Chain of Title (2 page)

The retired couple liked Lisa. Or maybe they liked the idea of adding some youth to the building. So they financed the property themselves. In December 1998 Lisa put down $25,000 cash and signed a private, fifteen-year fixed mortgage with her neighbors for $56,000. Every month she would walk down three flights of stairs and slide her payment under the door. She never dealt with a mortgage company and never had to take out a separate homeowner's insurance policy, as her neighbors bundled it with the monthly payment. Lisa's local “banker” lived in her building, and they agreed to a mutually beneficial private deal. No hidden fees, no adjustable-rate mortgages, none of the innovations of the past forty years of financial services. There were maybe a dozen mortgages like this left in America.

Lisa had backed into a nice little life: a job she enjoyed, the respect and appreciation of her patients, the view of the water. And then she met Alan in an America Online chat room. Both Alan and Lisa were middle-class Jews raised in the Northeast, reinventing themselves amid the sunshine. Lisa introduced Alan to her brother, who ran a business reselling mobile phones and equipment, and Alan began to work with him. A closeness soon blossomed between Lisa and Alan, and they quickly fell in love.

Very early into the relationship, while not explicitly trying to have a child, Lisa and Alan stopped trying to prevent it. The tug of motherhood pulled Lisa into her life's next phase. In the fall of 2002 she became pregnant. The couple made plans to marry and beamed with joy. But twelve weeks into the pregnancy, Lisa was at work when she found a pink spot on her clothing. Hours later, at the hospital, the obstetrician couldn't locate the baby's heartbeat. It took surgery to extract the fetus; Lisa's body wouldn't let go.

Despite their profound grief, Lisa and Alan did marry. And it took three years—a period of much heartache, guarded hopefulness, and expensive fertility treatments—before they conceived a second time. After enduring so much, Lisa was thrilled to have life growing inside her again. She was
forty-one and knew this would be her final pregnancy. She smiled every time the baby kicked and when she got to see her little arms and legs on the sonogram.

And then Alan tried to sell Lisa on moving.

Lisa and Alan lived in Lisa's one-bedroom co-op. The place could barely fit two people; Alan considered three out of the question. He started telling Lisa he wanted their daughter to grow up in a typical American home, with her own room. Lisa felt like the motivation wasn't simply greater comfort but a sense of duty, what you could call “white picket fence syndrome.” People get married and have a child and move into a big house. Society dictated that, and everyone had to play by the rules.

“For people all over this world, this would be paradise,” Lisa argued, pointing out how families lived in New York with two kids and a dog in a studio apartment. Maybe in a couple of years, after the baby started walking, after they built up more equity, it would make sense to move, but not now. Lisa had her view of the water, and she didn't want to give it up. But Alan was insistent.

It was early 2007 when Lisa and Alan started looking for a new place. Whatever Lisa remembered about the housing market when she bought her apartment did not correspond. Stories about real estate mania were legendary in Florida. Turn on the radio or television, pass by a bus stop, and the messages bombarded you:
New homes! Great opportunity! Buy now!
One day Lisa drove by a row of people in tents, lined up in front of a trailer on an empty tract of land. These were prospective buyers, camped out for two or three days to pick their preferred spot on a grid of new construction. In Florida during the housing bubble, every day was Black Friday.

As Lisa and Alan began their search, however, things were a little less frenzied. Where advertisements once stressed urgency (
Don't miss out!
), now they highlighted deals (Was
$400K, now $350K!
). The professionals pitched it as a moment for bargain hunting, “a great time to buy.” Lisa wondered if they would ever consider it a
bad
time.

In truth, the housing bubble had begun its long decline. If you scanned the back of the business pages, you knew it.
Ameriquest, one of the biggest mortgage lenders in the country, abruptly closed all its retail branches in the middle of 2006.
New Century Financial, another giant, faced a huge
cash shortfall that summer, and would go bankrupt the following spring. Homeowners felt the crunch as well; foreclosure rates doubled within three years. For most ordinary Americans, even prospective home buyers, these warning signs stayed far in the background. And you could still find optimists among economic analysts.
As Federal Reserve chair Ben Bernanke testified to the Joint Economic Committee in early 2007, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” In other words, there would only be one foreclosure wave, not two, flushing out only those who bought too much house and borrowed too much money. Young families with steady incomes, like Lisa and Alan, didn't have to worry.

But while Ben Bernanke didn't foresee a crisis, Florida home builders knew the machine that had sustained profits for the last decade was seizing up. They needed to dump their remaining homes before the market collapsed. Subdivisions halfway through construction suddenly listed all their properties for sale. Developers hired landscapers and quickly poured asphalt for streets. They cut prices to reel in shoppers and flush inventory off their books. Those looking for homes thought they were smartly buying low, but they were actually the last unsuspecting souls lured into the housing bubble's trap. Lisa didn't pay much attention. She was pregnant, still working full-time, and low on energy.

One day Alan asked Lisa to stop by a house on Gazetta Way, in a brand-new gated community built by D.R. Horton, one of America's largest developers. She made the trip to the development, twenty minutes west of the Atlantic Ocean, down one of the wide boulevards that seemed to stretch endlessly through south Florida. The homes inside the gate looked gargantuan, dwarfing the tiny, just-planted palm trees scattered about. To the left was a standard item in Florida subdivisions: the giant, purposeless manmade lake, with a fountain shooting water skyward. Lisa called Alan and asked if he was sure the house was on Gazetta Way. “These look like college dorms, not homes!” Alan assured her she was in the right place.

The model Alan picked out was the most affordable on the block. But Lisa frowned before walking inside. Despite the relative modesty—neighbors' homes towered close on either side—the house was almost three times the size of her co-op. The front door opened to a giant room with high ceilings that Lisa found pointless. Mazelike corridors spilled into bedrooms
split between opposite sides of the house. Lisa hated the idea of having to walk through the giant unusable room to attend to her child in the night. The kitchen had no windows, but the bedroom windows looked directly into the neighbor's property, with zero space in between. Lisa thought she could reach out her hand and actually touch the neighbor's house, at least if the windows would open.

Lisa stepped outside to a tiny backyard patio bracketed by two saplings, and a few feet beyond that was a thin canal containing something resembling a liquid substance. It hardly compared to Lisa's view of the water. Everything about the house seemed rushed and slapped together. She had no interest in the place. But Alan did, and so did his parents, who encouraged the house hunt. Lisa felt outnumbered and exhausted, so she just went along.

They made a plan to buy the house and then sell the condo. Lisa was eight years into a fifteen-year mortgage, and thanks to sometimes paying extra principal, she only owed about $25,000. Meanwhile, the value of the condo had shot up. They figured they could get at least $250,000 for it and put the proceeds toward the new house, with a small mortgage left over. It wasn't a reckless idea; growing families stepping up into bigger homes had used the same strategy for decades. And the bubble-era price spike would theoretically work in their favor on the condo.

To lock in the house, however, they had to close the deal first. So on February 23, 2007, Lisa and Alan sat down at DHI Mortgage, D.R. Horton's financing subsidiary, to sign the closing papers. They put $17,000 down for the house on Gazetta Way, 5 percent of the purchase price, and took out a mortgage for the remaining $313,000. Because Alan's phone reseller business had unpredictable revenue, the couple decided to use Lisa's superior credit score—803 at the time—and put the loan in her name. And Lisa, eight months pregnant, told the loan officer, much to his surprise, that she would read every page of the mortgage before signing it.

The problem was that she had to pee. A lot.

The closing agent, representatives from the builder, and Alan had to wait while Lisa perused the mortgage, line by line, in between trips to the bathroom. She could get through about five pages at a time before excusing herself.

Lisa's only experience with mortgages was the private one with her neighbors. That was a simple fifteen-year fixed-rate deal; this was much
more complicated. Despite her perfect credit, DHI Mortgage put Lisa into a loan reserved for subprime rather than prime borrowers. To keep initial payments low, it was interest-only for the first ten years. After that, not only would principal payments get added and the mortgage reamortized over the final twenty years, but the interest rate would adjust upward. The monthly payment would end up hundreds if not thousands of dollars higher. Financially speaking, it was a time bomb set to explode in ten years, by which time DHI Mortgage would have made plenty of money.

The interest-only terms meant the couple would build no equity for a decade, beyond the 5 percent down payment. Once closing costs were factored in, a small decline in home value, maybe 3 percent, would put them underwater. That would create a precarious situation if they experienced any financial disruption.
As prominent financial analyst Josh Rosner said back in 2001 when these types of mortgage products started coming out, “A home without equity is just a rental with debt.” But Lisa wasn't aware of these downsides. Reading through the mortgage was more of a formality, a way to appear responsible. She didn't have the background to decipher it all, and in the back of her mind she gave herself an out: Lisa was planning to sell the apartment and use the money to pay down the mortgage significantly. So whatever those pieces of paper said wouldn't apply. When she reached the last page of the mortgage, she signed it.

Only later would Lisa and Alan realize their mistake. They could not sell the co-op, whose value would eventually drop by more than 60 percent. Every week Lisa would call the listing agent, and every week she'd hear the same thing: no bidders. Lisa slid the mortgage payment under her neighbors' door at the Royal Saxon once a month, then came back to write a check for the house. The couple had enough savings to handle two mortgage payments for a little while, but not forever.

In March Jenna was born, and Lisa considered all the hardship of bringing her into the world worth it. But when she was eighteen months old a new pediatrician found a birth defect on Jenna's lower spine, something her old doctor had dismissed as nothing important. The new doctor requested an MRI, which led to the diagnosis of spina bifida. Her vertebrae were tethered to the bottom of the spinal cord, pulled tight as a rubber band. Without treatment, the stretching would aggravate over time. The barrage of tests and doctor's visits took Lisa out of work periodically. Jenna's doctors
recommended surgery to correct the malady, and between that and aftercare, Lisa and Alan were looking at thousands of dollars in medical bills. At the same time, as the housing bubble popped, businesses throughout Florida failed, including the cell phone reseller. Alan lost his job.

The cascade of financial and emotional pressures overwhelmed the young couple, their relationship suffering the collateral consequences of the mounting pile of debt. Compounding this was the fact that Lisa and Alan dared not tell family or friends about their money troubles. Anybody in Florida in 2007 could recognize a foreclosure crisis if they paid attention—a moving truck in the driveway, packed boxes on the curb with a crude sign attached reading “Free”—but you'd almost never hear about it in public. Neighbors who lost their homes drove down property values, which led to more foreclosures and more drops in home prices. So people had powerful reasons to keep to themselves, to try to solve their problems in isolation, lest they be identified as the source of the community's downward spiral. As a result, the foreclosure wave swept through Florida practically in silence.

In January 2008 Lisa made some calculations and determined she could pay the mortgages on the house and the condo for nine more months. After that she would need financial help for the first time in her life. She called her mortgage company, hoping it could modify the payment or work something out. Though Lisa had taken out the loan with DHI Mortgage, early on she was advised to mail payments to Chase Home Finance, a division of JPMorgan Chase, one of America's biggest banks. The whole thing always seemed a little suspicious. But JPMorgan Chase's stature encouraged Lisa about the prospects for assistance. The company boasted of its “fortress” balance sheet. When the investment bank Bear Stearns failed in March 2008,
government officials solicited Chase to buy it. Lisa read about other banks failing left and right, but Chase seemed secure. Surely it had some smart people who could make this all work.

She talked to a Chase Home Finance representative. “I have nine months to work something out,” she said. “We have plenty of time, I have a perfect credit score, and I've never paid anything late. What can we do?” The representative told her to fax in financial documents and they would get back to her. Lisa did what she was told but never heard anything. She called back the next week. And the next week. And the next.