California city loses American dream

Protected by the San Gabriel Mountains from the smog of Los Angeles 60 miles to the south, this desert city's brilliant night skies have inspired countless dreams -- dreams that soared in the 1980s, when Palmdale was the fastest-growing city in California.

"There's nothing like the stars at night in the desert," says Joe Morales, who, until recently, looked up at night from the deck of his two-story, middle-class house.

These nights, the stars are shining as brightly as ever, but the dreams are dimmer.

A vicious cycle of recession, defense cutbacks, aerospace-industry layoffs and the collapse of the real estate market has turned this city of about 104,000 into the foreclosure capital of California.

Morales, 45, an auto body repairman, lost his home in September, raising the white flag after a financial battle that began when he was laid off.

"It was heartbreaking for my wife and me," Morales says of losing the house. "It's still hard when I go by there."

Morales could see what was happening in Palmdale even before he bought the house. The former owner, an aerospace engineer, also had lost the house to foreclosure. Morales figured the same thing could never happen to him.

Nobody here did. During the 1980s, Palmdale, like many communities on the fringe of major metropolitan areas, grew wildly, its new, affordable housing attracting hordes of up-and-coming dreamers.

But 1990s economic realities have trashed aspirations that once were taken for granted.

"The American dream is garbage for Californians as a whole," says Jay Beninger, 33, a salesman who moved out of Palmdale this year but is still saddled with a house there. "Our parents bought homes, paid down the mortgages, saw the values go up. ... Now I've owned a house seven years, and I'm at a big negative. To me, the dream doesn't exist."

Rooted in aerospace

Palmdale takes great pride in its aerospace roots. Something, though, is terribly wrong here now.

Each month in Palmdale, about 140 homeowners lose their homes through foreclosures, distress sales in which they take a total loss or, in some cases, by walking away.

The overall numbers are staggering. In the late 1980s, with Palmdale in the middle of a housing boom, foreclosures were almost unheard of: 31 in 1988, 41 in 1989, 37 in 1990. But the numbers shot up after that, and in 1995, an estimated 858 homes will be foreclosed.

The Palmdale foreclosure problem, statistics show, is about four times worse than the state average. And reality is even worse than the numbers indicate. Maybe twice as bad. That's because many homeowners lose property in ways other than foreclosure.

More and more lenders, having experienced hard times themselves, are accepting "short pays" -- or pre-foreclosure sales. With a short pay, the owner finds a buyer and then pays off a negotiated amount of the remaining mortgage. The owner is free of the loan and may avoid credit problems. But the equity in the house is gone, and so is the house.

Other owners simply walk away from their house and deed the property back to the lender.

Add it up and, in Palmdale, the five-year total ending with the projected 1995 number is 2,920 foreclosures. Double that, and you have almost 6,000 homes -- at least a quarter of the city's stock of owner-occupied houses and condos -- lost through foreclosure or otherwise since 1990.

Personal financial disasters accompany most of these tales: life savings evaporated, retirement plans shelved, bankruptcies declared, credit ruined.

The emotional toll has been heavy as well.

"It's so sad," says Palmdale resident Trini Moselle, whose house is surrounded by homes that have been in and out of foreclosure. "It's gotten to the point where I don't know if I should get acquainted with the neighbors anymore."

Stream of buyers

In the 1980s, as housing prices in Los Angeles escalated beyond the reach of many, tens of thousands of disillusioned home shoppers found their way to Palmdale and its dramatically lower costs.

But in the early 1990s, the promising economic trends broke down. Defense budgets were slashed. Major aerospace contractors laid off thousands of southern California aerospace workers, many of them Palmdale residents.

At the same time, the bottom fell out of the southern California real estate market, and it fell further in Palmdale than most anywhere.

Real estate values have plummeted since 1990. Homes that were bought for $300,000 then are worth perhaps $170,000 now. Lower-end homes that fetched $160,000 in 1990 languish on the current market for $95,000 or less.

The result is a massive amount of negative equity, with owners owing more than their houses are worth.

They're "upside down," in real estate jargon. Much of the real estate business in Palmdale these days involves working with "upside downers."

"Every week, I sit down with owners of homes who are going through personal hard times," Palmdale agent Jack Marshall says. "The husband or wife has lost a job. They can't make the payment. They want to sell. Then they discover how little it's worth and one or the other breaks down."

White collar. Blue collar. Luxury homes. Starter homes. The foreclosure beast does not discriminate.

Ask Joe Lanear. He had a salary of more than $60,000 as an engineer with Lockheed when, in 1989, he put his life savings into a beautiful new house in Palmdale -- five bedrooms, three baths, three-car garage, 2,700 square feet. "Everything you ever dreamed you could want in a house," he says.

Total investment: $351,000.

The next year, Lanear, then 55, was part of a major Lockheed reduction. He took an early retirement, got a job in Seattle with Boeing and decided to sell his house.

But Lanear had no idea how far the market had tumbled. When he suggested to agents that he wanted to break even and list the house at $351,000, they laughed out loud.

"How about $240,000 or $250,000?" they asked.

"Not a prayer," Lanear said.

For the past four years, Lanear lived in Mukilteo, Wash., and rented out his house in Palmdale -- although it was vacant half the time. His retirement checks from Lockheed went to pay the mortgage as he waited for values to rebound.

Instead, his equity -- his life savings -- went down the drain. He recently gave up and accepted an offer of $170,000, some $30,000 less than what he owes on the house.

"I'm 60 years old, and I'm screwed," he says. "My life savings are gone. I've lost $220,000 to $240,000 on that house. ...

"I don't know what to do when we're 65 and I have to retire. I'm going to be a ward of my children -- a nice thank you after 30 years in the aerospace industry and being an honorable citizen. ...

"I don't think our executive and legislative bodies understand what has happened out here. I wish they would understand. I wish there was some legislation that would allow me to recover from all this."

Neighborhood dying

Palmdale's Larchwood Drive, at the corner of Ivy, is particularly hard hit. Here, the dream is in critical condition.

When these homes were built in 1988, they were scooped up by middle-class families, typically with small children, and the streets were alive with hospitality and high hopes.

Now, the neighborhood is a mixture of malaise: foreclosures, empty houses, dead lawns, renters coming and going, owners unable to sell, owners bitter about the free-fall in values and about what their neighborhood has become.

Joe Morales' old house is at the corner on Larchwood. He fought hard to save it. He turned in a new Ford truck. He took out a second mortgage. He filed for bankruptcy. He found a buyer and negotiated a "short pay" with his lender, but the deal fell through.

"Finally," Morales says, "I just gave up."

He and his wife and daughter are renting a house in Lancaster.

"It's like someone keeps digging and digging at California," he says, "like they're trying to close down the state."

Hopeful slogan

Even if the local economy improves, it will take years -- maybe decades -- for the thousands of upside-downers to get right-side-up. Real estate values will likely rebound at some point. Will it happen soon?

Real estate agents say the answer is no.

If a rebound does occur, it likely will be too late to help Trini Moselle.

Moselle, 40, a single parent of two daughters, moved to Palmdale in 1988 because she couldn't afford a house near her job as a tax accountant in Burbank.

She bought a pretty, new, one-story house for $98,000. But now, her daughters plan to go to college in Los Angeles, and Moselle wants to move nearer to them.

The house is the problem. She took out a second mortgage to help with her daughters' college costs. She owes about $122,000. She's afraid to find out what her house -- on the corner of Ivy and Larchwood -- is worth. A similar one in this neighborhood, although not in as good condition, just sold for $53,000.

What will she do?

"I have no idea," she says. "I'll probably have to lose it."

Foreclosure?

"Probably," Moselle says. "There's no way I can pay off the loan by selling."

She hopes to rent something near UCLA or the beach.

There isn't a lot she'll miss about her Palmdale neighborhood -- not the way it is now, anyway. Except one thing.

"The stars," she says. "They're so beautiful. I'll really miss that."