Early this year, 46-year-old Rajesh Patel cashed in half of the retirement savings in his IRA and used the money to pay Wells Fargo what he owed in overdue mortgage payments on his Saratoga home. This was only a desperate stopgap solution, however, for Patel continued to have cash flow issues and no clear strategy on how he was going to avoid inevitable foreclosure.
Patel does not sound like the typical foreclosure candidate. He has a Master’s degree, is a senior engineer at a large Silicon Valley company and owns three properties in the San Francisco Bay Area. “I came to this country to study and settle down and, just like everybody else, I believed in the U.S. economy,” explains Patel. A successful startup guy, Patel, like his neighbors and fellow entrepreneurs, invested in real estate during the housing boom. Then the economy began sliding down the fast ramp. In the past two years, Patel has seen his investments erode in value and his homes depreciate. The rental income from his two other properties barely covers the mortgages on them, and he is unable to sell the properties, because of the taxes he will have to pay. As the foreclosure crisis enters its fourth year, middle-class professionals like Patel are becoming its newest victims.
“This is a very typical scenario,” says Martin Eichner, Director of HUD (Housing and Urban Development) Counseling for Project Sentinel, a non-profit organization that educates and counsels homeowners and members of the housing industry. He advises homeowners to make sure that they have the financial wherewithal to continue their mortgage payments.
“Some properties are just simply under water, i.e., more is owed on the property than what it is worth,” Eichner clarifies.
Patel still lives in his Saratoga home, but he knows that he will have to move soon. His family is upset about moving to a less desirable school district but he has few options.
Our Sacred Home
Home ownership confers prestige and status on an upwardly rising class. It’s a step up into the privilege of freedom within cedar and concrete boundaries. Getting a foot into that seemingly affordable first home is like a chest swell of success. It has its own celebratory event, the house warming, which, as the name suggests, creates bubbles of envy in the have-nots.
For the South Asian, a house deed is usually secured safely with the family heirloom jewelry. It is part of a dream that can only be transcended by the birth of a first child.
Generally speaking, one leads to the other. I have attended combined house-warming-baby-shower parties. I have attended baby showers where the talk was about moving into a home. I have attended house-warmings where there was fond discussion of imminent parenthood.
The idea of a home leading to happier occurrences in life is perpetuated by Hindu scriptures where the grihapravesha (entry into the home) is performed by priests who repeat sacred slokas to keep away evil spirits from entering the doors of the new abode.
Vaastu and feng shui have become accepted and well-researched practices in many Western countries. Homes built and laid out according to these practices are believed to create energy and engender peace. Too bad the economics of a failing economy pay no heed to any of that.
The Statistics
In June 2011 there were 20,223 loan default notices issued in California and 22,936 notices of sale registered. Most default notices were sent to owners of homes that were about 1,500 square feet in size. This refers to first time home owners, a few years into their careers, starting families, ambitious, optimistic, and believing in real estate as the path to prosperity.
A much smaller percentage of larger homes registered on the foreclosure tracking system.
There were 213 notices of default sent out to homes with more than five bedrooms, compared to 8,146 to homes with three to four bedrooms. Though the ratios are skewed, it is clear that this problem has become endemic and no economic class is immune.
The Long and Winding Road
42-year-old Southern California resident Arshad Ali lives in an apartment in Lake Elsinore, a charming city in Southern California. He is a musician, has three children and has learned to live simply, frugally and with economic restraints. Five years ago, his biography would have read, “Lake Elsinore homeowner, manufacturing engineer, and able provider for a growing family.”
His story is one we’ve heard before. Ali was working for Netlist, a company that manufactured memory chips, when he was laid off during a restructuring operation. At the time he was living in a three bedroom starter house. His wife was not employed and with three young children, options were limited. Ali realized that manufacturing jobs were scarce, because “most companies were moving their manufacturing operations to China.” It was ironic, Ali explained, how he was responsible for training the Chinese to do his job, in effect making his own position obsolete.
When he lost his job, he was confident that he would find another one soon enough. After all, he’d moved from India to find this sweet spot, a haven for the hard working.
In the meantime he occupied himself by singing and performing at events, just to pay a few bills. He slipped behind on his mortgage payments and received his first warning notice. Thus began the long and winding road to foreclosure.
Loan Modification
Once that first delinquency notice is received it is a short path to the lending agency filing a “notice of foreclosure” with the county. Then the homeowner’s options are limited to loan modification, where the monthly payments are reduced; short sale, where the property is sold; and walking away where, as the name suggests, the home owner just walks away from the unaffordable property. Most people facing foreclosure would like to have their loans modified to more affordable payments and thereby retain their homes.
Under President Obama’s Making Home Affordable (MHA) plan, $75 billion in loan modification incentives were earmarked for families in order to infuse some vitality into the housing market. But there is no watchdog agency that can enforce the execution of this program. The latest MHA numbers are staggering. Out of 3.7 million eligible candidates for the program, there have only been about 633,459 active permanent modifications as of May 2011.
Patel was hopeful when he filled out a financial worksheet as part of the process for loan modification, but his application was rejected. However, he did enter into a forbearance agreement with Wells Fargo for a period of four months. In essence, Patel was given a four-month respite on his delinquent account. According to Patel, that didn’t achieve anything. “Wells Fargo sent me a letter at the end of the forbearance period, indicating that if I didn’t become current with my payments, they would initiate foreclosure acceleration. That’s when I decided to cash in part of my retirement fund.”
The Race Card
In Ali’s case his application for loan modification was rejected twice. “The lending industry created this mess,” Ali says, “They help some people and not others.” Ali ascribes another reason to his problems. “Our faces, the color of our skin, tell a different story.” The terse way the bank dealt with him and the rapid deterioration of his situation was what he remembers. “In the same neighborhood that I lived in, a Caucasian family was in a similar situation and their loan was modified.”
Ali explains how the neighbor’s bank reduced his mortgage payments to $900. “The family got an instant credit of 70,000 dollars and their interest rate was lowered to 3%. They still live in the same house.”
A recent report by the California Reinvestment Coalition indicated that there might be some basis to Ali’s claims. About 42% of housing counselors interviewed for the report indicated, “borrowers of color are receiving worse outcomes than white borrowers seeking to avoid foreclosure.”
Other details that emerge from the report paint a gloomy picture. 94% of housing counselors have clients who have lost their homes while in the midst of loan modification.
Patterns of ethnic and racial disparities are emerging for borrowers. Incomplete applications, lost documents, and rejected modifications are more frequently applied to nonwhite borrowers.
Eichner explains that the loan modification process is not arbitrary. It is essentially the net-present-value formula; if overall debt as a ratio to income is below 55%, there is very little chance that the loan will be modified. But from all first hand accounts, it seems that while the formula is useful as a guideline, there are other impediments to acceptance.
Left in Limbo
Banks and other lenders tend to drag out the whole process of loan modification.
Applications sit for six to eight months, “leaving people in limbo,” says Eichner. This, despite a clause in the MHA and HAMP (Home Affordable Modification Program) putting a timeline of three months on the approval process.
Sheena Wadhawan, Vice President of the South Asian Bar Association and a public interest attorney in Oakland agrees with Eichner. “Banks are generally abusive of people seeking modifications,” she says, making no bones of her disapproval. They ask homeowners to submit and resubmit the same paperwork. Each time the homeowner has to deal with a different person at the bank. Several times, conflicting advice is given. There are even instances when banks “wrongfully foreclose,” according to Wadhawan.
Foreclosure Radar, an independent firm in Discovery Bay, reported that it took an average of 317 days to foreclose a home in California in June 2011. This was an increase from 261 days a year ago. The number of foreclosures also dropped by 34% from the previous year.
Sean O’Toole, CEO and Founder of Foreclosure Radar cautioned against assigning any significance to these numbers. “We do not see it as signaling an end to lenders looking to avoid losses that they can’t afford by continuing the extend and pretend policies of the past.” Lenders are just taking longer to process foreclosures and possibly artificially deflating the numbers.
This is where scam artists show up. Predatory agents spin the hope tale in order to make a quick buck. Patel hired a lawyer to help him deal with the bank. Eichner, however, cautions strongly against a lawyer’s intervention. “It is against the law to charge a fee in advance in foreclosure cases.” Unscrupulous lawyers and real estate agents continue to come up with creative schemes where they make money off these desperate, cash-strapped clients, while they stay just this side of the law. It might be okay to work out a contingency agreement with a lawyer, in case the loan modification goes through and the mortgage is significantly lowered.
Social Stigma
Possibly one of the most inhibitive aspects of South Asians going through foreclosure is their need for secrecy. Both Patel and Ali feel that foreclosure is a failure of sorts. Patel declares that the perception of normalcy counts for a lot within the Indian community. He says he’s under tremendous “social” pressure to maintain the family’s lifestyle. For Ali, since it is an event of the past, he is better able to discuss it openly.
Wadhawan agrees that her South Asian clients suffer from this malaise. “Our people feel a lot of embarrassment and are rarely forthcoming about their situation. There is hesitation to even seek help. The worst thing for a family going through some stage of foreclosure is to do nothing and all too often people end up doing just that.”
As for seeking help from counselors and advisors, Ali scoffs at it, saying counseling cannot bring back income, or pay his bills.
Why Me?
Federal Reserve Policy maker Fred Kroszner lays the blame on adjustable rate mortgages (ARMs) as the leading cause of foreclosures. Offering low initial interest rates and down payments, these mortgages balloon dramatically after the first year. ARMs were marketed to low income buyers, who were happy to get into a home with little or no initial capital but were also unlikely to afford the higher mortgage payments. When it sounds too good to be true, it usually is.
Predatory lending practices contributed significantly to the housing collapse. Telemarketers aggressively advertised lower monthly rates and refinance options. They offered the possibility of home equity to be used on remodeling, consolidating credit cards, buying a boat or RV, and in some cases even taking a vacation. Unsuspecting homeowners fell victim to this stratagem and ended up losing their homes.
Under investigation for fraud, Angelo Mozilo, the CEO of one of the largest lending firms, Countrywide Mortgage, admitted in internal emails that some of the mortgages sold were “poison,” and “toxic.” It’s sad that companies interested in making a quick buck can so easily ignore the long-term fallouts of such deleterious business methods.
For most homeowners under foreclosure, it is usually an unlucky combination of personal circumstances that plays the villian in this bad plot: a lost job, illness, death, college fees, bad advice, or too many investments coupled with inflating payments. In some cases, homeowners are told not to worry about the increase in payments because refinance is always and easily an option. But when the time comes to refinance, qualifying becomes an issue.
According to Wadhawan, non-English speaking homebuyers are particularly at risk. They don’t have the financial literacy to comprehend documents in English and often end up being victimized.
Homebuyers, too, are culpable. In their desperation to qualify for a loan, borrowers lie about their income in loan documents, usually with the collusion of loan agents. “These liar loans,” Eichner says, “are given to people who never should have borrowed money.”
The Seven Year Sting
The hidden long-term cost of a foreclosure is the impact on credit rating. Patel realizes that losing his home to foreclosure would affect his credit for seven years. “This would be bad for the future since I have one son in college and another going into middle school.”
Whether it is a trustee sale, a short sale, or a walk away, the transaction becomes part of the homeowner’s credit history. Patel is eager to get out of the mess he’s in. He hopes the bank will approve a short sale of his property, though “there is no real advantage to a short sale,” Eichner emphasizes. Realtors tend to promote short sales, but the reality is that there’s little value in it for the homeowner. It still goes on record as a default. Realtors, however, make money on short sales. If there’s no way to avoid the credit hit, then maybe a prudent walk-away is the answer? “We advise our clients not to keep putting money into a bad investment. Better to walk away and start afresh,” agrees Eichner.
Lesson Learned
“I have really seen ups and downs,” Patel says sadly. “Unless unemployment and the housing market improve, we are all in trouble. At the end of the day, my kids and family get priority. I will do what it takes to give them security, whether it is living in an apartment or a smaller home.”
The process from receiving that first warning letter to losing a home is disturbing, disruptive, and fraught with anxiety and “it was especially hard on the children. But it’s a lesson they’ll never forget,” Ali says, as the only positive to this ugly business.
There are probably more than a few Patels and Alis among us, and calamity could just as near as the next monthly household spreadsheet. Their stories make us realize the impermanence of our worldly goods. Losing a home, with all the familiar nooks and crannies of our existence, can be traumatic, but ultimately happiness doesn’t hinge on owning a home.
For stories of other ethnic communities affected by the foreclosure crisisvisithttp://special.newamericamedia.org/foreclosure/index.html
Jaya Padmanabhan is a prize-winning fiction writer.
California Bills Fail to Pass
There are no well-defined state or federal policies that can redress the grievances of foreclosed homeowners. Three state bills that dealt with foreclosures did not make it beyond committees: Senate Bill 729, State Assembly Bills 935 and 1321.
729 would have required banks to inform homeowners before initiating foreclosures and Bill 1321 would have cut down the time it took the county to record foreclosures. State Assembly Bill 935 sponsored by Bob Blumenfield, D-San Fernando Valley, would have leveled a $20,000 fee on banks and other lenders on every foreclosure and that fee could have been waived in cases where an effort was made to modify loans and reduce payments and thereby provide an incentive to avoid foreclosure. But this was not to be.
The Scene in India
There are fewer home loan defaults in India and the reason is more cultural than financial.
According to an article in The Hindu, “The hard core default of home loans is around 3 per cent.” Perhaps it is because most homebuyers in India have the support of family and friends who are willing to help. Secondly, there is a flourishing private(non-bank) moneylending sector that can be applied to for recourse.
Renting vs. Buying
To rent or to buy is a subject of many a real estate forum. The answer boils down to a few critical tests, age, long-term affordability, and job flexibility. A two-car garage home in the suburbs is not particularly tempting to the young and upwardly mobile. Childless families may find the single-family home a bit of an encumbrance.
Job flexibility or the fluidity to pick up and go might deter any longer-term investments. People who travel a lot would rather stay in an apartment somewhere.
Some cities are more amenable to renters than others. San Francisco is more renter-friendly than the bedroom community of Fremont, for example.
If neighborhood is a factor, then it might be easier to rent for a particular school then buy.
Moving into your “own home” makes sense when you have a steady job, have the possibility and wherewithal to sustain your lifestyle and have young kids who have put shackles on your wandering feet. As the mid-30s loom so does the desire for hearth and home.
An interactive graphic by the New York Times allows you to plug in your life factors to do a comparison to determine whether renting or buying is the best option for you at any particular moment. Check out http://www.nytimes.com/interactive/business/buy-rent-calculator.html
A Partial List of Resources
Northern California
• Project Sentinel: a non-profit agency providing services to help people resolve housing problems. Offices in Fremont, San Jose, Sunnyvale, Gilroy, Modesto and Redwood City. Website: www.housing.org; Email: mediate4us@housing.org
• Homeowner’s Hope Hotline: Homeowner’s HOPE™, a counseling service provided by the Homeownership Preservation Foundation. Website:hopenow.com; Phone: 888-995-HOPE
• Community Housing Works: Website: www.chworks.org
• SpringBoard, Fresno Housing Assistance: Website:www.homeownership.org;Email: housinghelp@credit.org.
• Neighborhood Housing Services, Silicon Valley: Website: www.nhssv.org; E-mail: areynoso@nhssv.org
Southern California
• Anaheim Housing Counseling Agency: Website: www.anaheim-hca.org; Email:gcontreras@anaheim.net
• Neighborhood Housing Services of Orange County: Website:www.nhsoc.org; Email: Kenm@nhsoc.org.
• Spring Board, Long Beach: Website: www.homeownership.org; E-mail:housinghelp@credit.org
• Operation Hope: Website: www.operationhope.org; Email: lance.trigg@operationhope.org