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.”

10 comments

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“The trouble is there is no easy solution to this problem” This is not true! There is a very simple solution: All MORTGAGES regardless of size should be reduced to 4.5% immediately: no modifications, no refinances, no requalifying, just change the rates on the lenders computers — plain and simple!!! Just do it! Everyone will have more cash to buy food, clothing, cars etc. on an ongoing basis!! Stimulate the economy by giving everyone a break! Not just Wall street! President Obama could do this with an executive order. Problem solved!!

Posted by Adele | Report as abusive

No, actually the president does not have the authority to alter the details of private contracts; something to do with not depriving people of their property without due process. Be interesting to see what would happen if he tried it tho…

Posted by ARJTurgot | Report as abusive

Good point ARJT.

It is a pity that people get suckered into fixed rate loans.

These upfront fees that gets capitalised – the power of compound interest compounds before the first downpayment has been made.

“We are willing to continue to work with this particular customer on achieving a loan workout solution.” – that says it, its over.

Posted by Casper | Report as abusive

Simple solution to the foreclosure problem: move into a rental unit. If she can’t afford the mortgage, she shouldn’t own the house. It’s unfortunate that the home value went down, that she has medical problems, and that her spouse left. But that particular problem shouldn’t be one shared by the American citizenry. And because she bought the house with the expectation of getting rich, that means she bought it along with a degree of risk. She is not entitled to a subsidy – upside down valuation or not. I like M. Goldstein’s excellent articles generally, but playing on the public heartstrings like this is below the belt. The government can’t take risk out of investing. If it does, we’ll need to find s place in line at the national soup kitchen.

Posted by Howard | Report as abusive

Great article… however, housing was not a root cause of the current crisis… it WAS the cause… never before in the history of the country has housing been the root cause of an economic crisis… to be sure it has always been affected, but never the basic cause.

Despite what the media is fed… despite the testimony this week from Asst. Secretary Barr, there are no effective loan modification programs in place… none… despite his testimony, the vast majority of lenders are still requiring a minimum 60 day delinquency… In assisting a client with loan modification at US Bank, I was recently told by the counselor (???) and I quote ” President Obama has his programs and we have ours…”

Twenty-nine years of experience and my intuition tells me that, based on the current programs, we will face no less than another 3-5 years of this fiasco

Posted by Stan Brody | Report as abusive

…well, there goes Joe the Plumber.

Posted by Casper | Report as abusive

The real story is the lack of empathy on the part of executives at banks, investment firm, hedge funds, insurance companies, and their refusal to accept any personal responsibility for the economic crisis in the USA, in particular the foreclosure madness.

The saddest victims are the children. Please read the remarkable article written by Ariana Huffington (on HuffingtonPost.com) about the skyrocketing numbers of homeless children attending US schools this fall.

Any American who has extra pennies, or perhaps time on their hands as the result of a job loss, can make a positive difference in the lives of these children.

Extraordinarily wealthy people can make an extraordinary difference in the lives of these children by following the example set by Bill and Melinda Gates, whose foundation has provided funding for schools and education in the USA. Wealthy individuals can donate money, clothing, school supplies. They can fund foundations. They can influence policy at their own financial institutions and in government offices to reverse the foreclosure trend and to put these children and families back into homes. They have the power and influence and money to take immediate and comprehensive action to dramatically improve the lives of these children and families.

It seems that the USA is turning into “Pottersville” as in the James Stewart classic, “It’s a Wonderful Life.” How sad.

Posted by Louise H | Report as abusive

Housing was neither the ‘root cause’ nor a cause of the current crisis. It was yet another symptom of an inflated economy.

Posted by yr | Report as abusive

That is the most insightful comment made in a long time ‘yr’: The Voice of Reason.

Maybe we all lost sight of actual/’real’ inflation, nominal and real returns etc. You are correct, too much plastic money chasing the same product/service. It was inevitable.

Posted by Casper | Report as abusive

It also didn’t help the the Glass Steagall Act was repealed, an Act instituted by FDR to prevent another Great Depression. This repeal allowed banks and other financial institutions to become heavily involved in derivative trading.

Posted by IY | Report as abusive