CNBC

The federal rescue of Fannie and Freddie is just one sign we aren’t at the bottom of the housing mess yet.

Other signs are all over Stockton, California. First dubbed “The Foreclosure Capital of America” a year ago, I came back this month, expecting to find some signs of a turnaround. I was disappointed.

In September 2007 when I first reported from Stockton, one in 27 homes was in foreclosure. Now it’s one in 25.

“It’s horrible,” says Valerie Gambrell, a day care provider who’s been renting a house here for 13 months. Her landlord apparently stopped paying the mortgage in April, the house went into foreclosure, and now Gambrell has to vacate. This is the SECOND home she’s rented in Stockton that has gone into foreclosure. Gambrell says she could really use the $1,500 security deposit she gave the landlord, but he can’t be found. “It’s like they have no heart or compassion,” she says. Well, some have compassion. The bank is offering her $4,000 to be out of the house in 30 days and leave the place clean. That will get her first/last month’s rent plus a security deposit at a new place. Will she rent another house? “Never. I will never rent a house here again.”

Foreclosures are up 300 percent from a year ago in Stockton’s San Joaquin County, and prices have fallen nearly in half, to a median of $215,000. Go to RealtyTrac and you’ll find more than 11,000 homes for sale here listed as either bank owned, auctions, or in preforeclosure. Only 52 houses are on the market as just regular old resales. That’s not even one percent.

• Paulson: Bailout Cost Depends on Housing Rebound

The good news, pending sales are up 500 percent from a year ago. Homes are selling.

Still, no one seems to think we’re through the worst of it. “If we have the bulk of defaults in the pipeline now, we could wash it out within 12 months,” realtor Kevin Moran told me. When I asked if he thinks the “bulk of defaults” is in the pipeline, he answers, “No.”

Stock tickers for this post

fnm

Loading...

fre

Loading...

And then he showed me something which took my breath away. Inside one foreclosed home we found all the walls stripped bare, all the outlets torn out, as thieves stole every inch of copper wiring. For some inexplicable reason, whoever did this gathered up most of the drywall and sheet rock into large trash bags and just left them there. “At one time there was $295,000 owed against this property,” Moran says. Now he has it listed for $71,000, but given the new damage, “I think a more conservative investor will offer (the bank) $25,000 all cash.” $25,000 for a home in California. You’d think even the land was worth more than that. Not here.

The first video clip here is more with Kevin Moran.

If you think it’s hard selling existing homes in this market, imagine being a home builder. “Business is tough,” says Joe Anfuso, CEO of local home builder Florsheim Homes. He’s cut his staff by two thirds and is selling his remaining inventory at a loss just to get rid of it. Buyers “only care about what the price per square foot is,” and he can’t compete with the foreclosures. But the foreclosure sales experience has become such a nightmare that Anfuso is seeing a benefit. “We’re starting to get more and more buyers disenchanted with the foreclosure market,” he says.

The second clip is more with Joe Anfuso, and also comments from Rep. Barney Frank, in town last weekend touring Stockton as part of a House Financial Services Committee hearing.

Here’s the problem with trying to buy a foreclosed home or doing a short sale in this town. Banks have so many homes on their hands—and banks traditionally aren’t in the residential real estate business—they are inundated with paperwork. Jeremy and Sarah Duncan have been trying for a year to buy a house in this area, hoping to get a good deal. They are first-time home buyers with good salaries and credit ratings who can finally afford to get into the market. Lenders told them they’d be shoo-ins to qualify. Instead, Jeremy Duncan says they’ve been “jerked around” for the better part of a year.

• Buffett: Treasury 'Did Exactly the Right Thing'

He describes the process as being “dragged through a knothole backwards.” They made multiple offers on multiple homes, but those offers sat on desks at overwhelmed banks for months. “And then when we’d come to the table, all the rates would be different, we’d owe more,” says Sarah Duncan. They finally managed to buy a home in the nearby town of Lodi in a short sale, paying $227,000 for it, prepared to put in a lot of sweat equity. The pool was a mess when they first moved in. “I think if you had enough momentum you could have actually ran across the top with all the stuff that was just floating there,” says Jeremy. Still, they’re relieved to finally have a home.

The third clips more with Jeremy and Sarah Duncan.

But fasten your seatbelts. Some here believe that banks have actually been putting off many foreclosures because they just don’t have the manpower to go after everyone who’s late on a mortgage. That could mean wave after wave of homes flooding the market for months (or years?) to come.

And if banks can’t handle the residential real estate business, what happens if the federal government, now running Fannie and Freddie, are forced into it?

It seems incredibly unlikely, as Fannie and Freddie merely securitized mortgages, and it has been the loan servicers which have ended up owning the deadbeat houses. But many “incredibly unlikely” things have happened in the last year. Imagine the mess if some bureaucrat in Washington has to decide which bids to accept on thousands of foreclosed homes 3,000 miles away in Stockton.

Realtor Kevin Moran is hanging on, hoping to ride it out. You could say Moran himself personifies all that’s happened in Stockton. Since we first met a year ago, his income has collapsed, and his own home went into foreclosure. Like a lot of other people around here, he’s trying to regroup. “My ego wants to say it happened to everybody,” he says. “And then my other side wants to say how foolish I was, and I think the truth is somewhere in between the two.”

• US Is "More Communist than China": Jim Rogers

Questions? Comments? Funny Stories? Email