Down the Up Escalator

by Barbara Garson

  In the 1990s, Karsten did just what young people were encouraged to do: he “invested in himself.” In the course of four years of undergraduate and one year of grad school, he amassed a BA, an MFA, and $85,000 in student loans.

  But he’d paid that down to $45,000 during his first teaching job. It was at a boarding school where he had virtually no living expenses. Soon his teaching salary went up, but he had household expenses and dropped his student loan payments down to $500 a month. At that rate they’ll be paid off in seventeen years.

  It irks Karsten when he’s visited by friends from other countries who graduate debt-free and can take a year off to explore the world. It also bothers him that while the Fed keeps interest rates low, he still pays 8.25 percent on his loan. “I’m basically paying twice as much as current students for a product that is guaranteed by the government. What a deal for the banks.” Unlike most other loans, student loans are not allowed to be refinanced and can’t be discharged in bankruptcy. “Think if you could lend your money out at 8.25 percent and know that unless the U.S. government goes bankrupt, you’re not going to lose a thing.”

  A few years earlier Congress considered legislation that would allow student loans to be refinanced like mortgage and other loans, without losing their government guarantees. The proposal was lobbied away by lenders. So student borrowers of Karsten’s vintage were paying up to 8.5 percent while banks got their funds at less than .5 percent. I can see why that annoys him.

  Still, $500 a month on a $50,000-a-year job might be regarded as a modest agent’s fee. How sad to think of one’s education in such a mercenary way. Still, to me, Karsten’s debt seemed manageable.

  Then he happened to mention something about his house in Washington, D.C. “Wait, aren’t you calling from Minneapolis?”

  That’s when I learned that the couple had done something else normal for young families. Once they were “occupationally settled,” Karsten and Anita bought a house.

  “We were both teaching in D.C. private schools in June 2006. We were both making somewhere in the fifties at that point, so a little over $100,000 combined. But we had no idea what we could afford. So before we started house hunting, we went to Countrywide—one of those big loan companies that caused all these problems.

  “The mortgage broker took down our information, went through all their rigmarole, and said we could borrow $475,000. Which, I mean, in retrospect, it’s preposterous.

  “We didn’t have a real estate agent at the time, so the mortgage broker said, ‘Oh, I have a really close friend who is a great agent. Let me give her your name.” (In many ways Karsten is as innocent as his appealing smile.) “The agent took us around the Washington area and did not show us a single house under $400,000.

  “We told her that we wanted to pay $250,000, and she showed us one that was $399,000. But it got into a bidding war and sold for $426,000. Basically, she just wanted to show us that $400,000 was a normal price.

  “Anyway, I found a listing myself online just outside of the city. It was listed at 299. I went myself, I looked around and called Anita and I said, ‘I think we should get it inspected and put in an offer.’ One of the things the realtor didn’t like about that house was that they were only offering 1.5 percent commission to the buying agent. She basically refused to write a contract unless we upped that to 2.5 percent, which is why we bought a $299,000 house for $301,500.

  “So basically we bought a house for $300,000 that had sold ten years earlier for $45,000 and was in need of a lot of work.”

  Over the next five years Karsten and Anita put in the work, paint, lumber, and love that made them happy with their house. But they began to be unhappy with their jobs. And when their daughter was born, they realized that they’d rather raise their child somewhere else.

  “We saw when we started job hunting that it was pretty much impossible for two performing arts teachers to find work at the same time in the same city.” But when Anita got a permanent job in Minneapolis and Karsten was offered a one-year sabbatical replacement spot, “We committed to coming to Minneapolis and went to put the house on the market.”

  That’s when they grasped what had been going on in the outside world while they were busy teaching and starting a family.

  “We had an agent over; he was actually the selling agent when we bought the house. He came, looked at all the upgrades we made, and said, ‘There’s no chance you’re going to get more than $200, 000 for this.’

  “Funny thing,” Karsten observed, “the Washington area didn’t get hit that hard in the crash. There are parts of Montgomery and Fairfax Counties that are now back above their 2006 high. But we had bought in a transitional neighborhood. It’s a really nice block with lovely neighbors and an organic co-op. But once a year there was a shooting on a block behind our house.”

  “It didn’t transition fast enough?” I asked.

  “It took a dive. Look it up if you like. The zip code is____. In the six months before we went to sell, not a single house in that zip code had sold that wasn’t either a foreclosure or a short sale.” In a short sale you sell a house for below the mortgage debt with the bank’s agreement that it will accept the sum you get as full payment. Short sales are notoriously difficult to negotiate with banks.

  At that moment the Linds had a buyer who’d agreed to pay $115,000 for the house, but his commitment ran out in three weeks. They were waiting for approval from two banks that jointly held the mortgages. They had tentative approval from one.

  “While we’re waiting, we’re paying mortgage, utilities, insurance, taxes in D.C., which comes to $3,000, and $1,100 rent in Minneapolis and going further into debt each month.”

  “Who’s lending you all that money?” I asked.

  “Credit cards,” he answered.

  “Oh,” I said.

  Karsten’s expression acknowledged the dubiousness of that recourse. The couple already had $30,000 in credit card debt. “Twelve or 13 percent, I think,” Karsten said in answer to my query about his interest rate. He called off camera to confirm those numbers with his wife. But no matter how high the interest it was imperative, they felt, that they keep paying on the D.C. house.

  “Our lawyer says this short sale, by itself, will knock about 100 points off our credit scores—between 100 and 150. If you also don’t pay your mortgage during the six months leading up to your short sale, that knocks another 200 points off your credit. So if we stopped paying our mortgage, we’d be looking at a 300-point ding in our credit, which would decimate our chance of ever getting another mortgage. So we’re doing our best to keep paying till our short sale is approved, and we’ll only take about a 100-point ding.”

  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?

  Chapter Seven

  UNDERWATER AND UP THE CREEK

  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 educ
ational 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.