U.S. HOUSING CRISIS
Property owners are seeing their investments - and lives - fall apart
By Bhagyashree Garekar
WASHINGTON: At the time, it was the 'normal' thing to do - buy five houses on a manager's salary of US$60,000 (S$91,800) a year and expect to pay off the mortgages of over a million dollars as the property values escalated.
But as the housing market fell apart and the worsening economy claimed her job, Mrs Nannette Johnson is having to square up to the grim prospect of losing all five properties, including her own residence.
When the 52-year-old bought the four-bedroom colonial-style house in Maryland's Bowie town some five years ago, it was worth nearly US$700,000. Today, it is valued at half that price.
She began acquiring the other four properties - smaller houses in downtown Washington, Maryland and Virginia - about 10 years ago with what she believed were reasonable expectations.
'That is what you do if you want to set yourself up to do well,' said Mrs Johnson. 'I wasn't the only one. Everybody wants to own properties; it is part of the American Dream. It means additional income from rent, it increases your net worth and if you are thinking of starting a business, that is the collateral.'
In a humming economy, she was easily meeting the monthly payments - amounting to more than US$8,000 to service the five mortgages totalling over US$1.2 million - out of the rental income from her four properties and her own income of US$5,000 as an administrative manager with a mortgage lending firm.
Then, the music stopped. And in just over a year, because of Mrs Johnson's failure to imagine and prepare for the worst, her world collapsed.
In February last year, she was laid off as her company's business dwindled. Around the same time, two of her tenants started to default on rent payments.
Mrs Johnson hastily dipped into her retirement savings account to avoid defaulting on the mortgage payments, only to find the fact that she did so blocked her access to unemployment benefits.
'I was told by the state unemployment office that because I cashed my 401(k), officials determined that I did not need cash. I've argued my case over and over, but I've hit a bureaucratic hurdle.' The 401(k) is the United States' retirement savings plan.
She was left wishing she had applied for unemployment assistance before cracking her nest egg.
That was not the end of her personal troubles, however.
Nine months after she was retrenched, her 31-year-old daughter Alicia lost her job as an underwriter and was forced to vacate her rented home. With her five school-going children, she moved in with Mrs Johnson while the social services agency put her on a three-year waiting list to find her a new home under a law that provides relief in such circumstances.
In the meantime, Mrs Johnson was making no headway in her quest to land a job despite filling out 112 applications.
'There has never been a time in my adult life that I have not worked; this is incredibly hurtful,' she said.
It is more than just hurtful. Her inability to find a job means that Mrs Johnson cannot be helped by the programmes introduced last month by President Barack Obama. These provide ways for up to nine million home owners to reduce their monthly payments to avoid losing their homes - not investment properties - because the mortgage interest rate has risen or their income has fallen.
Under the programme, the interest rate may be reduced, interest payments may be skipped for a period, or the loan term may be extended to as long as 40 years.
The catch is that to qualify, the home owners have to show they have enough income to make the new payments.
And income is what Mrs Johnson does not have. Still, she filled out an application for assistance under the new scheme. The bank denied it and is dangling the threat of foreclosure.
Selling the properties to raise cash is no option. For one thing, it is near impossible to find a buyer. Besides, in today's market, the proceeds would not even cover the mortgages.
There are more heart-rending stories to be found, for instance in the 'tent cities' housing hundreds of foreclosure victims outside Sacramento, the capital of California which has among the highest foreclosure rates.
Many Americans are resentful, even enraged, at the government's readiness to use taxpayers' money to bail out people who bought houses beyond their means.
In a recent congressional testimony, Federal Reserve chairman Ben Bernanke made the case for helping the irresponsible for the larger good, using the analogy of a man who smokes in his bed and sets his house on fire.
Should his neighbour avoid calling the fire brigade just to punish the smoker although that would risk the fire spreading through the entire neighbourhood?
Some were persuaded by that logic, but others ripped into Mr Bernanke's example.
'We have paid the smoker outrageous sums to also be the fireman. We could arrest the smoker and put out the fire at the same time,' said one disgusted poster on an online forum.
Indeed, Mr Obama's bailout of distressed home owners - the counterpart of bailing out distressed banks - has been criticised as both inadequate and irresponsible for rewarding reckless behaviour.
Yet, at least until the recession ends, the American Dream of millions depends on it.