SPRINGFIELD, Mass. -- After two years of bewildering futility, John and Linda DeCaro thought they had finally found a way to hang on to their home.
They could no longer afford their mortgage payments and had slipped into delinquency. They could not refinance to take advantage of low-interest rates because they were among the nearly 11 million American homeowners who are "underwater," meaning that they owed the bank more than their house was worth. Bank of America had already initiated foreclosure proceedings.
Then in the spring of 2011, a nonprofit lender, Boston Community Capital, presented a potential fix, one it has used to aid some 200 underwater borrowers in Massachusetts over the last two years. The bank would buy the DeCaros' home at market value -- about $87,000, which was barely half of their mortgage balance -- and then sell it back to them for a little more, providing a manageable loan. Bank of America affirmed the sale price as fair value.
But one powerful obstacle stood in their way: Freddie Mac, the government-controlled mortgage giant, owned the DeCaros' loan. Freddie has a policy of refusing to approve so-called short sales -- those where the purchase price is lower than the mortgage balance -- unless the buyer signs a legal document promising not to resell the property to the original homeowner. The document bars the buyer from even renting the home to the initial owner.
In short, the deal could proceed only if the DeCaros gave up the very point of the transaction. They would have to surrender their home.
Linda DeCaro, 46, absorbed this turn of events as if she were being asked to renounce her identity. More than a financial asset, her home was the center of her existence. She and her husband had bought it from her brother almost a decade ago. Her sister lives around the corner. They all grew up in a house two doors down -- the same place where her parents still live, where the family gathers for dinner every Sunday evening, and where her 6-year-old daughter often plays while she is at work.
"This is my neighborhood," Linda DeCaro said. "This is all I know. I would never want to leave here. Everything that I have is here. The church that I was baptized in -- that's the church I belong to. My daughter's going to the same school that I went to. I don't sleep because I'm wondering, 'Where are we going to go?'"
Freddie Mac and its sister company, Fannie Mae, have been holding the line against intensifying demands that they forgive loan balances to stem the foreclosure crisis. They portray their resistance as a simple act of fiscal responsibility, one aimed at doing right by American taxpayers, who are on the hook for their losses. But an exploration of Fannie and Freddie's handling of underwater homeowners in this city in western Massachusetts -- where unemployment remains stuck above 12 percent and foreclosures have doubled over the past year -- suggests that the two companies are guided by considerations that extend beyond mere dollars and cents: They sometimes require that borrowers relinquish homes even when doing so does not improve the bottom line.
The experiences of four local families struggling to keep their homes reflect the broader costs of Fannie and Freddie's rejection of principal reduction, from the deterioration of properties to the dislocation besetting neighborhoods. Their stories highlight how local economies are being constrained by the unwillingness of underwater homeowners to spend, even on crucial things such as health care and home maintenance. They illustrate why some now accuse Fannie and Freddie of overriding taxpayer interests in pursuit of an ideologically driven goal: exacting retribution from delinquent borrowers.
"We see it as being about punishment and not about business," said Malcolm Chu, an organizer with Springfield No One Leaves, a community association of residents fighting foreclosure and eviction. "It's entirely about trying to make it clear that foreclosure is the worst possible thing that can happen and ensuring that the millions more homeowners who are underwater and not yet in foreclosure will keep on paying."
Edward J. DeMarco, who oversees Fannie and Freddie as acting director of the Federal Housing Finance Agency, has rejected calls to forgive principal balances, citing an agency analysis that concludes that other forms of relief -- such as loan modifications that defer payments -- better limit taxpayer losses. But that analysis has drawn withering criticism from housing experts who pronounce it intellectually disingenuous and colored by a predisposition against aiding homeowners.
Last week, word leaked that Fannie and Freddie's own assessments undercut DeMarco's insistence that principal reduction exacerbates taxpayer losses. New analyses prepared by Fannie and Freddie conclude that the two lenders would save money by forgiving principal balances and limiting future delinquencies, according to a report published by ProPublica and NPR.
DeMarco is reportedly mulling how to respond, as his staff explores the impact on the equation from a recent tripling of incentives paid by the Treasury Department to spur Fannie and Freddie to forgive principal balances.
DeMarco refused requests for an interview. His spokeswoman, Corrine Russell, disputed characterizations that the agencies under his oversight have sought to punish delinquent borrowers.
"Fannie Mae and Freddie Mac have been leading the effort on foreclosure prevention," she wrote in an email, adding that the two agencies have delivered 1.1 million permanent loan modifications since they came under the supervision of the Federal Housing Finance Agency. "These modifications typically lowered borrower payments by substantial amounts and have yielded positive results by keeping homeowners in their homes."
Freddie Mac acknowledges having a policy that requires short sales be accompanied by affidavits from buyers pledging to not sell or rent properties to the original owners. The policy was introduced in July 2010 in response to a growing incidence of short sale-related fraud, according to Freddie Mac spokesman Brad German. Con artists were stopping payments on their mortgages, employing friendly middlemen to buy their homes at fire-sale prices, and then flipping properties back to them, effectively cutting loan balances at taxpayer expense, he said.
"If everybody just got to swap their note for a smaller note by simply not paying their mortgage for a while, how is that a good business model for us?" German said. "We require that there is no side agreement. We don't want to leave money on the table if we can possibly help it."
He cited a report by CoreLogic, a real estate research firm, which estimated that, in 2010, one out of every 52 short sales of single-family homes was "part of a suspicious resale."
But the same report noted that professional investment companies -- as opposed to ordinary homeowners -- "are involved in a disproportionate percentage of suspicious transactions."
Some lenders are willing to approve short sales without prohibitions on selling or renting to the property to the original owners. Bank of America engages in such transactions with Boston Community Capital.
Any borrower who stops making a mortgage payment to take advantage of a short-scale scheme would damage his or her credit in the process, jeopardizing the ability to secure a mortgage, said Elyse Cherry, chief executive of Boston Community Capital. She added that her bank has a stringent process of checks aimed at limiting its vulnerability to dishonest participants.
"We don't want to be used for fraud either," Cherry said. "Freddie has taken the position that the mortgage crisis is really the fault of the homeowner. They are holding this position that if you assist one homeowner, then others will stop paying."
Fannie and Freddie together control more than half of all American mortgages. Their continued resistance to forgiving principal balances stands in the face of growing sentiment among housing experts that such a course is required to stabilize the housing market. The Obama administration previously opposed principal forgiveness, but now advocates it as a key piece of limiting foreclosures.
Meanwhile, political forces conspire to increase the pressure on Fannie and Freddie to go along, as public anger continues to seethe over the role that unsavory mortgage lenders played in putting many homeowners in peril, and as foreclosures mount. Bank of America last week announced a pilot program that will enable borrowers facing foreclosure to remain in their homes and pay rent.
DeMarco argues that Fannie and Freddie have been delivering the equivalent of principal forgiveness by deferring payments and lowering interest rates. Academic studies challenge his logic, concluding that cutting principal balances for underwater borrowers leaves them less likely to slide back into delinquency and constitutes a better deal for taxpayers.
The experiences of distressed homeowners here in Springfield illustrate the pitfalls of leaving large numbers of people underwater -- not just for borrowers, but for surrounding communities. They are more inclined to give up and accept foreclosure when the next financial shock arises. They are more likely to forego spending, out of fear that they will be forced to find shelter on short notice. And regardless of whether they are justified in doing so, whether it is courageous, selfish or contemptible, borrowers who are underwater are more likely to stop making their mortgage payments and walk away -- either by choice or through eventual eviction -- adding boarded-up buildings to the stock of distressed real estate pockmarking American communities.
"Ed DeMarco says he has an obligation to making sure that the taxpayer gets the greatest bang for the buck," Cherry said. "But the burden on the taxpayer is not just about the losses on Fannie and Freddie. It's what happens to the need for fire and police services when homes are abandoned, and what happens to communities when blight comes back. I can't figure out as taxpayers, how are we possibly better off blowing up our neighborhoods?"
Eunice Waweru, 38, lives on a street off Boston Road that used to buzz with children playing soccer and riding bicycles while their parents congregated on front porches. Not anymore. The family who lived two doors down -- fellow Kenyan immigrants with whom she attended church services -- lost their home to foreclosure two years ago. Their old place sits empty, and someone recently broke in, presumably looking to harvest leftover appliances, plumbing or wiring.
The house across the street was once home to a couple whose three children went to school with Waweru's daughter. It, too, is now lifeless. So is the house down the block, where Waweru's friends used to live.
"You don't know about these empty houses," she said. "Before, I never worried. You would see lights everywhere. Now, it's just dark when I come home. You just see darkness. You get scared. You don't know who might be there."
Yet when Waweru looks out from her front door at night, it is light that she fears, the glow of headlights on the patrol car that she imagines the sheriff will be driving when he arrives to tell her to get out, leaving behind what has been her home for the last seven years.
Waweru got behind on her mortgage when she lost a nursing job in 2008, she said. Her home is worth perhaps $150,000, though the last statement she looked at had her owing the bank $193,000. She sits at her dining room table, across from her 7-year-old daughter, who leans over a school writing assignment, and tells a tangled tale about her failure to secure a permanent loan modification.
The details fill out sheaves of documents, but the basic state of play is simple: She sees no point in continuing to make payments on a house in which she owns no stake. She wants the bank to reduce her principal. The bank has demanded she pay what her original note states while threatening to auction her home to the highest bidder.
While she waits, vowing to stay until the bitter end, she spends as little as possible. She has shelved thoughts of returning to nursing school for an advanced degree that would allow her to earn more. When she is ill, she does not go to a doctor because she lacks health insurance. Anytime she has an impulse to spend -- on education, nonessential food or a new blouse -- she imagines the sheriff's knock on the door and what happens after: scrambling to find a new place to live, with tattered credit and meager savings.
"I don't know what's going to happen," she said. "I don't know about tomorrow. If they kick me out, I need to have a backup plan."
By Fannie and Freddie's calculus, the costs of the foreclosures that have remade Waweru's block -- the loss of community, the perpetual fear, the austerity -- are beyond the scope of their ledger books. The houses in which underwater borrowers pass fitful days have been boiled down to bare essentials: They are bad investments that must be managed to recoup as much as possible for the taxpayer.
The DeCaros have difficulty conceiving of their home as an item on a balance sheet. It is the place where they live with their 6-year-old daughter and where their wedding picture hangs -- the ceremony held in the same church where Linda was baptized. John painted the walls and hung the doors. He and his father-in-law laid down the ceramic tiles in the kitchen and the wood flooring on the addition they built just before his daughter was born.
John DeCaro makes his living installing home security systems. He claims no credentials as an expert in high finance. But as he vows to stay put until they throw him out, he describes a basic inequity.
"The way it looks to me is they don't want to help us out," he said. "They all went to the government when they had trouble, your big banks, your two big automakers. Fannie and Freddie went to the government crying, saying, 'You need to bail us out or the economy's going to crumble,' and that was our taxpayer money. Now that the people want help, they don't want to help us anymore."
Long known as the City of Homes for its wealth of Victorian architecture, Springfield has in more recent times gained a reputation for less fortunate attributes, such as a loss of manufacturing jobs, urban decay and the strip clubs and tattoo parlors that dominate its forlorn downtown. The city's median annual household income sits below $35,000. More than one-fourth of the city's 150,000 people live in poverty, according to Census data.
This backdrop of scarcity proved fertile ground for mortgage lenders who descended here during the housing boom, offering ways to turn increased home values into cash. The end of the boom delivered a slow-motion disaster. During the first two months of this year, 149 homes in the city were auctioned off in foreclosure, according to the Warren Group, a Boston-based real estate research firm. That was up from 86 compared to the same period a year earlier. Over the same time frame, new foreclosure filings more than doubled.
By Fannie and Freddie's reasoning, the best way to prevent more distressed underwater borrowers from sliding into foreclosure is to extend out the terms of loans, drop interest rates, defer collection of some of the principal and lower monthly payments. Writing down loan balances simply sticks taxpayers with fresh losses, DeMarco argues.
But that reasoning does not account for the costs inflicted on taxpayers by the status quo, with underwater borrowers hunkered down in houses deteriorating around them.
Rose Webster-Smith, 35, absorbs daily the sight of a crack marring the picture window in her living room, though she is powerless to fix it. She and her husband, a truck driver, bought their home five years ago for $159,000. Today, it is worth about $111,000, a sum dwarfed by the roughly $164,000 that they owe the bank, after tacking on delinquency fees.
"Being underwater, we can't take equity to fix it," she said. "Every time the wind blows, you're hoping that the window holds."
"Every time" is a phrase that gets a vigorous workout in her conversation, as in "every time you turn on the furnace" -- the original furnace, installed when the house was built in 1973 -- "you hope it gets you through another winter." Or "every time I try to go somewhere in my car" -- a 1999 Ford Escort that needs struts, a new muffler and a new transmission -- "you hope you get there."
"It kind of makes it hard to go look for work," she said.
"If I had equity" is another phrase with currency. If she had equity, Webster-Smith would add insulation to cut her heating bill and make life more comfortable for her three children. She would bring the wiring up to code by putting in a new fuse box, limiting the danger of fire. She would borrow to patch the crack in her front window.
Except she doesn't have equity, so she would be wasting her money on improvements to a home that is no longer legally hers.
In recent months, her husband has seen his income increase a little, as demand for trucking services has picked up. But their family is more parsimonious than ever, as the two prepare for a potential eviction.
"We haven't bought anything since 2006," she said. "I don't buy any clothes. I sew anything with a hole. Thank goodness ripped jeans have come back in style. When you have no equity, there's really nothing to back you up. It's just paycheck to paycheck and pray."
This state of mind is no help for the moribund local economy. Indeed, only one industry seems to be thriving: firms positioned to get a piece of the growing number of foreclosures.
Last fall, after Webster-Smith and her husband were turned down for a permanent loan modification by their lender, U.S. Bank, their house went up on the auction block. No outside buyer made a bid, so Freddie Mac stepped in and secured the property, paying $84,000, according to a letter that Webster-Smith later received from a law firm representing the mortgage company.
The letter detailed the costs of completing the foreclosure, including legal fees ($2,670), newspaper ads for the required legal notice ($4,203), postage ($53.08) and service by the sheriff's department, which dropped the foreclosure documents on the front stoop ($95.24). It included the costs of the auctioneer ($669.74) and of recording the foreclosure ($650).
These fees added up to the price tag of legally separating Webster-Smith and her family from their home. They would gladly have spared the taxpayer such costs and taken on a mortgage for the $84,000 that Freddie paid, an amount that they say they could have managed. They would gladly pay rent, though their mortgage company has not responded to their offer to do so, she said.
"My kids ask me, 'Are we moving?' and we just don't know," Webster-Smith said, as the gray light of a soggy morning refracts through the crack in her front window. "Is my son going to have to change schools and leave all the school friends that he has?"
On the statement from the law firm tallying up the costs of foreclosure, none of these items were listed.
PUNISHING BAD BEHAVIOR
David Dunwell has difficulty grasping how, after 41 years of productive life, he has somehow devolved into a supposed threat to the American taxpayer -- such a threat that Fannie Mae wants him and his family out of their home.
He has always worked for a living, while saving to buy a home large enough to raise a family, he said. For 17 years, he held a single job as the mental health director at a residential treatment facility in the Boston area, bringing home about $48,000 a year. Combined with his wife's roughly $30,000 annual salary at her mental health counseling job, that was more than enough to manage the $1,100 monthly mortgage payment on their century-old house in Springfield.
That they lived here at all was a testament to their thrifty nature. They bought the place in 2003, in a bid to escape the overpriced housing market in Boston, where Dunwell grew up and where -- at the height of the boom -- prefabricated homes in the suburbs were changing hands for $500,000 and more. Here, $136,000 was enough to claim their three-story home, giving them room to raise their three girls.
But in 2008, amid the financial crisis, his company lost a state contract and Dunwell lost his job. By the summer of 2009, he was applying for a loan modification from Bank of America. He gained approval for payments of less than $900 a month on a trial basis that was supposed to last three months. But after he made seven payments without receiving approval for permanent relief, the bank told him he had been denied, he said.
He was still out of work and the bank deemed his household income inadequate, he said. A Fannie Mae spokesman said Dunwell was turned down for missing some of his trial payments.
In July 2010, Bank of America sold his house at auction. Subsequent documents revealed that Fannie Mae had wound up with title to his home. In the ensuing months, eviction threats came, from a law firm representing the mortgage giant.
In February 2011, Dunwell got a new job as an assistant supervisor at a juvenile treatment facility, bringing his annual household income to near $70,000. He sent a letter to the law firm offering to buy back the house at market rate -- by then, little more than $100,000. Absent that, he offered to rent the property from Fannie, allowing his family to remain in "the only home my three young children have known."
The response landed like a cruel joke: He could buy the house for what he owed on his mortgage -- more than $155,000 after late payments.
"I imagined them laughing when they sent that letter," he said.
Asked how this posture represented a good value for taxpayers, Fannie Mae emailed a written statement: "Fannie Mae's foreclosure prevention options are designed to create an affordable, sustainable monthly payment for struggling borrowers while carefully managing losses for taxpayers."
Almost two years have passed since Fannie took his house, and in all that time Dunwell has not made a payment, even as he has pleaded for a chance to rent or repurchase the property.
"It makes absolutely no sense to me," Dunwell said. "They have the taxpayer interest in mind, they say. And in so many ways, this makes no sense. We want to send our children to college. We like stability. We're the kind of people that would fuel the economy. They want to punish bad behavior. I'm still trying to figure out my bad behavior, other than losing my job."
JOHN, LINDA AND FREDDIE
The DeCaros are still trying to figure out why, despite years of efforts to get their mortgage payments down to a level they can afford, they remain in serious peril of losing their home.
In late 2009, as their income deteriorated, they called Bank of America to try to secure lower payments. In February 2010, the bank gave them a verbal approval for a trial modification that dropped their payment from about $1,500 a month to $1,047.79.
They made their trial payments for the required three months, operating on the understanding that they would receive paperwork for a permanent modification. But the paperwork never came, prompting Linda to call the bank to see what was happening. Each month, she said, bank representatives assured her that all was in order and that she should simply continue to send in the modified payment amount while awaiting the documents.
A Bank of America spokeswoman maintains that the DeCaros never sent in the documents that were required to complete their application.
Last May the DeCaros received a letter from a law firm saying that their home would be auctioned off that July. They engaged a lawyer, who successfully negotiated a delay. The following day, Bank of America sent documents offering a new loan modification. When they read the details, they were perplexed: It increased their monthly payments to nearly $1,600 a month.
The increase reflected the late payments that had been building, swelling their loan balance, the Bank of America spokeswoman said.
Rejecting the offer as no help, the DeCaros continued to send in the lower payments that they had been making under their trial modification. In September 2011, Bank of America returned their check, marking it "partial payment."
The DeCaros say that they deposited the returned money into a savings account and have added the same amount every month since, setting these funds aside as demonstration of their desire not to freeload but to rent or purchase their home under terms they can afford.
When the DeCaros made contact with Boston Community Capital, they thought they had secured a new beginning. Particularly after the nonprofit bank's initial offer of $74,000 elicited a counteroffer from Bank of America for $87,000, a number the bank said it affirmed as a fair value by relying on an estimate from a Freddie Mac-approved provider.
But then the DeCaros got the word that put them back into their agonizing limbo, Freddie's decree that they had to leave their home for the deal to go through.
In essence, Freddie was willing to turn down an offer for market value in pursuit of something with no quantifiable worth: a deterrent against other people deciding to stop making their payments.
"I think they're just being mean," Linda DeCaro said. "They just don't care about families."