Caveat Venditor1 As of the end of January, 2010, our 1,078 square foot home’s value near downtown 2 Phoenix, Arizona is $108,500, a numbing drop from its original purchase price of $278,000 in June 2006. We have “owned” our home now for roughly 1,340 days, that $169,500 decrease in value representing a drop of $126.49 every day since moving in; our home now worth 39% of its initial “value”. “Owned” in that we must also consider our mortgage of 3 two interest-only loans (80% and 20% with zero down payment ) at approximately $56 a day for a vague total representation of cost at $182 a day. Ten months earlier, in March 2009, the architecture office I had been working with for seven years closed its Phoenix office, my wife and I having moved to Arizona to start the office’s first satellite location. Fairly aware of and assuming its closure, I was probably more ready than most - personal website nearly complete, resume fully redesigned and updated, portfolio ready to print. Several others from our office, let go several months earlier, were still without jobs. For the first few months I looked hard at other Phoenix architecture offices, scouring company websites for design directors’ names to 4 send CV’s . Feeling fortunate at first, several interviews and lunches arranged - it seems most interviewers were looking for ways to pass an hour, have an ear to describe how dire their firm’s condition is, maybe hear firsthand how poorly other offices are doing and/or most likely to begin polishing up their own contact network when they are in the same situation a few months from then. Months pass, without the architectural job my body and mind had become used to having, time quickens even more. Phoenix’s coffee shops, multiplying monthly, are overfilled with out of work architects and designers. Days skip, weeks becoming months. The three-month emergency fund period most financial advisors recommend is quickly crossed off our calendars. Half of the employer contacts listed on firms’ hiring websites are no longer working there. Unfortunately these conditions are nothing new, not surprising, and potentially a new normal. Unemployment in construction 5 related jobs sits at 20% compared to national unemployment levels of 10% according to the Bureau of Labor Statistics. Seemingly, any office that mentions potential future work foresees only a flexible network of independent contractors and consultants expanding and contracting as work demands. Out of university and working for almost a decade now, contributing the maximum allowable to 401k and focusing our savings on retirement accounts, our cash reserves are 6 7 minimal. Those accounts quickly evaporate. Seeing the obvious trend, one starts
Latin for “Let the Seller Beware”
Zillow.com’s “Zestimate” is the sole estimate of the home’s value in this case as I have had three different real estate agent’s fail to return correspondence after agreeing to evaluate our home, certainly though it has decreased dramatically in value. 3
We will eventually be very glad our down payment was nothing.
Here begins the underground art of email address identification - once the receptionist denies revealing the address; one then blind carbon copies every potential first name/initial/last name/initial combination @ the companies domain name. 5
For whatever it’s worth I have heard architecture/design unemployment in Phoenix may be as high as 40%
Not even able to keep up with the cost of inflation; and like everyone else, 0% return on investment since graduating university in 2000 would have been the smartest investment possible. 7
There goes the Porsche for sale, bought at the height of profit sharing and year end bonuses.
reviewing options - staying and attempting to make payments would be very difficult without my consistent income. Even so, taking our current, basis value of $108,500 - even at a healthy real-estate market’s typical appreciation of 8% a year it would take almost 13 years to regain the original value of our home. That of course is just one model but it is unfortunately, actually a rather optimistic outlook. Keeping the home and leasing is a losing proposition, similar homes are renting in our neighborhood for more than $1,000 less than our monthly mortgage. Refinancing is an unlikely option, we have heard numerous stories and read countless articles on the difficulties of refinancing, as the 8 New York Times reports a “Paper Avalanche” burying the possibility for refinancing based on the sheer volume of refinance requests. Our real-estate attorney has told us less than 16% of short sale and 3% of deed-in-lieu-of-foreclosure attempts in Phoenix are successfully transacted. Selling is certainly not an option with the home’s value 40% of the original loan’s value. It quickly becomes clear that we must look at the possibility and outcomes of foreclosure. Concerning the moral and ethical implications in deciding to foreclose, thus breaking our “promise to pay”, we remind ourselves that this is a secured loan by the contact we signed. It is secured by our home and the banks ability to take it back, regardless of its increase or decrease in value like any other investment. Other concerns typically pertain to the negative effect on the neighborhood. Check. It’s been affected. In our case we are late to the party, dozens of homes in our neighborhood have already been through foreclosure - sat vacant, had their copper stripped, air conditioning units removed and had been re-inhabited at times by both homeless and adolescent vandals. This 9 is in just one home across the street from us. Arizona in particular is in a potentially catastrophic situation - according to the Wall Street Journal at the end of the third quarter of 2009, 47.9% of Arizona homeowners 10 with mortgages had negative equity in their homes (second to Nevada’s 65% having 11 negative equity share) with that number sure to have grown into 2010. Arizona’s total Loan-to-Value ratio is also the second highest among states, illustrating exactly how deep values have dropped. Arizona has one of the highest percentages of subprime loans to standard loans; and what made our decision to walk away both an easy one and relative 12 necessity - Arizona is one of a handful of states with nonrecourse/anti-deficiency laws. With nonrecourse loans, the only collateral secured is the actual property and the lender may not pursue personal assets to offset the difference in the original value of the loan and the current value of the loan/property. A major source of the problem is actually the other main determinant in our allowing to/decision to foreclose - subprime loans and in particular the availability of zero-down, interest-only loans. Had our bank remained with
Goodman, Peter S., “Paper Avalanche Buries Plan to Stem Foreclosures” New York Times, http://www.nytimes.com/2009/06/29/business/29loanmod.html (June 28, 2009) A few months prior to our decision to foreclose - needing to change bank account numbers for automatic payment withdrawal was a painful process, taking weeks of paperwork, checks written for payment and analog mail delivery. Oddly, two weeks after changing our bank account numbers (our official beginning to foreclosure) we received a letter describing the ease of updating bank account information in case something has changed “Online or Just a few minutes on the phone with one of our helpful representatives” or something like that. 9 This home, the exact square footage and floor plan as our home, sold a few months ago for $56,000 10
The Wall Street Journal, “In Deep: Underwater Borrowers” The Wall Street Journal, http://s.wsj.net/public/resources/documents/info-NEGATIVE_EQUITY_0911.html (November 24, 2009) 11
Also according to The Wall Street Journal article in the above footnote, Nevada is the only state where the Mortgage Debt Outstanding is greater than the Total Property Value 12
Though anti-deficiency laws vary subtly among states, the states with the most basic nonrecourse laws are: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, Washington
a more typical 10-20% down payment as part of the loan, we would have some substantiation for the claim of ownership, specifically nearly $56,000 we would stand to lose with our home. By living in Arizona (though the major impetus for our current economic situation) and by the bank’s rewriting of its own rules, an ideal situation was created for us to 13 give our home back to the bank. Unlike the negative economic factors combining to create “The Perfect Storm”, our storm appears more like one appealing to the Old West’s Pecos Bill - winds ready to be harnessed and power us to another place. I would like to think of ourselves as semi-strategic defaulters, reluctant walkaways; we could continue to make our mortgage payments, though doing so at a much larger than comfortable percentage of our monthly income. Still no architectural offices are hiring in Phoenix. Since purchasing our home, with our adjustable mortgage, our monthly payment has actually decreased $300. We don’t have a second home or investment 14 properties; our pursuit of the “American dream of home ownership” was not one of financial indulgence and material exorbitance. We, like many others, just didn’t think 15 there was an end in sight. Gladly, in our $200 hour-long appointment with a real-estate attorney, we discovered the Mortgage Forgiveness Debt Relief Act of 2007. Typically after foreclosure the home is sold at auction and in a down market the property is usually sold at a loss to the lender. In all states that loss is then transferred to the previous homeowner and treated by the IRS as “forgiven debt” and is income subject to income tax. With the Debt 16 Forgiveness Act, through 2012 this “income” will not be subject to tax. The United States government forgives us. Somewhat unbelievably and very interestingly - before our attorney meeting, we had never heard of the Act. In the same way that we had never heard about the Debt Forgiveness Act, it seems a large part of the system relies on just that, that most people don’t understand the nuances of real-estate transactions nor the true consequences of foreclosures, that moral and ethical double-standards are put forefront by those standing to lose. Because of our bank’s allowing for a zero-downpayment loan, we stand to lose almost nothing financially. Because of Arizona’s nonrecourse loan system, we are protected financially in the future. Because of the US government, we will owe nothing in the future. Credit rating and mortgage companies are scrambling to formulate the algorithms
“Giving our home back to the bank” sounds better and more literally appropriate than “Walking away from our financial obligations”, as we realize we have never “owned” our house and the real obligation has always been to simply pay or have the home taken back by the bank and suffer the tax and credit consequences. 14
We were really just tired of such poorly designed apartment complexes: beige-textured, paper-thin walls, beige carpeting, loud neighbors having sex or arguing, drunken late nights from the bar-goers, vandalism, cars being broken into, untended (or just disregarded) pets defecating on sidewalks in their neat little piles. Yes, with that we went searching for our American Dream. 15
And we certainly couldn’t see ourselves having to move back into the same apartment complex we just left, which had just been converted to condominiums and selling for the same amount we purchased our house for. I am still looking for information discussing the repercussions of having removed all the renters to convert to condos which eventually did not sell. 16
The Mortgage Forgiveness Debt Relief Act was introduced in Congress on September 25, 2007, and became law on December 20, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying to debts discharged in calendar year 2007 through 2009. (With the Emergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through calendar year 2012.) The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.
to identify us and these new levels of risk to calculate into future loans - the same risks unaccounted for (or simply overlooked) before the housing market collapse. We haven’t paid any principal, our home’s value is down 60% and fortunately the drop in our 17 credit rating for a few years won’t affect us. The decision was simple. The decision was purely rational and financial, perceived as a simple business decision, not allowing ethics into our decision the same way ethics are never a part of any bank’s decision to provide any type of loan - numbers plugged into an equation. Certainly if we had made a 10% or 20% down payment on our home, our decision would be more difficult. If future wages, retirement funds and assets were in jeopardy our decision would be more difficult. If we were looking at more than $30,000 to $40,000 owed in taxes based on how much our home actually sold at auction - our decision would be much more difficult. Difficult also in that there is still no architectural work in Phoenix. On the day that our Notice of Trustee’s Sale sale was recorded with the county, 389 other foreclosure proceedings were filed. Some of the original loan values were into the millions, some as low as $4,000. Checking other random days through the month, I found between 300-400 notices filed each day, possibly only limited by the length of time it takes to process them and an 8-hour workday. In 2009 there were a record 41,000 singlefamily home foreclosures in the Phoenix area. A new Realty Studies report from the Arizona State University’s W.P. Carey School of Business and ASU economist Jay Butler 18 also said there were 4,000 foreclosures in Phoenix in December and 3,000 in November. Just two days after our notice was filed, our mailbox began filling with concerned 19 offers of help. (We only found out it was officially filed because these letters started coming.) With the amount of junk mail19 delivered daily we are certainly used to recycling it automatically without much attention. Mortgage assistance companies have answered that problem well in various ways. Most of the mail is cleverly designed as official documentation - the 3-side perforated and tear tabs that look like W-2’s, “Official County Document” stamped in red, “Urgent! Time Dependent Material Inside”, federal warnings repeated on envelope fronts warning the information inside must only be read by the addressee. Some companies take the other approach - handwritten letters with carefully selected paper types: linens, textured cottons, watermarked in “memorable” hues: warm off-whites, beiges, pastels and blues. For a few thousand dollars, each will help you get through such trying times; ensuring your family’s dignity; foreclosure and short-sale specialists urging you move quickly against the clock. There may still be time to save your home! We do not feel so much that we are abusing the system rather than learning as much 20 about it and working within the system toward our best eventual outcome. Operating in
Fico has revealed a foreclosure having a negative effect of -140 to -160 points on your credit score according to Liz Pulliam Weston “5 ways to kill your credit scores” http://articles.moneycentral.msn.com/Banking/YourCreditRating/weston-5-ways-to-kill-your-credit-scores.aspx Fico has also stated there is no difference in the effect on credit rating regarding short-sales, deeds-in-lieuof-foreclosure and foreclosures - Credit Q&A http://www.myfico.com/CreditEducation/Questions/Foreclosure-CreditScore.aspx 18
Phoenix Business Journal “Phoenix foreclosures set record in 2009” http://phoenix.bizjournals.com/phoenix/stories/2010/01/11/daily39.html (January 13, 2010) 19
If nothing else the struggling US Postal Service is staying busy.
Schnorrer ( ;רערָאנשalso spelled shnorrer) is a Yiddish term meaning “beggar” or “sponger”.The word Schnorrer also occurs in German to describe a person, who frequently asks for little things like cigarettes or little sums of money, without offering a return, and has thus come to mean freeloader. The English usage of the word denotes a sly chiseller who will get money out of another any way he can, often through an air of entitlement. A schnorrer is distinguished from an ordinary beggar by dint of his boundless chutzpah. The term
the cracks opened before us, working on the edge. We did not design the system and though certainly not economists, we realize that if everyone in our situation made the same decision then our economy would be in for a very long uphill battle. We do ask ourselves why anyone in our situation, with the same set of circumstances, would not do the same as us. Many are. A study from the credit reporting agency Experian and consulting outfit Oliver Wyman estimated that in 2008 close to a fifth of troubled mortgages involved borrowers who were “strategically” defaulting, a percentage likely to have grown as home values continued to drop while unemployment numbers have risen. For now we wait, squatters in the desert. Bedouins in search of work and another roof. Perpetual renters. Listening for each city’s call. Looking for our notice to vacate and ready to move each week. By turning our back on the twentieth century American dream, we may have found ourselves living the new American dream - living for free for a few months, saving as much as we can, ready to move with a day’s notice, starting a new business21, renting, hustling for work each day. Happier than we were with swelling 401K’s, perceived job security and assumed direct deposits. Rethinking the meaning and purpose of house and home and ownership. In fact, we will soon begin discussing with our mortgage company the possibility of getting paid to leave the house in move-in condition for the next home “owners”.22
does not apply to begging or being homeless, but rather a habit of getting things (food, tools) rather than money by politely wanting to borrow them. The term, which is used in a pejorative or ironic sense, can also be used as a backhanded compliment to someone’s perseverance, cleverness, or thrift. For instance, Azriel Hildesheimer, known for his travels around Europe to spread his rabbinical wisdom to the poor, and for his refusal to accept payment for his services, was sometimes referred to as the “international schnorrer” for his reliance on the local community to house and feed him wherever he went. Israel Zangwill best described a schnorrer as a beggar who would chide a donor for not giving enough. (Taken straight from the wikipedia page) 21 While there still seems to be no architectural work around, graphic and web design are becoming very busy and stable work. It’s starting to become more difficult to see myself going back to architecture, certainly in the traditional mode. 22
Where many foreclosed homes are left stripped of appliances, fixtures and copper; sometimes vandalized and pets left, we will certainly leave our home in move-in condition in any case - if the bank offers us bonus to move out peacefully (typically 1% of the value with a stipulation to leave at a certain date - called a Cash for Keys incentive), we will accept.