Burst your bubble

Your house is worth shit.

Get used to it.

The shit value of homes in Washoe County since the real estate bubble burst is not news to anyone. Here’s the part that’s hard to swallow: Your house may never be worth what it was worth when you bought it. In all likelihood, particularly if you bought at the height of the bubble, your life savings are gone.

In January 2010 in Reno, the median house price was $235,699. In January 2007, that same median house sold for $386,570, according to housingtracker.net, a real estate data website.

Now, let’s just say you put 20 percent down—not that anyone did in those heady days of subprime, unethical and stupid loans from lending institutions. (You know, the “institutions” that took your fees, life savings, and then tax dollars for a “bailout.”) If you put $77,314 down, and you sell your median house at $313,013, the value of the loan—you’re still out your down payment. The bank, of course, is out nothing.

For you to recoup your investment, the house has to return to the original value at which you bought it. To put this in perspective, as recently as 1998, 4 percent was the average annual appreciation rate for homes in the United States, according to the Office of Federal Housing Enterprise Oversight.

We want to keep things simple, so we won’t use compound interest or any of that arithmetic gobbledygook the mortgage brokers used to sink you in debt up to your eyeballs.

That median house lost $150,871. At 4 percent a year appreciation, that’s $9,428 a year. That would mean it would take 16 years just to break even.

There’s a simple formula disillusioned home owners are using to break it down. It looks like this (M+D-d)at=U. In other words, M is mortgage, D equals down payment, d is devaluation, a equals appreciation, t equals time, and U is fucked. It’s that simple.

Your money comes back last. Assuming you stay in the house, you will pay the bank back first.

Have you considered what might happen if you just walk away?

For one, your credit would be down the toilet. For now.

OK, more fun with math.

Let’s say you got a 6.6 percent loan on that $313,013 mortgage. That’s a $1,999 plus insurance, etc., monthly payment.

Reno real estate appraiser Johnson-Perkins & Associates said rents fell to $848 a month in the fourth quarter of 2009, according to the Reno Gazette-Journal.

If you were to walk away from your house, your credit would be damaged for seven years. So let’s say you moved into an average apartment. You save more than $1,151 a month. In seven years, if you saved every dime, you’d have $96,684 in the bank, and spotless credit.

Let’s assume homes instantly begin appreciating at 4 percent, although they’re more likely to drop as people sharpen their math skills. In seven years, you could buy a median house for $301,694. But you’ve got 33 percent down, which becomes instant equity, and not only that, but you’re also only financing $205,010. Since you have more equity and perfect credit, you’re going to get a lower interest rate mortgage, but let’s just call it 6.6 percent to make things even. Your monthly nut would be $1,309.

One final piece of math, and then we’ll move on to how to stay in your home. In that nine years after you move to the new home—the nine years before you were back at break- even status on the old house—you’d have accrued $74,520 in equity for a total of $171,204. Even minus your original lost down payment, you’re $95,000 in the black.

But now you know better than to “invest” in a home, right? Right?

There are two little-known and little-used methods some people are using to stay in their homes. The first is the Making Home Affordable program through the federal government in cooperation with lenders. The second is Nevada Foreclosure Mediation, which was passed during the 2009 session of the Nevada Legislature. This program is for owner-occupied residential properties that are subject to foreclosure notices—formally known as a Notice of Default and Election to Sell—filed on or after July 1, 2009.

We’ll talk a little about each of these methods for saving your home, but then we’ll return to the big question: Why would you want to?

There are essentially two parts to the Making Home Affordable program: The Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

According to the perky website www.makinghomeaffordable.gov: “The Home Affordable Refinance Program gives up to 4 to 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments. The Home Affordable Modification Program commits $75 billion to keep up to 3 to 4 million Americans in their homes by preventing avoidable foreclosures.”

In the Home Affordable Refinance Program, once it’s determined whether your loan is owned or guaranteed by Fannie Mae or Freddie Mac, the homeowner is asked a few questions to determine eligibility:

• Are you the owner of a one- to four-unit home?

• Are you current on your mortgage payments? “Current” means that you haven’t been more than 30-days late on your mortgage payment in the last 12 months.

• Do you believe that the amount you owe on your first mortgage is about the same or less than the current value of your house? You may be eligible if your first mortgage does not exceed 125 percent of the current market value of your home. For example, if your property is worth $200,000 but you owe $250,000 or less on your first mortgage, you may be eligible.

Do you know anyone who bought a home during the bubble who fits the description “your first mortgage does not exceed 125 percent of the current market value of your home” in Washoe County? Neither do we. Not very many, anyway.

The Home Affordable Modification Program is for people who have fallen behind on their payments or who are struggling to remain current. Interested people must answer a few questions to determine eligibility:

• Is your home your primary residence?

• Is the amount you owe on your first mortgage equal to or less than $729,750?

• Are you having trouble paying your mortgage? For example, have you had a significant increase in your mortgage payment or reduction in your income since you got your current loan, or have you suffered a hardship that has increased your expenses (like medical bills)?

• Did you get your current mortgage before Jan. 1, 2009?

• Is your payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) more than 31 percent of your current gross income?

Does this sound like you? It sounded like Mark Shulman, a service industry worker.

Mark and his wife, Velea, refinanced their home in April 2008 for $319,000. In May 2009, it was appraised at $159,000. Their 30-year fixed at 6.25 loan was through GMAC.

“I went to HUD counseling because they recommend that as one of the steps you take,” Shulman said. “The first HUD counseling session, they told me to let the property go into foreclosure. … That was unacceptable counsel to me. It makes sense financially, but it didn’t set right in our hearts.”

In addition to working with GMAC to get the Home Affordable modification, Shulman sent letters to everyone who represents him in government, including Harry Reid, Dean Heller, John Ensign—even Jessica Sferrazza: “If they had an email, they got a letter.

“When we finally negotiated our Home Affordable in September of ’09, the house was appraised at $157,000, and they refinanced it for $253,000 for 2.75 percent for five years, 3.75 for the sixth year, and the seventh year it was 4.75 in which it would finish out the life of the loan.

“The program is just misnamed; it should be Making Payments Affordable,” Shulman said. “It did not make my home affordable. It did not sell my home. It still is a negative, toxic asset for me.”

Shulman has a couple of problems with this since it only increased the length of the loan in order to lower the payments. He believes when someone buys a house, he or she is entering into a partnership with the bank. “But your investor won’t negotiate or talk to you unless you’re current, but by being current, they’ll ignore you because there’s no sense of emergency.

“And I’m a 20 percent investor, but I’ve incurred 100 percent loss on my equity. They’re an 80 percent investor, but they’re going to get 100 percent of their investment back. There isn’t another investment model like this. If you and I bought a hot dog cart, we’d split the losses. If the house devalues to $160, why wouldn’t they adjust down the balance for 80 percent of the loss, and I would take 20 percent of the loss? I’m the only person who had anything invested; all they had was paperwork.”

One might argue that if Shulman were to sell at a profit, he’d get the whole profit.

“Finally, why am I not able to write off that loss against my taxes? If it were a business, I’d be able to write off that loss. It’s a loss I certainly incurred. If I had gained money, they would tax me on that money. It’s subject to tax, but not subject to a credit against a loss?”

In the Making Home Affordable program, participants are given a three-month trial period in which lower payments must be made on or before the first of the month. (In one example, the monthly mortgage payment was lowered from $1,650 to $1,299.) The final negotiation and new contract comes after the trial period. There have been complaints across the country that banks are taking months to prepare the negotiated contract.

This is the Shulman family’s first month making the new, negotiated payment of $1,250. The old mortgage payment was $1,750. Shulman says the $500 drop was arbitrary and didn’t meet the MHA goal of making the monthly payment 31 percent of his income.

“I haven’t walked away … yet,” he said. “Realistically, there’s just no way the numbers work for homeowners anymore. Why have I decided not to default? That is still an option that we consider.”

Brian Kaiser, housing and real estate analyst for the Center for Regional Studies at the University of Nevada, Reno, has been quoted in a lot of stories about the Nevada Foreclosure Mediation program. He freely admits he doesn’t know as much as he’d like about it.

“I track the monthly data, so I pull all the data that we can from every source that we can and put out reports, but I haven’t looked specifically at the nuts and bolts of that mediation program. I know anecdotally hearing through the grapevine how things are going, but I don’t have any firsthand knowledge of that program at all.”

Problem is, nobody does.

Even though the Nevada Supreme Court released numbers related to the program, the court has not released any data about success rates—in other words, how many of these negotiations resulted in an equitable solution for a homeowner and lender. Supreme Court spokesman Bill Gang says these statistics should be available in a matter of days.

In statistics released in December, according to the Supreme Court, in July through October in Nevada, there were 29,242 Notices of Default filed. Since then, there were 3,446 requests for mediation; 372 mediations conducted; 805 mediations scheduled; 1,402 cases processed and ready for mediations to be scheduled.

Only about 10 percent of eligible Nevada homeowners have requested foreclosure help. In part, that may be because so many homes being foreclosed upon are second or investor homes, which don’t qualify for the program.

Much of the information about Nevada’s Foreclosure Mediation program can be found online at www.nevadajudiciary.us/index.php/foreclosuremediation. Particularly look to the left-hand column under Documents and Forms.

The rules are simple. The program is open to homeowners of owner-occupied houses who receive a foreclosure notice—formally titled Notice of Default (or Breach) and Election to Sell—filed on or after July 1, 2009. People with older notices can participate if they can get their lender to agree to mediation. The homeowner has 30 days to request mediation from the time they get the notice of default.

What can mediation do? Primarily it could result in a loan modification, which “is a change in the terms of the mortgage loan. A loan modification can result in a lender adding missed payments to the loan balance, changing the interest rate, extending the term of a loan, or reducing the total amount due on the loan,” according to information provided on the website.

It’s a fast-track deal, with most mediations expected to conclude within four months of the receipt of the notice of default.

Kaiser said he hasn’t seen much in this program or in any statistic that gives him hope that the real estate crises is going to solve itself any time soon. “Foreclosures have been a real, real issue for the last couple of years, but what’s more disturbing is the NODs. The Notices of Defaults have just been off the charts in 2009. … It’s a worthwhile trend to follow because generally it’s about a six-month leading indicator of what foreclosures are going to do. So if you see a huge runup in Notices of Default, chances are in a few months you’re going to see a foreclosure spike, as well.”

And get ready because the new defaults are not the subprimes. When the foreclosure mess first started, it was all the subprime notes imploding. Those have worked their way through the system. These days, it’s the prime mortgages—from people who have good credit and solid conventional loans—that are defaulting.

These government programs may only be delaying the inevitable by offering too little too late. Even though some people have been able to delay foreclosure, “the actual success rate of these mediation programs is very, very low.”

When Kaiser says “very, very low,” he’s primarily talking about California, for which he has seen solid numbers, but he says there’s a 60-70 percent redefault rate. “Even on a renegotiated loan, the default rate is astronomically high because the rest of the economy is still in shambles. If you can’t afford the home, you can’t afford the home. You can renegotiate the loan all you want, but if you don’t have a job, it’s not going to help. It’s a nice thing to talk about, but I haven’t seen any compelling numbers yet that say the mediation process is actually working.”

These government programs may help keep people in their homes, but are they necessarily a good deal? That’s a whole other issue. Homeowners are still paying on a home that’s worth far, far less than the price they paid for it. For some properties, experts like Kaiser say, the chance of ever seeing positive equity is nil.

Some of these homes were so overvalued, and they’re so underwater unless banks do a huge principal reduction, homeowners will be underwater in that home forever. It’s difficult to argue that people should sacrifice their futures and the futures of their children in order to keep an agreement with a lending institution—the very organizations that out of greed caused the bubble and its resulting collapse.

“I’m not sure that’s a smart thing to do—if you’re looking purely economically and not bringing in other factors of moral obligations to repay your debt,” Kaiser said. “If you’re just looking economically, I’d be hard-pressed to say to stay in a home that you have little chance of ever seeing positive equity in. … Early on, when this whole thing started to unravel, there was more of a stigma, and there was more concern about the moral obligation side of it. By nature, people aren’t willing to walk away. I know I wouldn’t have been. But now, having seen two years of economic devastation, if I was sitting in a home that was worth half of what I owed on it, I’m not sure I wouldn’t economically say, ‘Enough is enough,’ and walk away.”

That question of a moral obligation to repay the institution that caused the bubble and its collapse and your embryonic financial ruin is interesting, considered often by lawyers and other ethicists.

Reno lawyer Mark Mausert has litigated several cases related to this very matter.

“Is it immoral? It depends. In this situation, for the average person, the answer is a definitive no. … I had a lady from Countrywide say to me, months ago, ‘You signed a contract.’ My response to that is, ‘Precisely, I did. And so did you.’ The essence of contract is mutuality of obligations. Both parties are bound. And while I was putting down a hefty down payment and making my payments every month, what was Countrywide doing? Countrywide was out writing predatory loans, loans which were intended to result in foreclosures. They wanted them to end in foreclosures because they had them backed up by credit-default swaps, up to 30 to 1. It was a giant insurance scam.”

But, fundamentally, does the borrower have a moral obligation to stay in an upside down house? Two wrongs don’t make a right.

“You’re asking the wrong fucking question,” said the heated attorney. “The real question is, should we hang these fuckers or just put them in prison at hard labor for the rest of their fucking lives?”