Faces of the home-foreclosure crisis

Source: The Wall Street Journal

The foreclosure crisis that erupted four years ago has claimed more than five million American homes—about 10% of all homes with a mortgage. It began in lower-income neighborhoods and has spread to some of the most exclusive addresses in the U.S.

The seeds of the crisis were planted a decade ago when banks, discovering the high returns from selling bundles of securitized mortgages, relaxed lending standards and originated millions of adjustable-rate subprime mortgages. Such loans were designed to allow just about anyone to get a home loan.

When interest rates on the adjustable-rate mortgages finally climbed, many borrowers began falling behind on their payments, leading to the first wave of delinquencies and defaults.

At the start of 2008, with the U.S. economy weakening and job losses multiplying, the defaults began to spread as millions of Americans with plain-vanilla prime mortgages also ran into trouble making their payments. In some cases, borrowers found they had paid inflated prices for homes they could no longer afford. Others got into trouble by or borrowing against the equity in their homes. According to the Federal Reserve, Americans withdrew more than $1.1 trillion of equity from homes in 2006 and 2007.

By the end of 2008, with home values plunging, one in six homeowners found themselves underwater—owing more on their homes than they were worth. Borrowers, even those with stable jobs, began to see such negative equity as a reason to stop making their payments. That triggered the third wave of the foreclosure crisis: the strategic default.

The Obama administration is working with banks to head off future defaults and stanch the foreclosure wave by modifying mortgages. The federal programs have so far disappointed. The Home Affordable Modification Program, for example, was launched in the summer of 2009 with the intention of modifying three million to four million loans. So far, it has provided permanent help to fewer than 450,000 struggling borrowers.

Here are six stories of people caught in the foreclosure crisis, by circumstance or choice—from those who fell victim to hard times to others who squandered equity on cash purchases.

The crisis looks set to continue. Another four million people are in danger of losing their homes, according to the Mortgage Bankers Association. And until foreclosures are cleared, the housing market is unlikely to recover.

The foreclosures have had a silver lining for one group of Americans: Many families locked out of the housing market during the boom can now afford to buy.
—Robbie Whelan

Loan Choice Proved Costly
When Ghislaine Apollon emigrated from Haiti to the U.S. in 1974, she dreamed of owning a home. In 1997, after years of scraping by, she bought a fixer-upper in the Queens section of New York City.

Her original $147,000 mortgage was affordable on her income of about $1,600 a month from working in a hospital linen department, she said. Ms. Apollon then made some costly choices. First, she refinanced several times and took out large amounts of cash, pushing her loan balance to nearly $400,000. And the last time she refinanced she ended up with an option adjustable-rate mortgage, which lets borrowers select from different payment choices. Ms. Apollon, like many borrowers, opted to pay the minimum, which adds to the balance.

Option ARMs have become the focus of state investigations and lawsuits by borrowers who believe they were misinformed about the loan's complicated structure.

Consumer advocates say such option ARMs have proven a problem nationwide. "Every option ARM that we've seen has been delinquent," said Farida Rampersaud, director of the Foreclosure Prevention Services Program at the Ridgewood Bushwick Senior Citizens Council Inc. in Brooklyn, N.Y. "In most instances, the homeowner doesn't understand the nature of the product."

Trouble for Ms. Apollon started almost as soon as she moved into the single-story home. The ceiling leaked; the basement flooded several times. She refinanced several times to fund repairs, ratcheting up her monthly payments each time.

Ms. Apollon refinanced a final time in 2007 with Countrywide Financial Corp., which was acquired by Bank of America in 2008. This time, she wasn't looking to pull out money, but to get into a mortgage with more affordable payments. Ms. Apollon said she was stunned when she realized the consequences of her decision to make minimum payments: After a few years, "my mortgage went up and up and up" to $1,700 a month.

Realizing she would have to pay much more than that a month to start reducing her loan balance, Ms. Apollon sought a loan modification. She is being helped by Neighborhood Housing Services of Jamaica, a nonprofit.She wants a plain fixed-rate mortgage that doesn't grow.

Lenders aren't granting nearly as many loan modifications as consumer advocates would like, but Ms. Apollon has a few things in her favor. Under a 2008 settlement with several state attorneys-general over charges of predatory lending by Countrywide, Bank of America agreed to modify the terms of certain subprime and option ARM mortgages.The bank said it reviewed Ms. Apollon for that program in August 2009, but "her financial situation did not support a modification."

She was denied a modification under a government program earlier this year and stopped making payments in October. Bank of America said it was reviewing her request for a modification.

Ms. Apollon -- who receives extra income by renting part of the home to a relative -- has been depositing $1,600 a month into an account to get her mortgage back on track if she's granted a modification and to show that "I'm willing to pay," she said.
—Dawn Wotapka

Lost: A Business, Then a House
Like other people whose fortunes were tied to real estate, Sidney Banner has suffered a one-two punch from the downturn.

In 2008, he lost his small, family-run commercial-mortgage brokerage business, when tighter lending requirements made it difficult to finance sales of commercial properties.

This month, the 84-year-old Mr. Banner and his wife lost their 3,200-square-foot home in an affluent section of Boca Raton, Fla. They've moved into an 880-square-foot rental apartment in a modest neighborhood of Palm Beach County, cutting their monthly housing expenses from $2,600 to $400.

Mr. Banner bought his house 22 years ago for $296,000. By 2007, the house was valued at $429,000. Like many other homeowners at the time, Mr. Banner tapped the equity in his home by taking out a $250,000 loan. He used the money to try to keep his business afloat as the real-estate market unraveled.

A year later, Mr. Banner defaulted on his first and second mortgages; the value of his home fell to $350,000. It is now scheduled for auction in January at a foreclosure sale.

"When things were good, making payments was easy," Mr. Banner said. "But now I've cut down to the bone, to the point that we can live on Social Security payments."

Many former mortgage brokers have been able to find new jobs working for banks and other companies. But Mr. Banner typifies one problem facing older Americans: the difficulty of finding employment. Only about 6.1 million of the 38 million Americans aged 65 or older were employed in 2009, according to the Bureau of Labor Statistics.

For two years, Mr. Banner and his wife received $1,200 a month in unemployment payments, in addition to their $3,200 social-security checks. The unemployment payments have now run out, so Mr. Banner said he was going back to work. He hopes to start a company brokering small commercial-real-estate loans to borrowers he finds through online advertising and Craigslist.

Mr. Banner said the foreclosure may have been a blessing in disguise: "My wife and I are both very much more relaxed now that we walked away from this enormous responsibility, and all these people calling us every day, looking for something they're not going to get."
—Robbie Whelan

After the Good Life Goes Sour
Like many Americans who saw their home values shoot up during the housing boom, Christine Carr found lots of ways to spend her equity windfall.

A decade ago, she and her husband paid nearly $180,000 for a three-bedroom home in Dallas, N.C., outside Charlotte. Their income easily covered the $1,100 monthly mortgage payment.

In 2006, after discovering the house's value had skyrocketed by $100,000, the couple took out a second mortgage and got cash. They bought a $70,000 camper, took a cruise to Alaska and vacationed in Belize. The new loan added $698 to the couple's monthly payment.

"We had a ball," she said.

Three years later, her husband moved out and stopped contributing to the mortgage payments, she said. Then she lost her job as a consulting firm's marketing manager. In April 2009, Ms. Carr put the house on the market for about $235,000. With no income, Ms. Carr, now divorced, didn't qualify for a loan modification, which would have lowered her mortgage payment.

In July 2009, she asked the lender, Bank of America, to let her hand over the home to avoid the foreclosure process. But the two sides couldn't come to terms.

With no interest from buyers, Ms. Carr stopped making payments that August. "It was a gut-wrenching decision," the 46-year-old woman said. "I was raised to live up to my commitments."

These days, she receives a monthly statement that details the swelling late fees and penalties for both of her loans. Although she found work in March this year, Ms. Carr said she had no intention of paying: She has moved to a rental and her Dallas home sits abandoned. The luxury camper was sold for "a lot less" than the purchase price, she said.

Ms. Carr said she felt guilty but was ready to move on. "It makes me sick to my stomach sometimes, just thinking about it," she said. "But once you make the decision, you stick with it."
—Dawn Wotapka

Housing Nightmare Is a Dream for Some
Last year, Bret Sands and his fiancee, Fysah Thomas, shared a cramped $600-a-month studio apartment. Today, they're living in a Seattle lakefront property with three bedrooms, hardwood floors and a spiral staircase.

"This is a freaking dream house," said Mr. Sands. still giddy months after purchasing the home in March.

If there's an upside to the foreclosure crisis, it is largely enjoyed by people like Mr. Sands and Ms. Thomas: They can now afford to buy. He's a surveyor of marine vessels and she's the lead vocalist in a band. Both watched the mid-decade housing boom pass them by, thinking they'd never be able to join.

Then the bubble burst. According to the Case-Shiller Home Price Indices, prices in Seattle through October were about 25% off their July 2007 peak—with single-family homes now selling at a median price of $481,000, according to the local multiple listing service.

In 2008, Mr. Sands, age 34, started to see the stock market falter and grew worried about his retirement savings account. He took $60,000 out of the account, and with an eye on plummeting home prices, he and Ms. Thomas decided to buy a house.

They never intended to buy a foreclosure but nothing else fit their budget.

After two months and about 30 tours with SeattleHome.com real estate broker Sam DeBord they found their house. It went into foreclosure when its owner's restaurant went belly up. Ms. Thomas saw it during a random web search. The couple paid $232,000 for a house that in 2007 had been appraised at $300,000. One of its main attractions: It sits among much larger, half-million-dollar homes along Angle Lake.

"We wouldn't have been able to afford a house if the market hadn't dropped," Mr. Sands said.

With help from friends and Ms. Thomas's carpenter father, they have embarked on renovations: paint, French doors, new bathroom, new kitchen.

Because the house needed so much work, Mr. Sands kept a lot of his cash to pay for renovations. He put about $9,000 down under a loan insured by the Federal Housing Administration.

"It should be an inspiration to any other people like us," Ms. Thomas said. "Being able to buy a home is one of the most important decisions you can make."
—Mitra Kalita

Falling Value Ruled Out Refinancing
Kelli Kobor and her husband thought they were making a safe investment in 2004 when they made a $350,000 down payment on the $1.3 million purchase of their five-bedroom Dutch colonial in Kenilworth, Ill., a wealthy suburb on Chicago's North Shore.

Ms. Kobor and her husband have no other debt. They never refinanced or took out a second mortgage. But like many other Americans, they ran into trouble making their mortgage payments last year after Ms. Kobor's husband lost his job and later found a new one that paid much less.

Their home had fallen in value, wiping out any equity and making it impossible to refinance. Ms. Kobor wasn't eligible for the government's loan-modification programs because her loan was too large; her mortgage servicer offered a six-month interest-rate reduction that tacked the payment shortfall onto their loan.

Tired of feeling "strung along," they ultimately surrendered the home to the bank in what's known as a deed-in-lieu of foreclosure, and moved out in August. They now rent a three-bedroom ranch-style home in Deerfield, about 10 miles away.

Moving her family was a "very difficult choice, a very difficult transition," says Ms. Kobor, 43. She still takes her son to play with his best friend and former neighbor. "Every time I drop him off," she says, "I have to look at my house." The home was listed for sale last month at $749,000.

While Ms. Kobor felt vindicated that "there was recognition by the bank that the value had dropped considerably," she says it was also maddening because the bank "wouldn't ever negotiate with us. They took this thing that we actually prized and they practically threw it away."

Ms. Kobor and her husband are saving to buy another home, although this time they'll approach home ownership differently. They will take out a smaller loan, one they can repay within 10 or 15 years. "We will never leverage up like that again," she says.

But the biggest surprise over losing her house is that "our lives are so much better now," Ms. Kobor says. "The relief of knowing that we are not in a bottomless hole that we'll never be able to climb out of—psychologically, it has been great."

More borrowers need to "wise up," she says, and realize that the government and the banks aren't likely to help them. "People who are in our situation, we're told, 'Save your house,' " she says. But the crisis has taught her that "what's much more important is saving your family, saving your sanity, saving your financial future."
—Nick Timiraos

Seeing the Allure of 'Can Pay, Won't Pay'
When Chris Hanson bought his $875,000 luxury condominium in Scottsdale, Ariz., four years ago, he could afford the $90,000 down payment.

He said he had no difficulty paying the $5,000 monthly mortgage on the three-bedroom unit, which has floor-to-ceiling windows and views of Camelback Mountain. The condo is in a gated complex with a gym and pool.

And, true to his word, he didn't miss a single payment—until last month. Concluding that the home, now worth about half of what he paid, won't recover its value for at least 10 years, Mr. Hanson decided to walk away.

"It's a no-brainer once you do the math," said the 27-year-old real-estate investor.

He plans to let the lender foreclose on the home and rent an even nicer unit in either the same complex or one nearby, which he figures will cost less than half of his monthly mortgage payment.

Borrowers like Mr. Hanson represent the latest—and for lenders the most troubling—wave of the foreclosure crisis. When the housing downturn began, economists and industry executives believed homeowners would walk away from underwater properties only after a financial shock—a job loss or divorce.

Mr. Hanson's case illustrates the growing risk that borrowers in hard-hit housing markets will "strategically" default, even when they can afford to stay in the homes. Nearly one-third of homeowners in Arizona, and half of those in Nevada, owe more than 125% of the value of their homes, according to CoreLogic Inc., a real-estate data firm.

Mortgage-finance giant Fannie Mae has threatened to withhold credit for up to seven years from people who carry out strategic defaults and to pursue their assets in states that allow for deficiency judgments.

Mr. Hanson said that he felt little moral obligation to make his payments because he felt banks' shoddy lending practices were primarily responsible for fueling the housing boom and bust. Financial institutions often have no problem defaulting on soured commercial real-estate investments, he said.

Mr. Hanson runs an investment firm that buys up foreclosed properties and resells them. He said the company buys two to three homes a week at prices ranging from $15,000 to $1 million; they've recently expanded into distressed multifamily homes. He said he realized months ago his home would take years to recover its value but decided only six weeks ago to stop making payments.

He worried that wrecking his sterling 800 credit score would make it harder to run his business. But, in the end, he said he decided it was worth the risk.

"It's actually really relieving," Mr. Hanson said.
—Nick Timiraos

URL to original article: http://www.housingwire.com/2010/12/29/faces-of-the-home-foreclosure-crisis