for a profit within a year or two - ideally before introductory mortgage rates reset higher.
"There was the expectation that because prices were increasing so fast, you could get speculative gains and get out," said Doug Duncan, chief economist for the Mortgage Bankers Association in Washington, D.C.
The group analyzed loan records for properties in early stages of foreclosure and found that non-owner-occupied homes appeared to account for 13 percent of prime defaults and 11 percent of subprime defaults nationwide.
However, absentee owners were much more common among defaults in California, Nevada, Arizona and Florida - all states with particularly rapid price appreciation that attracted speculators.
In California, absentee owners accounted for 21 percent of prime defaults and 15 percent of subprime defaults, the mortgage bankers said.
Fraud is the sinister side of flipping. Scammers artificially fattened home prices - often with the aid of inflated appraisals - so they could take out loans for more than the house was actually worth and collect wads of cash back at closing.
"They pump up the value of the house and they pocket the money and then they just walk away," said Contra Costa Assessor Gus Kramer. "It's fraud, but nobody can prove it."
Doug Pollock, whose Florida company, Information Data Services, conducts private investigations of mortgage fraud primarily for title insurance companies, said fraud may be involved in many of the cases of investors facing multiple foreclosures.
Pollock said he has investigated many cases in which "investors" induced people to act as "straw buyers," lending their credit and names for loans to buy properties. Then the investors stripped the equity out of the properties, never paid the mortgage and left the straw buyers holding foreclosures. Sometimes the buyers got a cash payment for their involvement; sometimes they did it believing they were getting in on a great investment opportunity.
"This is a big nationwide epidemic that's going to kill everyone," said Pollock, who said the con artists often advertised the schemes as an investment opportunity on places like eBay. "They'd say, 'We want you to be an investor with us. We can buy properties cheap and flip them. And you don't have to invest any of your own money.'"
Christopher Wride, a 28-year-old East Bay resident who lost homes in Dublin, Vallejo and Bay Point to foreclosure this year, is now wanted by police for allegedly using false names to purchase cars and at least one other home in San Joaquin County.
San Ramon police Detective Michael Schneider said Wride, who may have had an inside business relationship with a Dublin mortgage company, is wanted in four counties on identity theft and other charges.
Schneider said he thinks Wride's motivation for buying so many houses was to access chunks of cash by tapping into their equity and then let them go into foreclosure.
"Whenever I hear them talking about foreclosure on the radio and saying, 'Woe is me,' I think: What about all the people who made a quick buck on this and did it illegally?" he said.
Lenders have touted the subprime loans that allowed people to purchase properties with little or no down payment as a way to help cash-strapped first-time home buyers. But The Chronicle's analysis shows that investors have used - and sometimes abused - the loans for money-making purposes.
Pollock said some investors may have tricked lenders into giving them loans on multiple properties by purchasing many properties at the same time, so lenders who saw their multiple loan applications would think they were just shopping around for the best loan.
But he said some of the blame should go to the lenders and mortgage brokers, who were so eager for loan origination fees that they gave little scrutiny to their borrowers.
"I think this kind of activity is responsible for more of the subprime lending crisis than what you're hearing about. And the lenders have a lot to account for in this mess," he said.
Being investor-owned is a significant predictor of whether mortgages will go sour. Duncan, from the Mortgage Bankers Association, said investor-owned properties are less-desirable investments on Wall Street because their foreclosure rates are higher than owner-occupied properties. The reason is obvious: People who don't live in homes are more likely to walk away when mortgage rates reset higher or the property loses value.
All the efforts to help struggling subprime borrowers are focused on owner-occupants. The administration's proposed plan to temporarily freeze some initial interest rates applies only to homeowners who actually live in the home. No bailout plan proposes to rescue investor-owners - and given public distaste for speculators, none is likely to.
"These people who were engaging in get-rich schemes, I don't have much sympathy for," said Johnson from the Public Policy Institute. "One thing that was clearly behind this was greed."
E-mail the writers at emccormick at sfchronicle.com and csaid at sfchronicle.com.