Foreclosure and the death of the dream

Can’t go to the country, the country isn’t there
Got chopped up and mortgaged and vanished in thin air.

—“Whatever It Was,” Greg Brown

I can see the collapse of the real-estate market out my front window. Across the street, the neighbors have moved out, two retirees who walked away from the accumulated work of a lifetime, a house that is no longer worth what they owe on it. And my neighbor to the right is gone, too, a woman who could no longer keep up the payments on her very modest place. I have no idea where she’s gone. She was a quiet woman who kept to herself, and it was several weeks before I realized her house was empty, with a sticker on the window that says the place had been abandoned.

On my daily walk of about a mile, I pass seven or eight homes that have been on the market for months, and two others that have been sold at auction, bringing such bargain-basement prices as to depress the value of all the homes in this neck of the woods.

In my case, the phrase is literal. I live in a neck of Magalia’s woods, tucked in among the pine and cedar trees in the polyglot zoning we have up here of stick-built homes and mobile homes and manufactured homes, all cheek by jowl in the neighborhoods that stipple this ridge. My house is on a foundation, purchased nearly eight years ago for $144,000, a very modest price at that time. We had sold an even more modest home in Sacramento for nearly a quarter of a million dollars, a sizeable profit over the $110,000 we’d paid for it less than a decade earlier. So, on the upside, we gained substantially from the wild ride in the real-estate market.

But what that market giveth, it also taketh away, unless one’s timing is exceptionally good and one’s relationship with fortune exceptionally benign.

After we moved to Magalia, we put another $30,000 into the house, and within a few years the real-estate valuation website known as Zillow had our house valued at about $75,000 more than we owed on it.

That was then; this is now. Currently, our house is valued at about $30,000 less than we owe on it. For the math-impaired, that’s a $105,000 drop in value. So, like millions of Americans, we’re stuck, under water after a lifetime of work and unwavering belief in the one-way trajectory of real-estate prices.

More than 11 million Americans (22 percent of all American homeowners) are in the same leaky boat I’m in, owing more on their homes than those properties are worth. In Arizona, half of all homeowners are upside down in their mortgages. Here in California, one out of three homeowners owes more than his or her home is worth. In neighboring Nevada, the figure is twice that number, with two out of three homeowners trying to maintain payments on houses that aren’t worth what they paid for them.

A Washington Post poll released in December revealed that more than half of all Americans reported being worried about making their next mortgage or rent payment.

Meanwhile, home prices continue to fall. The last four months of 2010 saw declines in each of those months. And, if that weren’t bad enough, home sales are down nearly 22 percent over the same period a year ago, meaning that, even at bargain-basement prices, houses aren’t selling. To make matters worse still, the number of Americans filing bankruptcy in 2010 was up by almost 10 percent, to more than 1.5 million. That figure is expected to increase this year.

If comparisons between our time and the Great Depression seem like hyperbole, consider this: The average value of an American home dropped 25.9 percent between 1929 and 1933; between 2006 and 2010, the drop in value has been 25 percent.

A Neighbor’s Story

When all those statistical data get transformed from ink and paper to flesh and blood, it reveals deep scars, wounds to the spirit that are seldom covered by people who write the financial columns or report on the vagaries of the real-estate market.

When I mentioned to one of my neighbors that I was writing this piece, she followed up on our conversation by detailing her own story. When I asked if I could use her tale, she granted permission, on the condition that I conceal her identity. Shame attaches itself to reverses in fortune, even when those who suffer are in no way at fault for the woes that befall them.

Like so many others, she and her husband moved to Butte County from the Bay Area, drawn by the allure of somewhat cheaper home prices than they knew back in the urban area they came from, and drawn, too, by the desire to be closer to aging parents who had been pathfinders to this particular earthly paradise.

Her husband’s job had evaporated during the pullback in the tech industry, and she was able to take advantage of a golden handshake that provided them both with a sufficient income to make the mortgage payments on what she describes as a “dream house” they found in 2004, a piece of property on the Paradise ridge that offered the prospect of a golden future.

“It had a lovely sun room, among other attractions,” she told me.

So they moved in, and she enrolled at Chico State to finish a graduate degree. Her husband found work with a local moving company, and they settled into their new life. She took a part-time job; they began to make friends and get involved in their new community. It was all good.

But then life intervened, as it will. Her husband was struck down with a devastating illness that put an enormous dent in their finances, and though he made a full recovery from the stroke that had felled him, they were left with a raft of bills their insurance didn’t cover.

They did what they had to do, and what lots of people were doing back in those not-so-distant days when loans were being offered so bountifully. They refinanced their mortgage loan, borrowing against the still-increasing equity in their house, and betting that the equity would continue to grow.

Hindsight has made it clear that refinancing was a very bad idea.

“We were stupid to do a re-fi,” she said, “but like everyone else, we looked at things in a positive way. We signed the papers, and I regret it to this day.”

Their lender was a British bank, HSBC. That’s a telling detail because, in this scenario, lenders tend to be distant entities, far removed from the people and the properties that make up their business.

In 2008, just four years after they’d moved into their “dream” house, things were beginning to turn nightmarish. Their mortgage was set to increase to a higher rate, one that would make their payments impossible. They applied for a loan modification and were granted a six-month extension at their previous rate.

Her husband had returned to work, but his job ended when the calamity befalling the real-estate market spread to the moving company he worked for. When homes aren’t selling, people don’t use movers.

They contacted the Community Housing and Credit Counseling Center in Chico. According to Patty Rough, its program manager, the center provides credit and housing counseling, with special expertise in foreclosure prevention designed to empower borrowers to solve their mortgage problems (see sidebar, page 19).

The center managed to get the couple an additional 18-month extension on their existing loan, but it wasn’t able to refinance the loan through the federal Home Affordable Modification Program. The couple’s bank, being British, is not eligible for federal funds, explained Dan Beveridge, a housing and credit counselor at the center.

The extension gave the couple relief, and hope, but when that extension ran out, the hope ran out, too. Their options narrowed, and bankruptcy loomed, especially when their lender would not consider any further modification of their loan.

“Our lender was increasing our monthly mortgage payment from $1,275 a month to $2,600 a month,” she told me. “We didn’t relish the idea of bankruptcy, but we contacted a bankruptcy attorney in Chico. I had been an emotional wreck over the idea of losing our house.”

Like so many other people who have been suffering through the collapse of the real-estate market, she had maintained an impeccable credit history until she was hit by forces far beyond her control, circumstances that made bankruptcy a necessity. The couple owed $313,000 on a house now appraised at $179,000. Upside down. Belly up.

Her husband is a Vietnam vet who served three tours of duty in that war. They have raised a fine daughter. They’ve always been conscientious about meeting their financial obligations.

“We qualified for Chapter 7 due to my pension and Social Security income,” she said. “It was a way for us to have no liability for the house. No dealing with short sales or realtors. Chapter 7 bankruptcy wiped the slate clean!”

But it’s hardly a happy ending. Though the bloated monthly payment has been removed from their shoulders, they are now living in a much smaller rental, the golden dream now but a fading memory.

The Distressed-Property Expert

Shelinda Bryant is a 41-year-old mother of two. She sits on the Board of Directors of the Paradise Association of Realtors and has recently taken over the post of heading up the Century 21 office in Paradise.

She’s been in real estate for only five years, and many people would think her career choice was spectacularly ill-timed. She went into real estate just as the market was beginning its implosion. Since the downturn, she said, the attrition rate among real-estate agents is about 50 percent. Lots of people have bailed out of that boat. It has just become too difficult to make much of a living off the slim pickings.

But, with the perspicacity and adaptability required of people in bad times, Bryant sought training in an entirely new branch of the real-estate profession: distressed properties.

There’s no shortage of distressed properties, though it’s mostly the owners who are in distress, not the properties. Helping relieve that distress is what people like Bryant are trained to do, seeking ways owners can get out of their mortgages with the least possible harm to their bottom lines, or their futures.

In normal times, there hadn’t been much call for real-estate professionals who knew how to facilitate short sales and deal with the increasingly convoluted world of mortgage loans. It can take enormous amounts of time and skill to figure out who, in fact, holds the paper on a property, since banks have bundled so many of the loans they made and sold them to investors throughout the world. The days when you knew your lender, and your lender knew you, are dead as dinosaurs.

According to the Certified Distressed Property Experts website, agents who gain certification in the emerging field then apply what they’ve learned to “solving the foreclosure crisis one homeowner at a time.” The website promo copy also says that certified distressed-property experts “fully understand that saving a home can save a life, which can save a family, which can save a future.”

The first thing people falling behind on their mortgage payments should do is to talk with a realtor they trust, Bryant said. “There’s a lot of fraud out there, and whenever there’s fear and uncertainty, there are people who will take advantage. And people don’t always make the best choices when they’re distressed.”

What will distressed homeowners get from a realtor they can trust?

“There are programs out there and people out there who can make loan adjustments,” Bryant said. “There are people whose loans can be restructured so they can save their houses. There’s also the opportunity to do short sales to save some of those people from the worst of their losses, or at least to get them out from under the burden of those big mortgage payments.”

Bryant recalled the time, not long ago, when every homeowner in the country was being inundated with offers to refinance their home loans, and houses were appreciating in value almost overnight.

“There wasn’t a day you went to your mailbox when there wasn’t at least one offer to take out an equity loan,” she said. “And prices were increasing, increasing, increasing. People weren’t able to imagine an end. It created a feeding frenzy.

“Lots of people went into new adjustable-rate mortgages knowing they couldn’t make that payment once the adjustment kicked in, but they assumed they could re-fi their way out, when the time came. … But, when the market stalled and the loan rates reset, the re-fi’s weren’t available because the equity was no longer there. Like a roller coaster. And then you miss a few payments, and there goes your credit score.”

She pointed out that the median price for a home in California rose from $175,000 in 1995 to $584,000 in 2006, but by 2008 had plummeted to $285,000.

Then she added, almost as an afterthought: “All of the experts believe that we’re not going to know how the market’s going to go until this summer or later. The odds are that if you got one of these bad loans and lost your house, you may be eligible to buy again in two or three years.”

Still, there are signs of life in the market. Statewide, the number of foreclosures is down for the fourth quarter in a row, according to the tracking firm DataQuick, to 69,799 during the October-to-December period, down 16.2 percent from the prior quarter and down 17.5 percent from the fourth quarter of 2009.

Locally, sales seem to be picking up, said Lori Akers, a longtime Chico real-estate agent and partner in the firm Rancho Chico Realty. “It’s very, very busy in the low end,” with multiple offers on many houses, she said. Most of the properties are distressed—either short sales or foreclosures—and inventory is low, which suggests other potential sellers are waiting for the market to stabilize.

The good news, she said, is that many banks are now working through short sales much faster—in 90 days or less.

As is so often the case, time is on the side of the young. “Younger people can ride this out, and maybe even find some advantage in it,” Bryant said. “Even if they got burned, young people with good jobs can rebuild enough money to make a down payment on a house. And there are bargains to be had, too.”

And, of course, the cost of renting has been forced downward by the pressure on home prices, so there’s that small upside to so many people being upside down.

Last year, 365 homes were sold in Paradise, an average of one a day. Bank-owned properties (that means places that are in foreclosure) accounted for 22 percent of those sales. Short sales accounted for another 7 percent, though that’s just an estimate because short sales take a long time to close.

Those percentages translate to the blunt fact that more than 30 percent of all sellers in one Butte County community lost their asses when their homes were sold last year.

Despite all the distress that comes with selling real estate in a distressed market, Bryant doesn’t regret her career choice. “I want to reach out to those people who don’t know where to turn, or who are embarrassed by the circumstances they find themselves in. It’s rewarding when you can help someone get out from under a house, or even save a house for them.”

When In Doubt, You Might Bail Out

Bankruptcy. The very word is anathema, especially to people like my neighbor, men and women whose very sense of identity and personal integrity is tied up with meeting obligations, honoring contracts and maintaining a good credit rating.

But sometimes bankruptcy is the least awful of an array of bad options. That’s why Michael O. Hays, bankruptcy attorney in Chico, doesn’t really need to advertise for new clients. Business is booming. For people in his business, bad times make for good business.

Hays was out of town at a conference in Monterey when I called him, so I interviewed him via a cell-phone connection that kept breaking up. Still, some points came through loud and clear.

“Most of the people who are coming to me these days are people with two loans—a first and second mortgage on their house,” Hays told me. “Lots of people can afford to carry their first mortgage, but they can’t afford the burden of the second. I can strip the second mortgage in a Chapter 13 bankruptcy filing.”

Hays then went on to explain the arcane legal differences between Chapter 7 and Chapter 13 bankruptcy. Suffice it to say that there are instances in which one of those two options could provide a way for some people to get right side up if they find themselves upside down.

But, Hays says, “some people are so upside down that they needn’t bother. They’re never going to see any equity, not in this lifetime anyway. They just have to come to see their mortgage payments as rent. They’re stuck.”

Or they can walk away, an option some people see as dishonorable. But banks and businesses abandon bad investments all the time, walking away from contractual obligations when it no longer makes financial sense to honor them.

For people who are forced to move but cannot sell their homes for what they owe, “then it may be time to walk away,” Hays said. If they do so, according to California law, they cannot be sued by their lender.

That protection applies only to first mortgages, however, not to second mortgages or refinanced loans.

The banks make out

Though they’re not keen to say so with their names attached to their opinions, some of the real-estate people I spoke with harbored anger toward the banks, blaming indiscriminate lending and loan bundling for what one realtor called the “debacle” that has unraveled the real-estate market.

Whenever there is a dramatic downturn in the economy, as in the Great Depression or the times we’re currently enduring, it helps to follow the money. Then and now, the causal agent for calamity can be traced to the banks. And, though the bankers created the disaster that has afflicted so many working Americans, the bankers have not paid much of a price for the harm they’ve done.

They were “too big to fail,” so they were bailed out with taxpayer money they’ve mostly been sitting on while returning to the practice of rewarding their top execs with bonuses that make people seethe, especially people who have lost most everything they’d gained through honest toil.

It’s been said that a recession is when your neighbor loses his job, but a depression is when you lose yours. Replace the word “job” with the word “home,” and it becomes clear that a big chunk of the public is living through a second great depression, under water and sinking, while watching the American Dream slip away.