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No American Dream for Underwater Homeowners

When Randy Wood purchased his new four-bedroom house on this one-time floodplain in Plumas Lake, Calif., three years ago, developers told him that new levees should protect the subdivision from being underwater.

Unfortunately, they weren’t referring to a cascade of plummeting property values.

Today, after the California housing market has been inundated by the collapse of home values, Wood’s dream home is deeply underwater—even as California suffers through a worrisome drought. Like the vast majority of his 2,700 neighbors in this new subdivision, Wood figures he owes the bank about $100,000 more than his property is now actually worth.

“We’ve gone from being underwater to being underwater,” said Wood, 60, who has been forced to stop working after becoming disabled. He was told his living room would have been 12 feet underwater during the famous New Year’s flood of 1997. “We’ll never see a return on our investment. We were hoping to make a little profit to help our retirement … but now we have to look at it as if we’re paying an enormous rent.”

Owning this Spanish-style home with its large backyard had always represented the American dream to Wood, a longtime renter. Now, he said with some bitterness as he tended to his colorful flower bed, “it feels as if some big lie was told somewhere along the line. I guess we should have had more sense.”

Record holder for underwater homes

Welcome to the epicenter of the American housing crisis. In no county in America are more mortgages “upside down” than in Yuba County, about 35 miles north of the state capital, Sacramento, in California’s Central Valley. According to SMR Research, a New Jersey-based consumer lending research firm, 60.3 percent of all borrowers in this county owe more than their property is worth.

Across the nation, some 22.5 percent of mortgage holders—one out of every five borrowers—owe more on their homes to the bank than the property is now worth, according to Stuart Feldstein, SMR’s president.

“I’m sure there are a lot of very unhappy people in the county,” Feldstein said in a telephone interview. “There are likely to be more foreclosures in that county than in others, and it’s likely to be the epicenter of personal disappointment,” since, for most Americans, homes tend to be the principal retirement investment, ahead of stocks and bonds. And the crisis is worse for older Americans, who have less time to recover from their economic misfortune.

Marina Bolshakoff, 64, a legal assistant, hoped she could retire later this year. Now, unless she can reduce payments on the house for which she and her husband paid $410,000, she doesn’t see how she can quit.

“It makes you kind of sick, what’s happening,” Bolshakoff said. “Of course, I lost money in my 401(k) retirement plan, and now we have no equity in our home. I’m at a loss as to what to do … I don’t want to be working until I’m 90 years old.”

Three years ago when the Plumas Lake subdivision was being carved up from pastureland, the hunger for housing was so intense that prices were being bid up by $7,500 per month, real estate agents recall.

Most of those who moved to this development were people like Wood, who had been priced out of the housing market in Sacramento and were willing to endure the 45-minute commute to live in a community of culs-de-sac, spacious yards, new schools and granite countertops in the eat-in kitchens.

John Taylor, 65, once helped market these homes for the consortium of builders who planned to erect more than 10,000 houses in Plumas Lake. He paid $500,000 for a home he figures is now perhaps worth $270,000 and concedes he may never be able to move to that golf course home he had been eying east of Sacramento.

Market collapse

“The market’s gone to hell,” said Taylor, who can look across from his garage at an empty tract of pastureland where houses once were supposed to sprout. “They used to be selling 20 homes a week here.” Now there are hardly any for-sale signs, he says.

Paul Woods, 60, a retired supervisor for the U.S. Postal Service, figures more than half of his block has turned over in the two years since he arrived. Neighbors who lost their houses to the bank have simply moved away. “I kick myself sometimes, because if I’d have waited a bit, I would have gotten a much better price. But what can you do? It is what it is.” Unlike many others, Woods put a substantial amount down when he bought the house, so isn’t worried about being able to make the payments.

That isn’t true for the majority, says Summer Jackson, 50, a former real estate agent, who has since started a new business providing food and other services at home to aging residents. The collapse of the housing market, she says, represents “the number one crisis for older Americans around here. The debt on these houses is so huge, and the value is just gone.”

An opportunity for new buyers

Carla Wilcoxen, a real estate agent in Plumas Lake, says the majority of the activity in the area these days revolves around foreclosures and so-called short sales—where the bank agrees to sell the home for less than the value of the old mortgage. New buyers are benefiting, she says, because they are buying at significantly lower prices.

She herself says she was inadequately informed when she and her husband bought their $350,000 house using an “interest only” loan—and then watched the value of the house plummet.

“I didn’t know what questions to ask,” says Wilcoxen, who subsequently studied up and got a real estate license—and also refinanced her mortgage into a fixed-rate loan. Many buyers were given large financial incentives to borrow from the builders’ own finance arms when they sought their mortgages—and those finance divisions didn’t ask too many questions when agreeing to lend the money.

“Everybody was in a frenzy,” said her business partner, Mary Jane Kelley. “There was a waiting list to get a home, and you were worried that you wouldn’t get a chance to buy.” Kelley, 49, and her husband, 56, figure they have seen $150,000 in equity evaporate in the last two years. “We love it here,” she said, so they are going to stay and wait it out. Wilcoxen had made an even bolder bet. She and her husband purchased a second home at newly reduced prices and turned their original home into a rental.

Homeowners now “upside down” on their mortgage essentially face three choices: Bite the bullet and keep paying the loan, in hopes property values someday rebound; walk away from the home and endure catastrophic damage to their credit; or renegotiate with the lender.

Renegotiating loans not so easy

The Obama administration recently announced a series of new initiatives to get banks to aggressively modify home loans, so that monthly payments won’t take more than 31 percent of a family’s monthly income. But getting lenders to actually recognize that loans on their books overstate the current value of the property isn’t always so easy.

Some agents here, like Michelle Haney of Keller Williams Realty, say that bankers seem more interested in reaping the mortgage payment insurance they collect from a defaulting loan than they are in preventing a foreclosure. “It seems like they want to get paid twice,” she says.

Many older residents like Bolshakoff are overwhelmed by the rising tide of foreclosures, which damages the home values of an entire neighborhood. She is distressed that so many neighbors put zero money down on their homes and then walked away when they couldn’t make the payments. And she’s upset with real estate investors who thought they could flip houses quickly and earn big rewards. “We put our money down and we keep paying, but there are so many who just walked away that it makes me angry,” Bolshakoff said. “These lenders who let it happen, the investors who thought they’d just flip the houses over—it was all greed. They allowed this to happen.”

Many here acknowledge trying to restructure their mortgages or refinance their loans, but they find lenders are not terribly eager to eat the losses, or are so swamped with calls that no one is available with whom to negotiate. Others have given up, like Gary Watkins, 61, who just lost his job in Sacramento, is moving in with his daughter and son-in-law, who also live in the community.

Jackson recalls that when she worked as a real estate agent in the county, she actively discouraged certain clients from buying houses she didn’t think they could afford. “I’d look ’em straight in the eye and say, ‘Do you really think you can pay $3,000 every month to keep a house?’ A lot of my colleagues didn’t bother.”

Now, she says, radical changes will be needed to clean up the real estate debacle before it destroys the entire economy. “We broke all the rules getting into this mess, so we’re going to have to break a lot of them getting out of it.” 

Michael Zielenziger writes about business and the economy. He lives in the San Francisco Bay area.


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