House of Cards: The Faces Behind Foreclosures
By DAVID VON DREHLE David Von Drehle
Fri Feb 27, 4:00 am ET
Jeff Wagoner is a bankruptcy attorney in Kansas City, Mo., with the brush-cut hair and clear eyes of a former Navy aviator. From his office in a tower on a hill, he can see miles of prairie and a world of hurt. Wagoner's clients (and he has plenty these days) range from folks who had no business ever buying a house to folks freshly fired from executive suites. Based on his survey of the economic wreckage, Wagoner's conclusion is that even the slightest miscalculation or change in circumstances could send another customer through his door: "There are not a lot of second chances out there right now."
We have entered the one-strike-and-you're-out era. One lost job. One medical emergency. One bad risk or misjudgment of the heart. "I've seen more people lose their houses in the past year than in the previous nine years put together," Wagoner said one recent afternoon, as gray skies hung low over the vast horizon. "It sounds crazy," he continued, "but I'd say unless you're making over $350,000 a year, the more you're paid, the more vulnerable you are. If you lose a job, you're going to have a hard time finding another that pays as much. Or maybe you need to move to find that new job, but you're stuck with a house you can't sell. Or maybe your marriage breaks up, and you have to liquidate your assets at today's prices." (Special Report: "25 People to Blame for the Financial Crisis")
In the one-strike economy, it's not just the subprime suckers going down. Trouble stretches beyond the province of liar loans, condo-flipping and the collateralized debt obligations that no one fully understands. A hard rain now falls on the just as well as the unjust. Consumers have stopped spending, factories have stopped operating, employers have stopped hiring - and home values continue to fall. For millions of people, the margin between getting by and getting buried is becoming as thin and as bloody as a razor blade.
The number of homeowners headed toward foreclosure is rising so quickly that "you need somebody to project what the projections will be - because they're just changing so fast," said Lindley Higgins, the applied-research manager at NeighborWorks America, an urban revitalization project created by Congress. A decade ago, Higgins said, 400,000 foreclosures nationwide was a busy year. America may see 2.5 million in 2009.
"The other day," Wagoner says, "I had a visit from a corporate executive who moved to town and bought a house." Which should be fine; a big wheel need not fear a big mortgage. But this guy's one strike was moving from Florida, where the real estate market is so screwed up that judges in one county are hearing nearly 1,000 foreclosure cases a day. Mr. Exec was stuck with his old house too, and that one was dragging him down, down - until there was nothing left to do but pay a visit to the bankruptcy attorney. " I would bet a majority of people are only a few paychecks away from being in this office," says Brent Westbrook, a partner in Wagoner's firm.
President Barack Obama described this stark reality in his recent speech rolling out an expensive plan to keep the housing market from sinking further. Picture "a young family," he suggested. "They save up. They search. They choose a home that feels like the perfect place to start a life. They secure a fixed-rate mortgage at a reasonable rate, make a down payment, and make their mortgage payments each month. They are as responsible as anyone could ask them to be." (Read: "Will President Obama's New Housing Plan Work?")
Then one thing goes wrong. "Perhaps someone loses a job in the latest round of layoffs, one of more than 3.5 million jobs lost since this recession began," Obama said. "Or maybe a child gets sick, or a spouse has his or her hours cut. In the past, if you found yourself in a situation like this, you could have sold your home and bought a smaller one with more affordable payments. Or you could have refinanced your home at a lower rate. But today home values have fallen so sharply that even if you make a large down payment, the current value of your mortgage may still be higher than the current value of your house. So no bank will return your calls, and no sale will return your investment. You can't afford to leave, and you can't afford to stay."
This is a harrowing experience, tightrope walking over the financial abyss. American Dreamers are optimistic, but few can tread that wire now without looking down in panic. We're geared to believe that risk begets reward and our tomorrows are brighter than our todays. One-strike-and-you're-out is a neck-snapping reversal for a culture accustomed to assuming that fate is a welcome friend.
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Stay Well, or Lose It All
What's an American dream story without a lucky break? Joseph Zachery's took the form of a mysterious stranger who pulled to the side of the road one day in 1986. An older white guy, slowing his car to ask a strapping black teenager why he was running down the street. Zachery, who was 19 at the time, could think of no benign reason why this man might be interested in him, but instead of ignoring the driver and running on, he gasped out an answer. His car wouldn't start, and he was due downtown to take a test for a job with the fire department. If he was late, he'd be locked out, and 50 blocks was a long way to run, so he was almost certainly going to be late - but he had to try.
Climb in, said the man. Zachery swallowed his misgivings, and away they went. They arrived at the test site with moments to spare. As Zachery bolted from the car, the man called out, with eerie conviction, "The job is yours." How did he know?
Zachery still wonders, as he reflects on the upward path his life followed from that chance encounter. His was the textbook tale: a foot in the door, some hard work and enterprise, and another American gets ahead. Twenty-two years after his lucky break, Zachery was a veteran firefighter earning north of $60,000. Like most firefighters, he always had a second job - delivering pizzas, driving a street sweeper, installing meters for the power company. Eventually he started his own business, demolishing houses condemned by the city. He supported an aging mother, a son in college, a new wife and a stately old house on a large lot with big trees in the center of Kansas City. The home cost him about $100,000. It needed renovation, which Zachery planned to do himself, one room at a time. As home values rose, he used his equity to buy the heavy machinery required for his business. He was pursuing the ideal of the self-made entrepreneur, but his ambition left him dangerously exposed when the housing market soured, because he owed nearly twice the original purchase price.
Then chance paid another visit.
It was July 13, 2007, Zachery's 41st birthday. He was working in the hazardous-materials unit, and a call came in from a local hospital: chemical spill. Normally, Zachery would have been behind the wheel of the truck, but on that day, he was acting captain, so he rode in the passenger seat. Siren blaring, lights flashing, horn honking - none of it registered with the driver of a city trash truck, who turned into the path of the speeding haz-mat unit. The crash folded the front of Zachery's vehicle, and his head spiderwebbed the windshield.
The aftermath played out in slow motion - and is playing out still. Zachery suffers from pain in his back and neck. There are unexplained memory lapses, lost initiative, mood swings and depression - symptoms that eventually led doctors to a diagnosis of postconcussion syndrome. In time, the fire department placed Zachery on full disability, but not before a doctor assigned to his case by the city prescribed a course of electroshock treatments that left him unable to remember his own neighborhood.
His finances began to fall apart. As he shuttled from one doctor to the next, his demolition business went into the tank. He was in no condition to rip old houses apart, and even if he had been, the soft economy was suffocating. Having pledged his home equity as collateral, now he was forced to sell his demolition equipment at a loss. He fell behind on his mortgage payments of $1,647 per month. His son had to leave college in Virginia to attend a school near home. His mother passed away.
Zachery showed up for a recent interview at one of Kansas City's barbecue temples carrying a large box full of medical records. But no amount of documentation could resolve his bewilderment over what was happening to him. "You play by the rules, then when you need them, the rules change," he said. "I had an occupation. I was at the top of the food chain, keeping my head above water. Then I happened to show up for work on my birthday - and everything since then has just spiraled."
The math looks like this, he said: his pension pays him a little more than $50,000 before taxes, out of which he pays about $800 a month for medical insurance. That leaves some $2,400 a month, he said, for his mortgage and other expenses. He has about $15,000 in unpaid medical bills and a similar amount in missed house payments. He has no significant assets; his home equity is gone. Houses comparable to his in more desirable neighborhoods are selling for less than the amount he owes to the Bank of New York Mellon. As the saying goes, Zachery is under water. It was this math that led him to Wagoner's bankruptcy office. (See pictures of the top 10 scared traders.)
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Late last year, Zachery told me, he received an invitation from the company that services his mortgage to apply for a loan modification. He has a 30-year, fixed-rate mortgage at 8.99% interest, at a time when the Federal Reserve is trying to push rates below 5%. But after faxing his paperwork and waiting for several weeks, Zachery received the same invitation again. Evidently his application had been lost. Zachery's documents had vanished in a flood of urgent requests for mortgage relief. So he sent his materials a second time, but instead of an answer from the service company, he received a letter from lawyers for the bank. This, too, is typical, said Wagoner. Modifications and foreclosures often proceed simultaneously along separate bureaucratic paths, so that the bank's customer-service face is encouraging even as the legal arm is threatening.
In any event, the nub of the message from the lawyers was that Zachery must pay up or get out: "Should you wish to retain the property," the letter declared in boldface type, "demand is hereby made upon you for immediate payment of $188,101.57 plus interest." Zachery immediately called the modification number, only to be told once again that his application was missing. The woman was polite but unyielding as she informed Zachery that his home was scheduled for sale on March 20 on the steps of the Jackson County Courthouse. "And then," he says, "she asked me in a nice voice, 'Is there anything else I can help you with today?'"
Since the accident, Zachery's renovations have stalled. He has fallen behind on the yard work and hasn't gotten around to hanging his father's portrait - a striking shot of a muscular man in dark briefs. Jerome Zachery wrestled professionally in the 1950s before settling into family life. The champ used to tell his sons, "As long as you have a place to keep the dew off your head, you're O.K." Facing foreclosure, Joseph Zachery worries about pride more than shelter, though. He has rented a storage unit so that his belongings will never be dragged to the curb. "If I have to leave," he said, "I want to leave with some dignity."
Hard Work Is Not Enough
A couple of facts stand out when you meet Paula Stevens for the first time. No. 1: she is not afraid of work. She has done everything from catering sandwiches for rock bands to light landscaping for rich old ladies. Her rÉsumÉ starts at age 9 and runs to 56 without significant interruption. Stevens has stories from inside the health-care industry, the hospitality industry, the computer industry, the casino industry. She knows the day shift, and she knows the night shift. Also, she could make conversation with a statue. That's Fact No. 2.
Her break in life - the twist that put her on the path to a snug house in the suburbs with a vaulted living-room ceiling - was the product of these two qualities, the work ethic and the gift of gab. As a free-spirited young woman, Stevens liked working in hip restaurants and bars where musicians would hang out when their tours passed through Kansas City. Bonnie Raitt, the Doobie Brothers. "Those boys from Lynyrd Skynyrd," as she now calls them, arrived after closing time at a joint where she worked and smashed some things when she refused to serve them - then came back the next day to apologize. Fun times. But life goes on, and the free spirit grew into a divorced mom of two daughters. Stevens decided she should find a job with better hours and benefits. There was just one problem: no college degree. A friend told her about a job processing medical claims. Stevens talked her way into the interview and just kept talking as the boss looked at her quizzically. Suddenly something clicked in his head, and he said, "Aren't you that girl from the deli?" He had met her years earlier, maybe with a sandwich in her hands, and he hadn't forgotten.
It wasn't a Wall Street bonus or a corner office, but Stevens' lucky break gave her enough to raise her kids and put a roof over the head of any friend or relative who happened to hit a rough patch. She left that job after eight years for the Kansas City office of Gateway computers, which was then a booming enterprise with a Midwestern flavor. There, Stevens rose through the ranks from customer service into sales. In her best year, she racked up so much overtime that she outearned her supervisor, grossing some $42,000 - not far from the middle of the pack of U.S. incomes. And if she sometimes spent too freely on clothes and gear for her girls, she was able to balance the books by drawing on her equity in the home she bought in 1995.
See pictures of the global financial crisis.
For constant business updates, go to 24/7wallst.com.
"I always managed to make ends meet," Stevens said over breakfast at a burned-toast diner near her home in Independence, Mo. "I was working day and night, but that's what happens in this country if you're not educated. Anyway, I'm not afraid of hard work."
Along came the curveball. Gateway's personal computers, marketed in cow-spotted boxes, lost their appeal. Sales tumbled; stores closed. The company's stock price plummeted. Fewer customers meant less customer support. When the Kansas City operation finally closed in 2006, Stevens was among the last employees let go. Now, for the first time in her life, she's finding it difficult to talk her way into a new job.
"It's a hard time to be 56, going on 57, and looking for work," she said matter-of-factly. "They're not allowed to say it, but you see it in their eyes: Why hire an older person who might have some medical issue when there are young people behind you in a line that goes clear out the door? I really can't blame them. Businesses are struggling, and insurance is a big problem." That's when she can manage a face-to-face encounter at all. Many employers take only online applications nowadays, a fact that discounts her charm while highlighting her lack of education. "You can't go in and sell yourself anymore," she lamented. "You just send your rÉsumÉ into cyberspace and hope that it works."
In the roughly 14 years that she has owned her home, Stevens refinanced three times - nothing crazy - but the bad news for her was that the third time was very near the peak of the real estate bubble. At that time, in 2005, her 3,000-sq.-ft. house was appraised at $185,000; she now owes about $159,000 on it. Real estate agents have advised her that she could not sell it for more than $145,000. Her debt is actually two loans, the larger of which was recently modified from an adjustable rate to a fixed-rate note at 9% interest. The second loan charges over 10%, and the two payments combined are slightly more than $1,400 per month. (Read: "How Stressed Is Your Bank?")
With only a part-time job - she visits office-supply stores and makes sure that the floor-model printers have enough paper and ink for demonstrations - Stevens found she could pay for food and utilities, or she could pay the mortgage. Not both. After she fell four months behind on her payments, the bank moved to foreclose. Stevens briefly considered letting the bank have the house, but her oldest daughter, Maggie, 28, has a new baby and is enrolled in nursing school. "I just have to get her through that," Stevens explained. So after several sleepless nights, she decided to go see Wagoner and file for bankruptcy, which stalled the foreclosure process. Now Stevens is hoping that Obama's new program will persuade the mortgage company to reduce her debt to the current value of the house.
And her job search continues. "It takes $14 per hour for me to meet my bills," she said. "That's what I was making at Gateway when I was laid off. But no one wants to pay that much, so I will be starting lower and hoping for a raise. That's how it works. You just keep starting over." A few months back, Stevens had a lead on a customer service job with a large, venerable company. The pay wasn't great; the commute was long; gas prices were high - yet Stevens had just about concluded it was the best she could do. The company was called Citigroup; they're not hiring anymore. (Read: "Will Citigroup Survive?")
The Brutal Game
There are about 75 million homeowners in America, according to the U.S. census. The latest gloomy estimates suggest that upwards of 6.4 million homes are at risk of sinking into foreclosure by the end of 2012. That number has no precedent, and its impact is only beginning to register. Populist pundits have struck a nerve with angry denunciations of Obama's plan. "See if we really want to subsidize the losers' mortgages," CNBC's Rick Santelli demanded - and the gut level reaction of millions of taxpayers across the country was, unquestionably, no. Not if we have a choice. (Read: "How to Fix the Housing Market?")
It's a brutal game, though, in which a single strike makes you a loser. And that brutality explains another strain of anger beginning to bubble up from the newly bankrupted. People like Paula Stevens and Joseph Zachery weren't flipping houses or lying on their loan applications. They didn't pile up mountains of credit-card debt. They worked hard for what they had and shared their modest portions with others. Each readily admits to making occasional mistakes with money, but even Warren Buffett has made occasional mistakes with money. Their bitterness stems from a feeling that they've held up their end of the social contract, but now the terms of the deal have been rewritten by malign forces. "It's a different world and a different time," Stevens said ruefully. "Even if you work hard you get laid off." Zachery put it this way: "It's not the United States anymore. Those at the top have sold out the bottom for money."
Both the rant and the laments are too broad. Not everyone who has fallen behind on a mortgage is a loser complicit in the housing collapse. And not every solvent American has broken faith with those who are struggling. Obama, in presenting his mortgage plan, promised to distinguish between the sinners and those unlucky bystanders dragged down by the economy's undertow. His lifeline, he insisted, will not "rescue the unscrupulous or irresponsible." Delivering on that promise is vital to Obama's future, because hope is a tough sell to people who believe that only the wicked prosper. And though it's not easy preaching cooperation when the public is feeling tapped out and TARPed to death, Obama may not get a second chance.
- With reporting by Maya Curry |
