Down the Up Escalator (17 page)

Good Lord, this young couple is sacrificing not to keep a roof over their child’s head but to keep open the
possibility
of buying another roof. They’re renting a four-bedroom house in Minneapolis for less than half of what it cost them to be “owners”—owners who paid $36,000 a year for six years and can hope for no gain from the sale of their property beyond the possibility of emerging without a huge debt.

The whole thing was so depressing that by some mutual impulse we segued from mortgages to a subject that delights us both: musical theater. Karsten told me with enthusiasm about shows he’d done with his students. We talked with pleasure about musicals
that we liked because they’re also good plays. Karsten is one of those generous souls who frankly acknowledges that he couldn’t make it in the professional theater world yet has not soured on either theater or himself.

“So let me get this straight,” I said, bringing us back to the couple’s finances. “You’re paying $3,000 a month on a house you’re not living in, $1,100 a month on the place you’re renting, $500 a month on your student loans, $1,600 a month for day care, and your credit card minimum is?”

Their minimum was $650, Karsten told me. “We try to pay $1,000 a month when we can.”

“So you must be living a bit less affluently than two teachers usually do,” I ventured.

“We have mostly cast-off Goodwill furniture; we would never go out and spend a thousand dollars on anything. My wife is an amazing pianist; I would love for her to have a great piano. But we just can’t do that.

“There are so many people,” Karsten explained earnestly, “who can’t afford to buy the luxuries that their parents could, or things that people without that mass of debt can afford.”

“By the way,” I asked, “do your own parents understand how difficult things are these days? Or do they think, ‘Those kids made bad choices’?”

“I think my parents believe that we made the right decisions for where we were. I don’t think they’re judgmental about that. But, God, they would
love
for us to have another child. As would we.
I would love for Eva to have a sibling!
And we still may if we can get rid of this house. But, you know, if it takes another two or three years for us to get back on our feet financially, that may not be a possibility.”

“You mean the window of opportunity will have closed?”

“In a way that’s the price we pay,” Karsten says.

“The price you pay for what, though?”

“The price we pay for having been part of a burst of a bubble and for having bought into something that seemed right but that”—he pauses—“was wrong.”

When the housing boom suddenly went bust, about one-quarter of American mortgage borrowers were left with “negative equity,” meaning that like Karsten and Anita they’d wind up owing the bank if they sold their houses. Economists worried that that would leave the traditionally flexible American labor force less mobile. People who’d have to lay out $200,000 or go on paying $3,000 a month in order to move might decide to stay put. The other option, if the job was good enough and the mortgage bad enough, was to simply walk away. A lot of people were doing that.

But the Linds had the daring (or naïveté) to move for work and assume that they could work it out with the bank. Maybe they will. But in their short sale two lending banks have to agree to take a loss. We’ll soon meet people whose bank negotiations stretched out for a year and a half. I wonder how long the Linds will keep paying on two residences if delays arise?

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.

Meet a Mortgage Hustler

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.