Mortgage Mania
Susana Elsemeer couldn’t pay her mortgage when she lost her renters, and Karsten Lind couldn’t sell when the bust put his house underwater. Still, New York and the D.C. area were only moderately affected by the mortgage crisis.
California was the Wild West of mortgage innovation. Nine out of the top ten subprime lenders were based in California before the crash, and so were most of the top ten mortgage banks that failed. California has 12 percent of the U.S. population, but between 2005 and 2007 more than 56 percent of America’s subprime mortgages originated in California. It’s estimated that in 2006, 9 percent of U.S. disposable income came from equity that people extracted from their houses: in California that figure was close to 20 percent. But most important for people who had to shelter themselves somewhere in the state, California was the epicenter of the housing price bubble.
In two decades California’s median home price had gone up to more than double the national home price. Then, in just two years, it dropped by almost 40 percent. On a graph, that would look like the first nauseating hill on Coney Island’s Cyclone roller coaster.
The bubble’s burst left more than a third of California mortgages underwater. The national figure was 25 percent. But because house prices had been so high and mortgage terms so lenient, Californians were also much deeper underwater. (California housing statistics come from California, Pivot of the Great Recession by Ashok Bardhan of the Haas School of Business and Richard Walker of the University of California, Berkeley.)
These statistics meant that about a third of the people driving past me on California freeways were living in houses they couldn’t afford to pay for yet couldn’t sell. But when I talked to individuals living with this contradiction, I was struck, at first, by an insouciant or perhaps fey spirit. Two decades of life in the bubble had led to a different way of thinking about home and debt from what I was used to.
To my parents, a house was a good investment because (as they and their friends repeated like a mantra) “real estate always keeps pace with inflation.” That didn’t mean they were going to make a killing. It meant that house prices would rise enough over the years so that if, God forbid, they had to move out of Brooklyn, they could sell this house and buy a similar one somewhere else.
When they were ready to retire, my parents sold the house where they raised us, bought a smaller place for less money, deposited the difference in the bank, and congratulated themselves on their prudence. During all the years that they were paying off their mortgage, I never once heard my folks talk about how much our house was currently worth.
But California house prices rose so quickly during the bubble decades and were followed so avidly in the local media that few buyers could help thinking about the resale value of their homes.
If you buy a house to live in, you’re a homeowner. If you buy a house to hold and then sell when the price goes up, that’s called speculation. It’s possible to be doing a bit of each in one’s heart. But during the boom years the balance in the Golden State tilted till many seemed to think of their house more as an investment than a home.
To some folks it was the kind of investment you eventually cash in for one lump sum. Often they already counted that future appreciation as a solid part of their retirement savings.
Others thought of their homes as more like an interest- or dividend-paying investment whose returns they could use for current expenses. The U.S. Federal Reserve estimates that in 2005, Americans extracted $750 billion of equity from their houses through refinancing and spent two-thirds of that on personal consumption, home improvements, and credit card debt.
Still others seemed to believe they could have their appreciation and spend it too. You could periodically empty the house of equity and still retire on it when you finally sold it.
If this was true of the house you lived in, what about the house next door? During the housing boom it wasn’t uncommon to buy condos two at a time. Turning over or “flipping” houses became something to brag about: speculation became an acceptable middle-class avocation.
When house prices suddenly dropped, many small speculators lost both their fantasy fortunes and every single penny of real cash that they’d put into their homes.
The first failed speculator I met was a charming mortgage saleswoman who displayed an edge-of-the-continent optimism about second chances that made it hard at first to think of her as a victim, even though she’s now living in a trailer.
A professor told me about a bright UCLA student named Zita San Antonio who’d been evicted during finals week from a house she’d been renting from her mother.
I met the thirty-year-old for coffee and asked her to tell me about her eviction.
“Which one?” she answered.
“The eviction from your mother’s house.”
“Which one of those?” She played it deadpan. “This isn’t the first recession where I got foreclosed out of the family home.”
Zita (short for Zeneida) explained that her parents had emigrated from the Philippines in the 1970s. By the recession of the early 1990s they were well enough established in California to lose two university jobs—her father as a staff architect and her mother as a bookkeeper—both on the same University of California campus. As a result the San Antonios lost the home they lived in and a smaller property they rented out. At the time Zita, their first child born in America, was seventeen and ready for college.
“My early childhood was as secure and stable as can be,” Zita assured me. “Both my parents had good jobs with traditional benefits. They got me into a gifted children’s school; my expected trajectory was four-year college.
“But we lost the house, and the state of California enacted the first big educational cuts in my lifetime.” (That recession was so deep that between 1991 and 1993, California lost 500,000 jobs. Its recession-related budget problems lingered until 1996.) “So I went to work and took some community college courses.”
Fast-forward a decade to 2003.
Zita’s parents are now living in Las Vegas. Her mother is involved in what Zita calls “multilevel businesses.”
“In the Filipino community, I guess in all tight ethnic communities, there are these businesses where you make money if you bring more people in to sell. Yes, like Amway. But at Mom’s level it was more like financial products, maybe insurance.
“In 2003, I hear from my mother that she’s studying for a real estate broker’s license to take advantage of the housing boom. When she started making real money selling mortgage loans in Las Vegas, it revived her dreams of flipping houses in California.”
Meanwhile, a decade had passed for Zita too.
“I was working in an Internet company, a cool little start-up, but then it got taken over by a big L.A. real estate magnate.” Unlike those of many of her colleagues, Zita’s job wasn’t outsourced to India; still, “working for a corporation like that will drive you either to substance abuse or socialism.”
So Zita was ready when her mother approached her with an offer.
“She said, ‘I’m making money now: I want to help you finish school.’ So she and I basically agreed to go in on a house in Burbank. She’d put up the down payment, and I’d pay whatever I could afford in rent to supplement the mortgage payments. Her idea was that I’d get cheap rent and soon the skyrocketing house prices would produce equity that she could take out of the house and use to pay for my education.
“I moved in in 2004 and worked part-time for a couple of years while I went back to community college toward transferring to the university. In fall 2007, I transferred to UCLA, and that’s when the real estate market plunged.
“And see, here’s the thing with my mother, she has that business spirit of reckless optimism. She’d talk a little about her real estate but never let us know how much in trouble she was. But I should have guessed.
“She was always asking us to send her recruits, people she might be able to sell these loans to. I had never actually seen my mom pitch until I took her to some friends who were interested in buying a house. That’s when I realized that her big market was subprime loans. So I started to send her copies of the show.” One of Zita’s part-time jobs was as technical producer for Beneath the Surface, an L.A. radio show that, at the height of the boom, featured guests who discussed the real estate crash to come. “I’m sending her articles like, ‘This Can’t Last,’ ‘You Have to Get Out.’ And she’s like, ‘Yes, you’re right, but we’ll hold on one more year because the prices are still going up.’
“I felt like Cassandra: I’m looking right at the iceberg”—Greek mythology isn’t Zita’s specialty—“but no one will listen to me. I wasn’t exactly listening to myself, either, because I thought I’d have time to move out at the end of the school year.
“So my mother’s assuring me that everything is fine, and one day a few days before finals week for the winter quarter of 2008, I come home one day and I see a notice on my door. Everything on the premises must be removed in ten days. I took a picture of the sign. What I remember was like, ‘This property is foreclosed and will be put up for auction on this date. You must vacate the premises by then.’
“So I’m,” Zita says, giggling, “freaking out. Not only do I have to pack up a two-bedroom house in ten days and find a place to go, but it’s happening during finals week. Wow, thanks, Mom, for telling me.”
“So you and your mother didn’t own the house together?” I try to get it straight. “I mean, you never got any of the earlier notices about falling behind on the payments?”
“No, we didn’t own the house together, and no, I never got any notices, and I never got any financial help with school. But I did get cheap rent. A two-bedroom house for whatever I could pay. Sometimes that was as little as $400 a month. So absolutely, living in my mother’s house was a leg up, a subsidy that allowed me to go to school full-time. I only had to earn living expenses. I guess the thing that made me angry with my mother is that she didn’t say anything. She never told me she was in trouble. And then I get that notice—ten days!”
A federal regulation passed in 2009 grants paid-up tenants ninety days’ notice to move out, but Zita didn’t even think of consulting a lawyer. This college-educated anti-authoritarian complied immediately with an official-looking notice tacked on her door and moved out during finals week. With the help of a couple of extensions she got through the term with her usual high grades.
“And your parents,” I asked, “how did they make it through their second American recession? Emotionally, I mean—two educated people who moved from Southeast Asia to California for economic opportunity, but they wind up living in a trailer in Las Vegas?”
“The first recession had the worse effect on my father,” Zita says. “He was used to being able to provide for the family. But after a couple of unsuccessful business efforts, he took early retirement. I’m the youngest, so I had to go off on my own during a time when he had lost his job and his house. It wasn’t how he expected to send me out into life.”
She thinks a bit more about her parents. “My father has the peasant mentality—focused on security, though he supports my mother in everything she does. But my mother is the real Horatio Alger type. Right now she’s talking about getting into short sales. That means helping people get out of the houses you loaned them the money to get into.”
“Short sale” was, for a time, the catchphrase and great hope for cleaning up the mortgage mess. But negotiations with banks usually got so complicated that the potential buyer often vanished before the sale came off. It takes a skilled and patient real estate broker to consummate a short sale.
“I guess you could say my mom is looking for ways to make up her own losses by cleaning off the bones of other people’s wrecks.”
“She sounds amazingly flexible,” I said.
“She really is. And I love her to death. She’s my mom. But she’s like a lot of people who buy into the spirit of capitalism but don’t have the capital. She’s always looking for the big chance. But she’s not from the class that will hear about the next pyramid scheme toward the beginning. She’ll never be ‘inside’ enough to get out in time.”
“But she’s still geared up for the next big thing?” I asked.
“Oh yeah,” Zita answered. “My mom is …” Her pause implied unstoppable. “You’ll just have to meet her.”
It’s a quick trip from Las Vegas to Burbank: the San Antonios visit their daughters there often. Zita arranged for me to meet her parents at her married sister Korina’s house. She, Zita, would join us after her last class.
Bibi San Antonio is a small, erect woman who gives herself an extra inch of height with a perky hairdo like that of her heroine, Corazon Aquino. But Bibi doesn’t need that inch to make a big impression.
I don’t know of any orthography that will catch the way she can pipe three musical tones into a single syllable to express derision, surprise, and most of all amusement. I’ll try using italics, but remember that while Zita’s mother could be adamant, she was never loud or shrill.
“You write shorthand,” Mrs. San Antonio said approvingly as we got started.
“But I can never read it back.”
She laughed and told me how she’d won a full scholarship to the Philippine government’s prestigious commercial high school. “At that time most business was in the hands of foreigners. The president wanted to train Filipinos to run companies. That’s how I learned accounting, salesmanship, public relations. That president was assassinated.
“What is it that you want?” Mrs. San Antonio asked in her straightforward way.
“I want to tell people how it felt to be selling houses in California in those days when everyone thought things would just keep going up.”
“Everyone but Zita,” her mother reminded me. “She kept warning me. But I didn’t think it was going to happen so soon.” She takes a brief pause for regret. “Anyway, I was not selling houses. I was selling loans. Mortgage loans. And the houses were in Nevada. In 2003 to 2005, that’s when I made a lot of money.
“I started as a loan officer in Las Vegas, but most of my clients were in California. I have friends from San Diego to San Francisco. I don’t do cold calls, and I don’t mail letters. What happens with me is once I work with a client, they’re happy and I get referrals. That’s because I empathize and I analyze their situation.”
Bibi explained that there were “a myriad” of loan options and it was sometimes necessary to insist that her boss make the lender (the bank at the other end of the phone) offer a specific loan to a particular client. “It’s not just a matter of ‘You want a loan, I give you a loan.’ No. Because if I give you the wrong loan, you suffer.”
“Okay,” I say, hoping she’ll get specific. “Let’s say I’ve seen a house that I want to live in.”
“That’s just one type loan, the buy-a-house-to-live-in. There are myriads of programs for that but …”
Buying a house to live in wasn’t her interest, I could see, so I tried another scenario. “Let’s say in 2001 I have a house in Richmond, California, that’s worth $300,000 and I want to give each of my two children down payments to buy houses in the neighborhood.”
“But what is your plan?” Bibi asks me. “Who is going to pay the loan back? Maybe I shouldn’t give you the loan.”
“Did you often turn people down?”
“Yes, many times. Because to make money, you have to hold this house for five years. Are you sure, just in case you lose your income, you can keep to a five-year plan?”
“Okay,” I ask. “What is a good plan? What should I ask you for?”
“The best example: a lot of people owned homes in California, and the homes are valued very high. Let’s say you own a house here. Your house is now valued at 1 million. Or let’s say $500,000. All you need is to get $100,000 cash money to make a down payment on another house. You’ll rent that out and hold it for two or five years, then sell it and make money.
“In other words”—Bibi’s eyes are coming alive—“if you had a home that you lived in for several years and you only have $100,000 mortgage left on it, suddenly it’s worth $500,000. What are you going to do with that $400,000?
“Ah”—her voice mellows as she answers her own question—“let us buy houses in Las Vegas and then let them appreciate for three or five years and then sell. That was the big thing, the big thing. There were other purposes for loans, but that was mostly what my people were thinking.
“Refinance your home in California and then buy a house in Las Vegas. So now you have your house with a $300,000 mortgage and you own two houses, right?”
“Right,” I say, suddenly realizing that this is classic speculation. “Did you sell mostly in the Filipino community?”
“Yes, a lot of medical people, doctors, nurses.”
“Did you bring people together like at Tupperware parties?” I ask.
“No.” Bibi is almost offended. “No, it was always individually, always around a dining room table like this. Every situation is different, personal. If you’re nearing retirement, can you afford to hold a mortgage for twenty years? If you’re young, is your income steady? Nurses, will they remain here, or will they go back?
“The point was to put all the money you can into mortgages instead of putting your hard-earned money into the savings account. What were you getting, 1.7 percent? The appreciation thing is far better than the bank.
“But each person’s life situation is different. You’d be surprised. That’s why I got a lot of referrals because I really do diligent work. But how did it fall out?” I was amazed when Bibi brought that question up herself. “How did it all fall out?”
“That’s what everyone’s asking,” I said.
“Please don’t blame people in your book,” Bibi appeals to me. “Don’t blame people for buying houses they couldn’t afford. Well, maybe there are those. But if you really examine the matter, people bought the houses in Las Vegas because there was a plan, a plan to take care of themselves. Now, how did the plan fall apart?”
I shrug, eager to hear her explanation.
“Remember,” Bibi says, “it was a five-year plan. But none of us knew what Wall Street was doing. We thought it was going to be the way it was. The way it was all those years. You know, your house appreciates and then …
“Remember, those loans were given by mortgage companies like, let’s say, Bank of America or Wells Fargo. But those banks got money from Goldman Sachs, and Goldman Sachs got money by betting against the houses. I told you there were myriads of loan programs. By the end they were concocting loans just to sell to investors, loans that they knew would make the clients fail. Then companies like AIG, they took our loans and …”
Bibi San Antonio is a keen observer of the world in front of her eyes, but Goldman Sachs and AIG conduct their business above her eye level. She seemed to realize that she didn’t know exactly what the Wall Street banks did with the mortgages she wrote, or how exactly they caused the crash. So she returned to the world she knew.
“We were working on the appreciation of the value and suddenly … If the value had just stopped growing, we would have been okay. But it fell, so everybody is upside down. But nobody knew it was coming.”
“Except Zita,” I reminded her.
“Yes, yes, my daughter. She is a genius. She is the only person that told me, ‘Mom, don’t do that, because it’s going to fall apart.’ I said, ‘Well, maybe it will fall apart, but after five years.’
“I was working in a five-year plan myself, because I was making a lot of money, and money was accumulated in our house. And you can’t just put your hard-earned money into the bank. So we bought houses too.”
“That shows you were an honest salesperson,” I said.
“Yes, we had the same plan that we sold to others. Would you believe that a house I bought for 260,000 is sold for 90,000?
“One house that I lived in for a while in Las Vegas, I was able to sell it on a short sale. Two other houses, they were going to be short sales, but they were foreclosed because …” She begins to mumble, and I catch “mortgage company,” “try to negotiate,” “lower the balance.” Bibi then decides to forget the frustrating details and just give the final score.
“Anyway, it’s short sale one, foreclose two, but not the house in Burbank. That’s the one I was able to save.”
“Burbank?!”
“It’s only nine hundred square feet, $390,000. I only bought one in California because it’s expensive. But one good thing about me, when I bought a house, I always put down 20 percent, so in the end …”
Zita’s mother saved the Burbank house?! Wait a minute. This started when I met a student who had to move during finals week because the house she was renting from her mother was foreclosed. But her mother says she still owns it. As I was about to delve into the Burbank mystery, Korina’s husband, John, arrived home from work with sausages to grill. Zita came through the door shortly after.
“Your mother called you a genius,” I said in greeting her. “I bet she never says it to your face.”
“Yes she does.” Mother and daughter hugged, and Zita went scavenging in the refrigerator for ready food. At no signal that I heard, Mr. San Antonio emerged from the den, and the family gathered around the table. The soup was lovely. Korina grows vegetables in the yard. She was trying to show her parents that food can taste good without a lot of salt. Bibi had had two strokes, I was surprised to hear.
“They eat what I send home with them,” Korina said. “But in Las Vegas there’s all the $3.99 buffets. And of course it’s a sin to waste food,” she chided her parents. “So if you take it, you have to eat it all.”
As the table was being cleared, I found myself alone with Bibi again and asked immediately about the Burbank foreclosure.
“That was Indy Bank—I’m sorry, sometimes my memory—I mean IndyMac.” (Bibi makes fewer word slips than most people I interview. Imagine her before the strokes.)
“When your payment is up-to-date, when you don’t have a delinquency, they will not negotiate a mortgage modification. If you stop your payment, then after three months, or six months, depends, they will start negotiating.”
So Bibi stopped payments to get negotiations going.
“I wanted them to lower the principal; they only asked, ‘How much can you pay?’ ”
“But wait,” I said, “Zita got an eviction notice.”
“I was negotiating with them, and it’s part of the process that they will give you the default notice. Maybe sometimes a possibly improper foreclosure is done too.” Bibi uttered this last bit about improper foreclosures as a throwaway line and went on describing her useless negotiations with IndyMac in some detail. Then finally she said: “We were not getting anywhere, and I was ready to let it go. But right then IndyMac went bankrupt, and the FDIC [Federal Deposit Insurance Corporation] took over. The FDIC was good, very good, because of that lady … Yes, Sheila Bair.”
Sheila Bair, a Republican who first came to Washington as legal counsel on Kansas senator Bob Dole’s staff, was appointed head of the FDIC in 2006 by George Bush. As early as 2001, Bair warned about a possible wave of defaults when adjustable rate mortgages reset. She tried unsuccessfully to get the most dangerous and abusive mortgage terms modified even before the crash.
In the run-up to the financial crisis, IndyMac and several other banks went bankrupt and were taken over by the FDIC in accordance with normal, well-established practices for resolving the affairs of insolvent banks.
Bibi described how the FDIC, under Bair’s leadership, temporarily stopped the adverse procedures and sent professionals to assess her financial situation and negotiate a deal. They didn’t grant the principal reduction she wanted, but they set a monthly payment she could meet by renting the house. “Twelve hundred dollars they wanted—it comes to $1,500 with insurance and property tax.”
“Wait, the Burbank house is now rented? You own it and rent it out?”
Bibi told me with some pride how, rejecting agents, she herself located a tenant eager to use the good local schools. “I asked $1,900; my expenses are $1,500; I let her bargain it down to $1,800. They’re good tenants. All I ask her is to take care of the yard. I used to pay this young man $65 just to take care of the small front yard.”
Didn’t Mrs. San Antonio understand what her genius daughter went through when she was foreclosed during finals week? Didn’t Zita ever ask her mother if she really had to move out in ten days?
“So I make a family happy, and the payments are covered. I told my kids I’ll hold on to the Burbank house till whatever my husband and I decide. But right now it’s cleaner to live in Las Vegas.”
What kind of Rashomon story is this? Zita races to empty a two-bedroom house and find a new place during finals week of her first year at the university. But in her mother’s account the “possibly improper” foreclosure notice is only a footnote. I wanted to get this mother and daughter together. But before Zita returned, Mrs. San Antonio excused herself to join the men. “My Lakers are playing.”
But I asked about the Burbank house when I got the two sisters alone.
“As soon as the FDIC took over, they stopped all foreclosures.” That’s Korina’s first recollection.
“You’re sure you really had to move?” I ask Zita.
“Yes. Remember that last day we ripped out all the fixtures?”
Her sister doesn’t contradict that detail. It’s just that her focus was on their mother’s struggle to bargain with the bank.
“She was still in the midst of negotiating,” Korina says, recalling her mother’s frustrations. “She talked to some rep who didn’t even know that a foreclosure notice had been sent.”
“She didn’t know until I called her,” Zita says, confirming that part.
“But as soon as the FDIC took over, they called her right back,” Korina recalls.
“I didn’t know it was the FDIC thing that turned it around,” Zita says. “I just remember four or six months later putting the fixtures back in.”
The pieces almost fit together now. Everyone was surprised on the day that a foreclosure notice landed on the door, and everyone participated in ripping out fixtures and putting them back months later. It’s just that some people were focused on saving the house, while some, or at least one, were focused on saving the term’s work. Zita moved out shortly before her mother’s deus ex machina, Sheila Bair, descended to take charge.
Sheila Bair is widely credited with preventing pre-crash bank runs by operating insolvent banks with a minimum of disruption as she applied standard resolution procedures to balance the interests of depositors, borrowers, and investors.
But before the crash the FDIC’s authority to “resolve” failing banks didn’t extend to bank holding companies like Citi or to various uninsured, unregulated, nonbank financial institutions that were in trouble. The post-crash Dodd-Frank financial reform bill is supposed to give the FDIC wider authority the next time.
Even before those reforms, however, many of the FDIC’s time-tested procedures could have been applied to the rescued institutions. Those standard resolution procedures usually begin with taking control away, at least temporarily, from the existing management. Resolutions also usually involve some losses to bank bondholders.
But both the Bush and the Obama administrations abandoned the traditional resolution approach in favor of simply handing $700 billion to the existing managements of financial institutions deemed too big to fail. I wonder what today’s political and economic environment would be like if our government had conducted its rescue in the spirit of a resolution rather than a bailout.
Save Your Cash, Not Your Credit
Before I left Burbank, Bibi San Antonio wanted me to understand that when the crisis hit, she’d acted honorably. As soon as she grasped that house prices weren’t coming back up, she contacted her old clients and advised them to stop paying on the mortgages she’d arranged for them.
“I have told many people, ‘You’d be a fool to keep paying the $200,000 on a house worth $70,000. If you want to live, walk away. Walk away from it!’ ”
She’d done that herself in Nevada and had been prepared to walk away from the Burbank house if she couldn’t get a deal to her liking.
“And you’re really not worried about past foreclosures if you have to apply for a new mortgage someday?” I asked Bibi.
“No.” Her tone says, “Are you some kind of child?” “You know what happened: you explain what happened. You’re applying for something now, and you have the right income now. I can’t be held captive for something like that!”
“Do you sell your children in order to make the monthly payments?!” Korina interjected. She and her husband had also walked away from a couple of properties after the crash.
“But most people worry about their credit,” I objected.
“You only need credit in order to borrow money,” Bibi explained. “It’s better to have money. That’s why I tell all my old clients, ‘Save your cash, not your credit.’ ”
————
A year after I met the San Antonios in Burbank, Zita came to New York for an academic conference. She was a graduate student by then. I asked whether her mom and dad were still living in their trailer.
“That’s a funny story,” she said, and explained that her parents had come into a chunk of money related to a Las Vegas hotel investment they’d pulled out of before the place was built.
“I don’t know the exact details,” Zita said, “but when the dust from the lawsuits settled, they received a check for $175,000. So I said”—here Zita becomes the mature adult—“ ‘Mom, why don’t you buy a house in California?—a house to live in?’
“She looked at me and said, ‘I can buy two houses in Las Vegas.’
“I said, ‘Mom, please, I don’t want you to die in the desert.’ ”
In the end the San Antonios bought neither two houses to invest in nor one house to live in. Residential property was still too risky, Bibi judged; no one knew when it would hit bottom. So she put the money into California commercial real estate in the form of a medical building her son-in-law got them into. Zita reported, “It pays them back monthly, like an annuity, Mom told me—about $2,000 a month.”
So the San Antonios still live in a Las Vegas trailer park—“That $6,000 trailer Dad bought ‘just in case’ is the best investment they ever made,” says their daughter—and they supplement their Social Security and Mr. San Antonio’s pension with returns from a commercial property. If that goes bad, Bibi San Antonio will surely be ready to move, probably just a little bit late, into the next big thing.