Down the Up Escalator (20 page)

Amanda bought her condo with a $10,000 original payment. Cindi’s mortgage had an interest-only option. Since she usually made that minimum, all-interest payment, she wasn’t building equity.

In effect, they were renting from the bank with an option to share in the appreciation when their houses were sold. But that option was now worthless. Their houses had been so overpriced that they won’t return to their prerecession values within these women’s lifetimes. These are hard facts, but the two friends were ready to face them squarely and try to come out of it as well as they could.

Two years later Cindi was still living in her Solano County home. There’d been a shake-up on the job in the meantime, and she’d accepted early retirement. She’d predicted that she wouldn’t be able to make her minimum mortgage payment once she retired. But with interest rates so low, the interest-only option had gone down by $1,200 a month. Since she could afford the payment, since she genuinely liked the house, and since she had to live somewhere, she stayed put for the meantime.

Amanda had also been affected by the job shake-up. She now works out of Southern California. Shortly after my visit she’d opted
for a short sale. She quickly found a customer ready to buy her Benicia condo for the then going price of $100,000. But when she contacted Bank of America, she was told by a clerk that the bank couldn’t start any sorts of negotiations because the mortgage payments were up-to-date. Amanda reluctantly stopped paying. After ten months of refusals and reversals the bank finally approved the short sale, and Amanda moved out with no debt.

“The bank could have had the same $100,000 without first giving me ten months of free rent,” Amanda said. “Fortunately, the buyer stuck with me.”

In the course of her research Amanda heard that her bank was even slower about foreclosures than short sales. She realized that she could probably have lived rent-free in her condo for longer if she dropped the short sale and simply waited for a foreclosure. But she and her husband wanted to do as little damage to their credit rating as possible.

This is how Amanda summed up her experience as a California homeowner: “It cost us about fifty points on our credit rating. That’s less than I thought it would. It also cost us all of $10,000 that we originally put in. And for five years we paid $2,000 a month in mortgage and owners’ fees for a place we could have rented for half that. I would call it an expensive rental.”

Carrots for Bankers

When housing prices plummeted and people started defaulting, the first reaction after shock was blame. Irresponsible banks had victimized borrowers. No, irresponsible borrowers had victimized banks. (This is still a provocative topic, and we’ll get back to it.)

But some people said it takes two to make a loan, so forget the blame and let borrowers and lenders share the loss, as would commonly happen with commercial or industrial real estate debt. The traditional way to do that is through a mortgage modification that lowers the principal to something between the new market value and the old mortgage debt. With a modification, lenders accept a loss, or a “haircut,” as they say in the debt business. In many cases the banks may ultimately collect more that way than they would through foreclosure, while homeowners get to stay in their homes.

The argument for modifications wasn’t purely humanitarian, however. The housing collapse triggered immediate massive unemployment. California alone lost some 600,000 jobs in the construction, building supplies, real estate, and related financial sectors.

But new home building couldn’t pick up while millions of foreclosed houses were still coming onto the market. Keeping people
in their homes was widely prescribed as a job, not just a housing relief measure.

So the brand-new Obama administration immediately proposed the Helping Families Save Their Homes Act, one feature of which gave bankruptcy judges the right to lower a homeowner’s mortgage debt as part of a bankruptcy settlement. Bankruptcy judges already have the power to modify mortgages or “smack down” the debt on vacation homes, farms, and yachts. The Obama proposal would have given homeowners the same leverage that those yacht, farm, and vacation home owners have in negotiating mortgage modifications before a bankruptcy judge can impose a smackdown.

The new president seemed stunned at how easily the banks, then at the height of their disgrace, were able to smack down the smackdown provision. Their lobbying of both parties was overt, venal, illogical, and completely effective. The quick defeat of this widely agreed-upon recovery measure set the pattern. The Obama administration went on, as it would so often, to propose an insufficient, ineffective compromise.

That’s how we got the Home Affordable Modification Program, or HAMP, a mortgage modification plan that was all carrots, no sticks. Banks would receive bonuses for each successful modification they made. Banks that signed up for HAMP had the obligation to accept and process applications, but whether they then granted a modification was strictly up to them.

Within a couple of years the administration acknowledged that the results of the voluntary program had been “disappointing.” They had prepared to subsidize between 3 and 4 million mortgage modifications, but in two years the banks approved only some 670,000.

When I arrived in California, the disappointing results were
already trickling in anecdotally. People dealing with different major lenders complained in almost the same words that the paperwork was overwhelming, that they were asked for the same information over and over, and that the process seemed to have no end. While many were applying, few were chosen. No one I questioned had heard of anyone who’d actually had his mortgage modified.

But if anyone was capable of dealing with paperwork, it was Balty Alatas.

Before he was laid off, Mr. Alatas earned $80,000 a year at a private company that trained professionals working in the area of child welfare. Most of his firm’s clients had been state or municipal agencies. As a top administrator, Balty not only had to work his way through government paperwork in order to get the contracts; he’d also helped create curricula to teach field workers how to handle the paperwork necessary to access services for needy children. But when their government clients suffered big budget cuts, his employer had to cut its staff in turn. Mr. Alatas was one of the last to go.

When I phoned him at home in Vallejo, he’d been out of work for a year and had been negotiating a mortgage modification with Bank of America for nine months.

Balty and I speculated about the bank’s motives for making the modification process so complicated. He was coming to believe that the baroquely embellished procedures were deliberately designed to give people just enough hope to keep them paying on the mortgage as long as humanly possible. That’s what he himself seemed to be doing.

I tended to think that the banks were confused, overwhelmed, and making it up as they went along. Neither of us was sure of our analysis. Balty suggested I come examine his files to see what I made of them.

Sticks for Borrowers

Vallejo is twenty-five miles north of San Francisco. According to my map, we were already in his neighborhood. But there wasn’t any neighborhood. The city once housed the largest shipyard on the West Coast. It was finally closed in 1996, and nothing had replaced it. The only open enterprise I’d seen since I’d entered Vallejo was a gas station. The only person I’d encountered on the street was a thin pregnant woman who talked to herself loudly enough for us to hear her through closed car windows.

Finally, according to the map, we were just about at the Alatas house. But I couldn’t find any street signs or even anything that looked like a street. Then I tilted my head, just slightly, and saw a tiny landscaped cul-de-sac shimmering like the mirage of a 1950s suburb. The fantasy came complete with polished house numbers, so it was easy to find the address.

Mr. Alatas settled me under the backyard arbor and brought out a tea tray. “Are those real?!” I pointed at what seemed a second mirage. My host picked a glowing fruit from a bush, and I shaved the zest of a Meyer lemon into my cup. What an aroma.

Now properly refreshed, I took note of the fifty-five-year-old man, his mildly frazzled and younger wife, and their appropriately playful four-year-old son, Stefan. The name Balty had conjured up a jolly, and probably plump, elf. But this Balty, short for Balthazar,
seemed a temperate and sober man whose solid frame suggested dependability.

First I asked about this Edenic enclave.

“It has twenty-six homes,” Balty told me. “In the last two, two and a half years, about eight, so almost a third, of the owners have been distressed. We’ve had neighbors who moved out in the middle of the night, and on the east side of the circle you’ll notice three houses in a row whose yards look like they haven’t been taken care of in a while.”

I asked how he and his wife wound up there. He answered by telling me how his Indonesian family wound up in Holland. His father had been in the Dutch air force. Indeed his family had served loyally in the Dutch colonial military for generations. “When Indonesia gained independence in the late 1940s, my dad and three thousand other men had the option of going to prison or leaving the country. So they went to Holland, where they were spread out in military camps.”

“How did your family get from Holland to Vallejo?”

Balty’s grandmother bought the house in the 1980s as a base for several young relatives going to school in the Napa area. After the last of them returned to Indonesia, the house stood vacant. But Balty’s part of the family settled in California, and in 1996 he moved in and began paying $600 a month to cover the mortgage. When he and Debbie married in 2001, they decided it was time to buy the house from his grandmother.

“It can be hard for people to blend households,” I suggested. (It was a second marriage for Balty, and he seemed to be a person of deliberate habits.)

“Well, we’ve renovated just about everything since we bought it,” Debbie said. “So it’s become
ours
over the years.”

The renovation was part of a five-year plan. Debbie, like Balty, had worked in child welfare. When they married, they’d decided to “give something back.” Over their married years they’d been foster parents to five children, three who had been successfully reunited with their parents, one out of the house to whom they still acted as legal guardian, and Stefan, whom they’d adopted soon after he was born.

The plan began with expanding the small house to accommodate the children. (At one point Balty and Debbie were sleeping on mats on the floor.) But there was no way Stefan would go to Vallejo schools. They’d seen what some of the foster kids endured.

So the five-year plan, as Balty summarized it, was “refinance, redo, and, by the time Stefan enters kindergarten, sell the home. We didn’t know that the market would fall out on us within two years.”

Their mortgage debt, including the original purchase plus $150,000 borrowed for the renovation, was currently $390,000. “We had this house appraised once at $625,000,” Balty said. “I’d be surprised if we could get $225,000 now.”

The bust that deflated individual house values wrecked the city’s already rocky finances, and Vallejo filed for bankruptcy. Firemen and policemen accepted 35 percent pay cuts. Two of three police stations were closed; the third is open to the public only three days a week. A city official advised citizens to use the 911 emergency number sparingly.

In many recession-hit cities, business shifts from better shops to the discount stores. In Vallejo, the Walmart moved out.

Even before the recession, Vallejo public schools had been unacceptable to the Alatases. Now the schools were worse, but they couldn’t move away, so Debbie was preparing to homeschool her
son in the fall. Mrs. Alatas had been a stay-at-home mom at the time that Balty lost his job. She’d now found a few freelance jobs as a parenting coach (a kind of super-nanny). I judged from the exercises on Stefan’s little desk that she was probably qualified to teach him at home. But she didn’t like the idea of keeping him isolated like that.

The economic crisis had boxed them into a tiny cul-de-sac, and they couldn’t afford to move out. But how long could they keep paying enough to stay locked in?

After Balty lost his job, the couple continued paying their $2,900 mortgage for two months. “He had vacation pay and stuff,” Debbie explained. “Then my parents began helping, thinking he would have a job by now.”

Lest I take that as an implied criticism, Debbie made sure I understood that her husband job hunted tirelessly. “It got to the point where I actually asked him to only put in a few hours a day because Stefan and I were here in the home and we were losing him to the job search.” In the last nine months her husband had had six interviews, she told me.

I gasped at that low number, then realized that it was a tribute for a middle-aged man to get to the interview stage on jobs for which there had been many applicants. “On three of those I was one of two finalists,” Balty told me. “But if you’re one of two and you’re not chosen, all you can think of is, what more can I possibly do to actually get it?”

Turning to another source of despair, Balty cleared a space and set down a pile of printed correspondence about a foot and a half thick. He also kept a handwritten log of his phone communications with Bank of America. Each entry included the date, the name of the customer service representative he spoke to, anyone he’d been
transferred to, and a brief summary of the conversation. Some of the entries were annotated with a smiley, frowny, or neutral face. That bit of whimsy surprised me.

The icons, Balty explained, described the tone of the conversation rather than anything about the outcome. “You can’t tell much about the progress you’re making by what one person said on the phone. But it feels better to talk to someone pleasant.”

The first papers I drew randomly from the stack were requests for documents verifying income and expenses. Like everyone else who’d entered modification negotiations, Balty complained, “I kept getting letters asking for the same documents over and over.” He’d learned that it was quicker to send things again than to try to locate the person at the bank who’d already received and even discussed the documents with him.