Published December 12, 2007
INQUIRER.net
For most Filipinos, owning one’s home is a dream. For the Fil Am couple Elena and Samuel that dream was multiplied 18 times. That is, they bought and owned 18 houses. And now, home ownership is turning into a nightmare.
They asked me not to use their real names, but Elena and Samuel, who own properties mostly in the Sacramento, California area, are two of the Filipino faces of the sub prime mortgage crisis that’s threatening to push the US economy into a recession.
But before we go to their story, a quick overview.
Just seven years after the so-called dot-com bust, America is reeling from another financial crisis. The last round involved overvalued tech startups that rode the wave of what former Federal Reserve Chairman Alan Greenspan called “irrational exuberance.”
Companies hoping to score big in the new frontier called the World Wide Web were -- sometimes to the surprise of their founders -- attracting tens of millions, and even hundreds of millions, of dollars in venture capital investment. Even though many of these firms weren’t making money and it wasn’t even clear that they were going to do so in the near future.
Well, the party eventually had to end. And when it did, it led to the painful tech crash of 2000-2001.
Hundreds of companies folded. Thousands of engineers, executives and others lost their jobs. Here in the San Francisco Bay Area, the collapse of the tech market was manifested in a curious way: Traffic on Highway 101, which could be compared to the EDSA of the Bay Area, suddenly became very, very light. It even became easier to get restaurant reservations. Why? Because the many of the thousands who flocked to the area, hoping to get a piece of the action, simply packed up and left.
But at least that crisis involved companies not really worth much anyway. The current crisis involves something much more valuable to families and individuals: their home.
Over the past 10 years, America saw one of the biggest housing booms in its history, fuelled largely by historically low interest rates. Lenders hoping to cash in on the craze also offered creative ways to finance home-buying, especially for first-timers.
Typically, a borrower has to go through many hoops to get a loan. Down payment of at least 20 percent the price of the house. Good credit. Stable job and income. But, like I said, lenders got creative. Bad credit? No problem. Not enough income? No problem, we’ll make it up.
Because of rapidly rising home prices, homeowners were also able to tap their properties’ equity by taking out home equity loans. The money was used for a variety of purposes, such as remodeling a home or paying off student loans. But it’s been reported that homeowners also used the money to, well, party: They bought boats and other luxury items or went on expensive vacations.American households have typically gotten 30-year mortgages based on a fixed rate. They knew how much they would have to pay for that period and adjusted their budgets accordingly. In other words, the pain, month-to-month, was predictable.
But in the past few years, lenders have become more aggressive in offering what’s usually referred to as ARMs, or adjustable rate mortgages. A borrower would pay a fixed amount for certain period – 5 years, 3 years, sometimes just one year – and the payments would be adjusted depending on the current rate. If the rates stayed low, as they have in the past few years, then there was no problem. But once the rates go up, homeowners get hit with higher payments.
And that’s exactly what happened across the United States – on a massive scale. So massive that it has a caused a major crisis on Wall Street, the US’s financial center.
To be sure, there were many speculators who reaped huge profits from the perfect storm of low interest rates and rapidly rising home prices. But these were people who probably knew the party was not going to go on forever, watched closely for signs of trouble and then got out just in time.
But majority of homebuyers didn’t get out.
That’s what happened with Elena and Samuel. They’re hard working Filipino expats who have done a great job taking care of their family.
In 2001, they bought a home for about $100,000. Rates were then still dropping, and home prices rising. Two years later, the house was worth three times more, so they sold it and bought another one. And they kept buying.
They used the equity on their home to borrow money to buy other homes, which they then rented out. While the rates stayed low and their property values continued rising, their home rental business worked, bringing in more than enough steady income.
Now, what Elena and Samuel did was not unusual. I know of many other Pinoy realtors and speculators who also took out home equity to buy one and even two homes in the Sacramento and Las Vegas, Nevada areas where prices were relatively lower. But until I found out about Elena and Samuel’s story, I had never heard of anyone buying 18 houses.
Then the housing bubble burst.
“We have homes whose values have dropped $50,000 to $100,000,” Elena said in Tagalog. “We bought one for more than $1 million. Its value dropped by $100,000. … We’re losing money on some of our rentals. We’re in the negative. “
That’s because the money coming in from rentals is now not enough to cover the steadily rising mortgage payments. For example, the $2,000 monthly payment they made on one home has doubled to $4,000, she said.“We can’t sell right now because the prices are dropping,” she added. “All we can do is wait for the market to bounce back.”Elena and Samuel had also launched their own real estate business. This has helped sustain them. But she said the situation is grim for many realtors and homeowners. Many of their clients have seen their homes foreclosed.
“Nakakaawa (Pitiful). We felt sorry for them. They just started to default on their loans and they got foreclosed. … I know someone who owned eight houses. They were all foreclosed. And they are just renting a condo right now.”
One bright spot, Elena said, is that each of their houses has a renter, and their real estate and home financing business is still doing well.
“Awa ng Diyos tuluy-tuloy kami.( By God’s mercy, we’re surviving),” she said.
Unfortunately, the mortgage crisis is bound to get worse. Many homeowners are expected to be hit with higher housing bills in 2008 and analysts already predict tens of thousands of them will be forced to give up their homes.
The Bush Administration recently announced a plan, drafted with the big banks, to freeze the rates on some, but not all, home loans. But that’s not likely to help people like Elena and Samuel. The plan only applies to a specific group. People who bought multiple homes hoping to sell them for a profit do not qualify.
So 2008 will be a critical year for Elena and Samuel.
“Iyon ang kinakatakutan ko (That’s what I’m afraid of) – my ARM loans,” she said. If the situation worsens, she continued, they are willing to walk away, give up some, if not all, their homes even if it means losing money and getting stuck with a bad credit rating.
Does she regret going on a buying spree? “Nagsisisi rin. (I do have some regrets.) But you know, it was like a gamble. … We just go month to month na lang.”
And their gamble paid off for them during the good times. When Elena turned 50 last year, she went on a trip to Europe and even got to visit the Vatican. “ “Naka-shake hands ko ang Papa “ (I got to shake the Pope’s hand),” she chuckled.
Copyright 2007 Benjamin Pimentel
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