A year on, it’s still a housing story

September 9, 2009

Around the time Lehman Brothers’ collapse nearly pushed the global banking system off a cliff, Rose Barrett’s own personal financial crisis began.

Recently separated from her husband, the Kissimmee, Florida resident quickly found it hard to keep making her monthly $1,939 mortgage payment on her salary as a night nurse at a local rehabilitation center. She made a hardship application to her lender, the subprime banking arm of Banco Popular seeking relief from her 40-year fixed rate $200,000 mortgage with a hefty 9.45 percent interest rate.

But by the time she asked for help in mid-September, it probably was too late to alter the trajectory of what is an all-too-familiar tale.

As the stories and commentary marking the one-year anniversary of the failure of Lehman mount, it is also worth remembering that housing was a root cause of the financial crisis — and that it had many victims like Barrett.

And even as the banks that are holding mortgages appear to be getting healthier, the tide of foreclosures, which threatens to keep a lid on consumer spending for months to come, shows no signs of abating,

Indeed, Barrett’s story is also about the post-crisis winners like Goldman Sachs, who snatched up opportunities amid the subprime wreckage.

It was an investment subsidiary of Goldman that began a foreclosure proceeding in Polk County Circuit Court on Barrett’s four-bedroom home in December. The Goldman unit last September paid $731 million for Banco Popular’s $1.1 billion subprime mortgage portfolio in the US.

Like many Americans, Barrett, 52, briefly benefited from what clearly was an unsustainable surge in home values. And subprime lenders like Banco Popular were all too willing to oblige, as long as they could collect a loan origination fee.

Following a series of cash-out refinancings to pay for medical expenses and home improvements, Barrett is left way upside down on her mortgage — meaning her home is worth a lot less than her debt. The house she bought with her estranged husband for $125,000 in 2004 would now fetch just $108,000 on the open market — after nearly doubling in value on paper for a few fleeting moments.

The predicament of Barrett, known to her friends as Jenna, is not unique; only the circumstances that got her to this situation are. In her neighborhood alone, just about every other home is in some stage of foreclosure. The numbers are grimmer in other parts of Florida.

Sure, the federal government has a $50 billion foreclosure prevention program that will keep a lot of people in their homes. But for homeowners like Barrett the terms of the program may not provide enough financial relief, meaning plenty of Americans are going to become renters again.

In some areas of the country, there will be such a large supply of vacant homes that it will be difficult for home builders to get any traction to start new construction projects. And that, of course, means fewer new jobs being created.

The foreclosure crisis will leave many Americans rightfully asking: “What economic recovery?” And until the foreclosure crisis is fixed, it could be years before consumer spending — the long reliable driver of economic growth in the US — returns to anything that resembles normal.

The trouble is there is no easy solution to this problem, and banks holding these mortgages can’t always be cast as villains — as tempting as that might be.

This spring, Litton Loan Servicing, another Goldman subsidiary that services Barrett’s mortgage, offered Barrett a “trial modification” that would have reduced her monthly mortgage payment to $1,100. But Barrett, who says she can’t afford much more than $1,000 a month on her current salary, rejected the offer because she couldn’t afford the $4,000 upfront payment Litton also wanted.

She’s asked Litton for a substantial loan reduction without the upfront payment. In June, Litton sent her a letter saying it was reviewing her request.

A Litton spokeswoman, citing privacy concerns, says the company can’t comment on the particulars of Barrett’s request. But she adds, “We are willing to continue to work with this particular customer on achieving a loan workout solution.”

Over the past year, Litton says it has modified about 44,000 home loans, or roughly 10 percent of its mortgage portfolio. And since joining the federal government’s anti-foreclosure program in early August, the company has offered another 7,000 loan modifications.

Still, Barrett, who recently returned to her nursing job after recuperating from heart surgery, isn’t hopeful that something will be worked out with Goldman and its subsidiaries “I’m assuming they are going to foreclose,” she says. “The stress and uncertainty isn’t good.”


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