http://www.washingtonpost.com/wp-dyn/content/article/2009/01/16/AR2009011604724.html
Washington Post
Saturday, January 17, 2009; A01
The Growing Foreclosure Crisis
One oft-repeated assertion no longer holds true. Those in trouble are
not, primarily, lower-income borrowers. The foreclosure crisis has
become a wave, afflicting neighborhoods of every stripe -- but
particularly communities created by the boom itself.
By Dina ElBoghdady and Sarah Cohen
Washington Post Staff Writers
Before Robin Bohnen and her husband, Shane, bought a $1.16 million
Mediterranean-style house in an upscale Southern California suburb two
years ago, they were not cash-strapped, debt-ridden or credit-impaired.
Now they are all of the above. Soon they also may qualify for one more
distressing category: home lost to foreclosure.
"Wake me up, can this really be happening?" the 42-year-old Bohnen
says. As she tries to describe how it feels to have the nation's
financial crisis land in her living room, the phone rings. She ignores
it. "It's probably the bank -- again," she says.
Bohnen once owed her comfortable lifestyle to the dizzying growth that
transformed Southern California over the past decade, creating a boom
that led many to believe their home values would keep climbing. As the
owner of a furniture store born during the housing boom, she provided
bean bag chairs and bedroom sets for the brand-new communities that
easy credit built.
Now, she and husband just owe. They cannot afford their $6,400 monthly
payment, and in this plummeting market, they wouldn't make enough on a
sale to pay off their mortgage or recoup the 20 percent they put down
to buy their Riverside County home.
They're "underwater," industry parlance for borrowers who owe more on
their mortgage than their houses are worth. They have joined the
growing line of homeowners seeking a break from their lenders.
Both the departing and incoming administrations in Washington have
promised help on the foreclosure front, but providing help requires
federal regulators to get their collective arms around the size and
shape of the crisis. That isn't easy. No one agency collects
information on every loan, every borrower and every delinquency.
But interviews and a Washington Post analysis of available data show
that the foreclosure crisis knows no class or income boundaries. Many
borrowers ensnared in the evolving mortgage mess do not fit neatly into
the stereotypes that surfaced by early 2007 when delinquency rates shot
up. They don't have subprime loans, the lending industry's jargon for
the higher-rate mortgages made to borrowers with shaky credit or
without enough cash for a down payment.
The wave of subprime delinquencies appears to have crested. But in
October, for the first time, the number of prime mortgages in
delinquency exceeded the subprime loans in danger of default, according
to The Post's analysis.
This trend shows up most acutely in California and other high-growth
regions, such as Arizona, Nevada, Florida and pockets of the Washington
region, most notably in Prince William and Prince George's counties.
The recession has made it tougher for people to pay their mortgages,
and crashing home prices have left many borrowers underwater, unable to
sell or refinance their way out of trouble. One of every five mortgage
holders now has a home worth less than the mortgage on it, according to
First American CoreLogic, a firm that tracks mortgages and provided
data for The Post's analysis.
Of the 20 Zip codes with the highest share of underwater loans, seven
are in California and four are in Riverside County, the vast exurb
southeast of Los Angeles where the Bohnens live. Riverside's
unemployment rate has zoomed to 10 percent, well above the national
average of 7.2 percent. About 94,200 people in the county are looking
for work, many of them formerly employed in the real estate, banking
and construction industries, according to the county's economic
development agency.
The foreclosure crisis hasn't played itself out. The next wave looms in
the form of a new batch of adjustable-rate mortgages scheduled to reset
over the next two years. Unless the market comes back with a roar,
which is unlikely, more borrowers will struggle to hang on to their
homes.
<snip>
In 2005 and 2006, more than half the homes sold in Southern California
were in Riverside and neighboring San Bernardino County, pumping
thousands of new jobs into the regional economy, said John Husing, an
independent economist. "Real estate became what gold was to the gold
mining towns," he said. "Everyone's job was tied to the mine, whether
they realized it or not."
<snip>
'No Equity, Just Debt'
On a drive through Riverside County, it's easy to spot the
foreclosures: Green lawn. Green lawn. Green lawn. Brown lawn.
The grass doesn't get watered when incomes dry up, mortgage payments
stop and families move out. Robin Bohnen can see patches of brown from
her house. A neighbor to her right and another to her left lost their
homes in the past year. Her arms flail as she describes life in a
financial vise.
The home to the left is listed for $699,900 and the other for $725,000.
She and her husband owe $932,000 on their house, so they're facing at
least a $200,000 shortfall. That's not what they expected when they
bought their home two years ago. The economy looked good then, the
housing market was still thriving and the house seemed like a steal. It
was the cheapest available in the exclusive gated community that they
had been eyeing for some time.
A lender offered them a mortgage that allowed them to pay interest only
for the first five years. They were not asked to document their income,
which put their mortgage into the class of loans known as "Alt-A," so
called because they are an alternative to a prime (or A) mortgage.
It turned out to be a risky decision. What galls the Bohnens is that
they brought $233,000 to the table when they bought the house -- cash
they had pulled out of their previous home, which was under contract
for sale. But the sale fell apart just before the scheduled closing
date, and while the agent was confident of finding a new buyer at the
time, the house never sold. It is now in foreclosure.
As the housing market tanked, so did their income. Robin Bohnen's
three-year-old furniture franchise couldn't make it without a steady
supply of new homeowners, so she gave it up. Her husband, who had
earned hundreds of thousands of dollars in yearly commissions selling
law-enforcement equipment, was hurt indirectly: His main employer cut
him loose after several California cities, pinched by declining
property tax revenue, cut back on buying police gear.
Bob Livingston, a real estate agent and friend of the Bohnens, tried to
sell the house.
"I couldn't," he said. "Everyone looked at it and wanted to pay
foreclosure prices."
Now the Bohnens are tapped out. They missed their third mortgage
payment yesterday and can barely keep up with their homeowner
association dues. Their twins are in college and their 4-year-old in
day care. They're working with a housing counselor to try to modify
their loan.
"We have no equity, just debts," Robin Bohnen said. "We've maxed out
our credit cards and gone through all our savings and retirement
accounts."
Once equity vanishes, income matters far more than the kind of mortgage
a borrower has. Luke Rizzo, another Riverside County homeowner, took
out a 30-year, fixed-rate mortgage in 2003. He put down $125,000, but
he, too, is teetering on foreclosure's edge.
In 2006, Rizzo lost his job as an information technology manager at
Lockheed Martin and sunk deep into credit card debt as he tried to keep
up with his mortgage payment. He bought the house for $460,000. The
house next-door recently sold in foreclosure for $340,000. His debt has
climbed to $498,000 because he took out a $200,000 home-equity line.
That money was spent on landscaping and living expenses.
Rizzo's lender initiated foreclosure six months ago but recently
rescinded the action without explanation. Rizzo is confused. He and his
wife have started packing, just in case. "When you have a
$2,800-a-month mortgage," said Rizzo, who has found work as an
electrician, "it doesn't take much to get behind."
Walking Away
Against this backdrop of plunging values, some homeowners are dumping
their homes even if they can make the payments, real estate agents and
lenders said. A California lawyer even launched an online calculator,
www.payorgo.com, to help borrowers decide.
"There's this easy come, easy go mentality," said Mike Novak-Smith, a
real estate agent in Moreno Valley, a working-class part of the county.
"Some people would rather hold onto their pickup truck or Mercedes than
their homes."
In 2006, about 25 percent of Riverside County home buyers took out
loans without making a down payment, according to SMR Research, which
analyzes mortgage data. For those borrowers, Novak-Smith says, their
loan payments are akin to rent: They essentially have no stake in their
homes, which makes walking away easier.
"So they get a ding on their credit record. No big deal," he said.
"They wait a few years and buy again."
Diolinda Igma, a real estate agent in Riverside County, went through
this calculation before she and her husband, who works for a public
utility, stopped making payments on their Moreno Valley home. They were
underwater on their adjustable-rate mortgage, due to reset in 2010.
Because most lenders will not modify a loan until the borrower has
missed payments, Igma said she fell behind to get her lender's
attention. "I had to be practical," she said. "Why wait for 2010? Why
keep putting money into a house we'll lose?"
The Igmas took out two loans to buy their $437,000 house. The second
enabled them to buy without putting money down.
After Igma missed five payments, her lender came through. The bank
lowered the interest on the first loan from 5.5 percent to 3.5 percent
and extended the life of the loan to 40 years from 30. The lender added
the missed payments to the loan. If not for that, the couple was
prepared to move back into their much smaller first home, which they
have been renting out.
The decision to walk away involves a mix of emotions and pragmatism.
People get angry when they see a neighboring house in foreclosure sell
at a deep discount, said Carri Clark, a mortgage broker at Mortgage
Tree Financial in the city of Riverside. They see their home value
eroding and their equity disappearing, but their mortgage payment
remains the same.
"I had one the other day and she's telling me, 'We're going to buy this
other house and let the one we've got go because it's a money pit,"
Clark said. "They have three homes, including a vacation home and
rental property. . . . I keep telling people: 'You signed a promissory
note. You told the bank you'd pay it back. It's like marriage. It's for
better or worse.' "
For all those reasons, Carol Byrd, a real estate agent, does not want
to walk away from her home. But she will if she has to, she said.
Three years ago, Byrd bought a home for $525,000, in the city of
Riverside, getting a no-money-down mortgage. Back then, she was selling
50 homes a year and earning roughly $350,000 annually.
Byrd makes nothing close to that now, but her lender thinks the
potential for that income is still there. To keep her in the mortgage,
the lender has agreed to postpone her foreclosure until August and
defer half of her payment, a temporary savings of $1,600 a month. The
unpaid portion will be tacked onto future payments.
Byrd said the arrangement would not work long term. She wants her loan
modified to reflect the current value of her house -- about $250,000.
If not, then she's at peace with the consequences.
"If I have to rent, I have to rent," she said. "It's not the end of the
world."
Beware The Alt-A
Federal regulators recently held a one-day seminar in Riverside for
troubled IndyMac customers interested in a loan modification. About
4,200 were invited. Only 250 showed up, half of whom probably will not
qualify for a more affordable loan.
The turnout underscores a common complaint from lenders, who say many
struggling borrowers do not respond to outreach efforts and when they
do, they come with inflated notions about what can be done.
"They think it's 'Let's Make a Deal,' but it's not," said Evan Wagner,
an IndyMac spokesman.
Wagner ticks off some memorable ones: The couple who rejected several
offers even though they were 10 months delinquent. The investor who
owned four properties but refused to sell any at a loss to help save
her primary residence. The borrower who was approved for modification
but was disappointed that IndyMac couldn't help with his credit card
debt.
IndyMac specialized in Alt-A loans. The unraveling of this type of
loans has devastated several other large lenders, including Countrywide
and Washington Mutual.
Initially, Alt-A loans catered to financially sophisticated borrowers
with strong credit scores and hefty down payments who would not or
could not document their income or assets. People who were
self-employed or whose income fluctuated paid higher rates to take out
these no-hassle loans.
For years, Alt-A loans performed as well as prime ones, reinforcing the
idea that income hardly mattered if a borrower had good credit, said
Dave Stevens, a former Freddie Mac official and now president of Long &
Foster.
"We had a period of time with ever-improving housing market conditions
and there was no history of default to look back on," Stevens said.
"Every year, the investors and lenders were proved right, that certain
people did not need to document their income, so the lenders started
becoming more lenient."
Increasingly, Alt-A mortgages came to be known as "liar loans" because
so many lenders and borrowers did not provide accurate income data.
Lenders also took on more risky borrowers and aggressively marketed
Alt-A loans, including option adjustable-rate mortgages like the one
Byrd used to buy her home.
Byrd's loan, which came with a 1.5 percent teaser rate for the first
five years, let her decide how much to pay each month. Most borrowers
who took out these option ARMs from 2004 to 2007 chose to pay no more
than the teaser rate. They can keep doing so until their interest rate
adjusts or they reach a certain percentage of the principal (10 to 25
percent, depending on the lender).
The excess money they owe is added to their balance so that they owe
more than they borrowed on the house. Fitch Ratings expects monthly
payments to jump 63 percent on average (or $1,053) on loans adjusting
in 2009 and 2010, which will undoubtedly cause a rise in defaults.
Already, 24 percent of option ARMs were at least two months late in
September, up from 5 percent a year ago, said Mahesh Swaminathan, a
Credit Suisse mortgage strategist.
"We're seeing delinquencies rise even before the recast date has hit,"
Swaminathan said. "After the recasts, the weakness will increase. In
2010 and 2011, the recasts will peak."
Tense Questions
Robin Bohnen hit a wall when she sought to modify her loan. The lender
told her it would not rework loans that are not adjusting immediately,
she said. Her Alt-A loan doesn't reset until 2011.
Shane Bohnen lets his wife deal with the lender. He was reluctant to
speak for this story. He figures no one will have any sympathy for a
family living in a $1 million house.
"We came in with eyes wide open," he says, standing in the kitchen. "We
knew what kind of loan we had."
"Oh, really," Robin Bohnen says. She darts him a look from the living
room couch before launching into a series of questions that gives some
hint of the tension that inevitably comes with financial trouble.
"Did you know that the housing market was going to collapse?" she says
to her husband. "Did you know I was going to lose my store? Did you
know you were going to lose your job? Come on. There was no reason to
believe any of this would happen. It's not like we did anything
impulsive. You've been doing this job for 10 years and making good
money."
"Twelve years," he said. "It's been 12 years."
And he walked away. The conversation was over, for now.
Minutes later, the phone rang again, a reminder that for the Bohnens,
the end was nowhere in sight.
© 2009 The Washington Post Company