Of The Mortgage Massacre
Carolyn Baker & Melissa Taylor
17 June, 2008
One family's true saga of a bursting housing bubble, the corporate corruption that engendered it, and the painful reverberations through their lives
Sonoma County, Calif. -- Nearly three years ago, the Taylor Family found a home they thought was perfect, a four-bedroom, single-story home with a hot tub in the backyard in a middle-class neighbor located between two parks. It was a safe neighborhood and a place that seemed to meet their needs as a family.
The price was a major stretch at $747,500. But as a couple, they had owned two other homes. One they had sold after they bought their last home. They tried to be landlords and found the experience frustrating. They rented their first home, but it was in a neighborhood where keeping tenants was extremely challenging. They sold the home for a small gain, but the cost of maintaining the rental was becoming a burden.
So it was that the Taylors moved from a gang-infested area in hopes of getting into an area where there was less violence and a better school district for the children. They moved into a nicer home knowing that while it was not perfect, they might eventually move into another someday.
Over the course of 12 years, they had adopted three children who were siblings and in the need of a home. In fact the children were all related to their family, and the decision was made that the children needed a stable family where they could be loved and cared for. The Taylors then refinanced their home to help cover large adoption expenses and other household repairs. The home became too small for their growing family, and they began to look at the possibility of adding on or moving to a larger home
For two years they worked with several real estate people looking for a new home that was single-level and a bit larger to accommodate their family. However, when they did find a home, they were often out-bid, and usually the home was worth what a buyer was willing to pay. The homes seemed out of their reach; it was a seller's market for sure. Eventually, they gave up and decided that when the children finished grammar school and the youngest was about to enter kindergarten, they would look in a state less expensive than California for a home they wanted and could afford.
Not long after, their loan officer called and informed them that the home next door to her was for sale and had fallen out of escrow twice. This was presented as a once-in-a-lifetime opportunity. The loan officer was sure that if they jumped on it right away, they would have a chance to purchase it. Based on what was explained to them, they believed they could do it, and the loan officer would set up the loan. The Taylors were perfect for the loan, the home was amazing, and they would be able to invest in their children's future.
Together, the Taylor family convened a meeting with their two older children around the kitchen table to hash out the differences between the two homes. The girls wanted to have their own room, and although they were siblings, both had very different experiences of being adopted. Having their own space appeared important and necessary. The baby had turned two and was ready to move into his own bedroom. The Taylors wanted to be homeowners again, and to rent the home they lived in to ensure they would not be bypassed due to having a contingency sale. They thought it was worth the risk to move even if it meant changing some things in their budget and assuming the additional expenses of the new home. However, the loan officer presented a new program in which the cost of both homes was going to be basically the same.
The Taylors agreed to pay $100,000 dollars down on the new home and financed $647,500, and after refinancing their other home they owed $488,000. The loan officer and the real estate company said they could easily rent the old home for what the new payment would be. The Taylors asked a lot of questions about the new loan product since they had always gone with a 30-year fixed rate loan. The rates were quite low, but the loan officer assured them that this was the best move and a financially sound one. The decision appeared to be a fine one with little risk. Former Fed Chairman, Alan Greenspan, and many others supported the American people to invest their money into the real estate market, arguing that it was a sound investment. The biggest risk appeared to be that the market might slow down, but since it was rising so high, there seemed to be little danger.
The Taylors moved into their new home and began to settle in. The first mortgage bill came in, and it suddenly appeared to be very different from what they had understood it to be. What was this negative amortization piece that exempted them from the first year? The family was told they were exempt from paying for it, but there it was on the statement. The family wanted to refinance the loan, but the loan officer said it was foolish not to see that the home's value would far exceed any negative amortization the Taylors were incurring. The loan officer told the family that they were over-reacting. Later, they learned that they would need to wait a year to refinance the homes, but during that time the home's value fell so low that refinancing was no longer an option. The Taylors agonized over this for months and went to their loan officer several times as the market began to slip. They now realized they should sell the home and cut their losses, but they were simply laughed at. The loan officer became frustrated at one point, stating that the Taylors were lucky to have gotten into that home--and that the loan officer who normally processed home loans had recommended against their buying the home. It was then stated that the Taylors knew they paid too much for the home and knew what the risks were. However, as the story unfolded the Taylors realized when they found the original notes presented before they signed the loan, that they had been lied to. Furthermore, the loan officer had also chosen an appraiser that would support the loan officer's price of the home. They were shocked and disappointed because they considered their loan officer to be a friend, and they had made a mistake that could possibly cost them their financial security with little recourse but to educate themselves and wait.
They were told that they were young, inexperienced, and failed to understand the fluctuations of markets. Hadn't the stock market made a dive and come back? The clear message was: relax. The family tried to do so as they watched one house lose the value of the $100,000 down and the equity in both their homes evaporate. Soon they had lost all the equity.
They consulted another loan officer and spoke to banks and other programs in hopes of correcting the loan problems they were in. All stated that the family had great credit scores, good income and long-term employment histories, and should never have been placed in the home loans they were given. They were told to wait because the market would stop falling, and real estate was a long-term investment. It was, wasn't it? Besides, they had to live some place, and they were doing better financially compared to many others because of their jobs. They were advised to borrow money wherever they could and hold on because this could not last forever. So repeatedly, they were told to wait, and then they watched their neighbors, one after another, let their homes go into foreclosure. Soon many people were trying to short-sale their homes. A short-sale is when a lender agrees to accept less than the balance due.
For example, says Melissa Taylor, "Our neighbors had sold their old home, having put almost $200,000 down on their home, and as the market fell, they lost all their equity, and the home was ‘upside down' to the tune of $75,000." Upside down means that a borrower owes more on the home than the home is worth.
Their neighbors had their home on the market for eight months, and finally a couple put in an offer that the bank took three months to accept. In the end, the family was asked to assume a $75,000 unsecured loan to cover the deal. They counter-offered, but the bank refused to accept anything less than was owed to them. The home has foreclosed, and the grass has since dried up, but two neighbors share the duty of caring for the grass to maintain their own home values. Recently, after a year, the bank called the family and asked them to try to short-sale the home. It was too late, and the home was more than $150,000 upside down. The family took the hit on their credit and moved on. So it appears that despite all the news that short-sales or loan modifications are available, they are hard to navigate and only a small portion actually become finalized.
The Taylor family and their neighbors all had the same exotic Adjustable Rate Mortgage (ARM) loans and were trying to get out of them. The exotic loan that they were told was "hard to get" was suddenly all over the daily news. We now know that the loans were sold in the hedge fund markets around the world, and the borrowers' losses affected the economy globally while brokers were given large bonuses to promote these loans and made huge profits off of exotic loans versus conventional loans. The Taylors realized they were in trouble, lots of trouble.
They were like many people who jumped into the rising housing market in recent years, except that they had a decent down payment, long-term employment, excellent credit, and what appeared to be enough money to cover both homes monthly if they lost their rental tenant. They had no debt except a student loan. They chose a loan that would hold their monthly payments down for the first year, then "reset" at a rate of 7 percent per year, but there was never an intention to keep the loan longer than one year. Their mortgage loan officer assured them that they would be able to refinance in a year to keep their payments affordable. Again they were told that they just needed to enjoy their new home and stop worrying.
They were caught up in the "American dream" along with millions of other families around the country. They were experienced homeowners. They earned over $ 70,000 a year each and had equity in their home.
Basically, the Taylors had a disaster on their hands. They had good jobs, health insurance and had relatively good health. However, over the course of five years, both partners at different times had major surgeries. The youngest child was finishing up pre-school, and the two eldest were going to be entering middle school. The Taylors were hoping to be able to cut down on some after-school care, but when returning to work, one of the parents was put into a job without any flexibility, followed by a course of consequences for inconveniencing the employer by being allowed to claim disability. That partner was a union member, but the union's advice was that although the treatment was unfair most people who have been disabled suffered the same treatment. Their advice was simple: Lay low and appear content, and hopefully the administration would shift their focus elsewhere. The employer stated that there was always the choice of moving on (that is, leaving one's job) if it wasn't working, as some others had chosen to do in the past.
The medical doctors were concerned that their recommendation for the employee returning to their regular job duties was being ignored, and as a result, modifications were necessary. The primary doctor, stated, "It just takes one person to alter the course of events." Although, frustrated and concerned, the medical doctor signed a release for the employee to return to work because the company continued to be unresponsive to the recommendations. However, given the current housing trend one could see that there was little room to move jobs, especially one that paid well and had medical benefits. Since this financial mess could not be easily remedied, the employee (one of the Taylor parents) decided to keep the paycheck coming in and lay low as instructed by the union. While there is always the option of using the union to grieve the employer's treatment, there are complicated consequences for this unless one is able to take years to fight in out in court. Historically, a few had been successful, but the cost emotionally and financially was huge. To make matters more challenging, the insurance provider for the employer often did not approve claims for up to two months. The Taylors simply had run out of options, money, and credit.
After a long series of calls to the banks asking for a refinance, loan modification, or any other help available, requests were refused despite the fact that the Taylors qualified based on all of the reasons for loan modification. Nevertheless, the banks would not respond until the loan was in default. The media kept promising federal help, but there was none. The housing market kept slipping, the bills kept growing, and the household bills have increased substantially. Every time a plan to hang on was put in place, something else would happen. The energy bill would double, gas would rise above $4 dollars a gallon, the value of the dollar fell, and working overtime was not cutting it. Neither was reducing household costs, and the budget continues to be forever changing.
The Taylors met with bankruptcy attorneys, loan officers and many, many real estate people. Everyone had a different opinion. Media stories are filled with one failure after another, yet the conventional opinion is, "Just hang on; things will get better."
Although they have not fallen behind on payments the Taylors will in the next few months to come. The injury mentioned above involved a hip replacement and work time which forced the Taylors to use credit cards to pay off household, childcare, and medical bills. The Taylors have tried everything possible to avoid foreclosure and bankruptcy, but every step has been met with resistance by financial institutions. In fact, the process of exploring other options has become a full-time job for the family.
The family stress is off the scale. There are many difficult decisions to make. Do the Taylor's walk away or try and hold on? When they called their real estate officer just yesterday, she said that banks are giving lower rate loans, but the neighborhood has so many foreclosures that short-selling the home will be very difficult, if not impossible. They were also told to check into tax penalties for foreclosure. Once again, the family mustered the courage to move forward and again were told no.
The Taylors are downsizing everything, clearing things out, and selling whatever is not needed. Now the family is left trying to sort through their belongings, unsure if they will keep one home or live in a rental-- something they are told might be hard to come by. They are trying to acquire the things they need such as a home, good schools for their kids, food, and healthcare. All of this as they try to explain to their kids why this home is no longer theirs and that the children are in no way responsible for the economic meltdown because it has now become global. Curiously, they seem to be able to accept it better than the adults around them.
The family once thought they were living the American dream by owning a home. Now the American dream has shifted to be nothing more than a place where the Taylors can at least raise the kids and buy food and gasoline. What the Taylors have come to understand through much pain and suffering is that the American dream never existed; it is now no more than a nightmare.
are not alone. Just last month hundreds of families in Sonoma County
found themselves either in, or near foreclosure. 65 percent of the
homes in the San Francisco Bay area purchased since 2005 are upside
down. It seems that subprime borrowers were scapegoated, but what
is America going to say when the exotic ARM home loan bloodbath surpasses
the number of foreclosures? Who will they blame then?