Lot 354: A Tale of America's Housing Meltdown

Lot 354 illustrates America's housing meltdown.

Kai Ryssdal: If you've been listening to this program over the past couple of years, you've heard our coverage of the housing market: the extreme highs and the lows. Terms that have probably become part of your regular vocabulary: Subprime loans, adjustable rate mortgages, short sales, and loan modifications.

But now I want you to forget all that and remember what used to drive residential real estate in this country. A house, a tangible bit of real property that's yours.

Alison Feinberg: So Kai, this is the house.

Eric and Alison Feinberg moved in just before Thanksgiving last year. It's their first home.

Ryssdal: So when you came in here the first time, though, obviously it didn't look like this. Right? Describe it for me.

Alison: No, so this was all bricks.

Ryssdal: The fireplace...

Alison: The fireplace, and it was not very pretty and we just...

Eric: Yeah, there was a hulking mass of bricks there.

Ryssdal: Literally as you walk in the door?

Eric: Yeah, so one guy had a suggestion: Maybe we just mortar it over and it'll kind of mute itself into the wall.

Alison: And then he painted it white.

Eric: And then he painted it white.

It's a 1927 Spanish bungalow, about 1,800-square feet, three bedrooms, three baths, cathedral ceilings and a giant picture window in the living room.

Eric: I only had two things that I wanted to have in a place. One was a flat, grassy backyard to kick around a soccer ball with -- and potentially with kids, hopefully down the line. And the other was to give her a garden somewhere, front or backyard. And now we have a choice.

Alison: But I think we wanted more space also. I mean, we are the on the verge of potentially starting a family. So we did talk about having more space, 'cause the place we lived in before was a lot smaller.

Eric and Alison saved their money, biding their time, until four years after they got married, they found this house. It's tract 7603 in the county map books, Lot 354, on Point View Street in Los Angeles.

The Feinbergs are the third couple to own Lot 354 in the past eight years. They're the last link in a chain of transactions that help tell the story of the rise and the fall of the American housing market.

There were the former owners, the ones with perfect timing, who saw the house triple in value during the four years they owned it.

Shawna Phelan: It's probably ridiculous, the price that we did sell it for. But, at the time, it was like, hey we did all this work, and you know, we loved the house.

There was the neighbor across the street, the one who watched her home's value rise with the rest of the neighborhood.

Wendy Posner: Well, I think we're really fortunate because we bought our house 12 years ago. So we have a lot of equity in our house.

There were the real estate agents who were swamped with eager buyers, buyers who knew they could get an easy loan with almost no proof of income.

Eitan Dagan: To just put a number on the application, it could be your brother or your mother and they call and said, 'Hey do you work there?' And that was it.

And there were the banks, swimming with money, pushing loans out to get more people into more houses.

Jesse Torres: They started to create, out of thin air almost, an entire group of borrowers that under rational times would not have been considered.

That was the American housing market just five years ago. If you didn't own a house, you had to get in. If you did own, you re-financed, you remodeled, you sold.

Christian Stevens: Christian.

Christian Stevens is a real estate agent for Keller Williams here in Los Angeles. He's been in the business for 20 years.

Stevens: It's the American Dream really, home ownership. A lot of people were chasing it. Coupled with the fact that during this time the drumbeat on the news about real-estate boom drove everybody to insanity.

The house on Point View was right in the middle of all that insanity. It's seen so much and it can tell us a lot about where the housing market in this country has been and where it might be headed.

Shawna: Are you going to share a room with Brooke? Would you sleep in bunk beds or two separate beds?

Child: Um, bunk beds.

James and Shawna Phelan, the couple who rode the house on Point View to the top of the housing boom, are pretty well established now. Good jobs, two little girls...

But in the spring of 2002, they were fresh out of business school. Shawna had a job offer, and they wanted to buy a house. The day they found Lot 354, the Phelans were just trying to avoid traffic on the freeways. They cut through some side streets and there it was -- a "For Sale" sign.

For Shawna Phelan, it was love at first sight.

Shawna: I mean, it was just a cute house. There was a lot of character inside of it. It had a good feel to it.

Ryssdal: That was it, you knew right then, that day?

Shawna: Yeah, I think we probably put an offer in that night or the next day.

James: Yeah.

The Phelans paid $445,000, not really so bad for that part of L.A. back then. But the place needed some work.

Shawna: We took the original den and made that a master bedroom, made it larger. Added a bathroom attached to the master bedroom...

That kind of work's not cheap. But remember, home values were crazy back then. So like a lot of people, the Phelans tapped into the value of their house and they set up a home equity line of credit.

Ryssdal: Was it easy to go to the bank and say, 'Listen, we've got this house, we paid $445,000, look at it now, what can you do for us?'

James: It was way too easy.

It was easy for everyone, so the bubble grew. Homes doubled and tripled in value. Open houses got mobbed. Put in a bid, buy a house, take the equity out, make a profit.

Again, real-estate agent Christian Stevens.

Stevens: You were getting flippers buying from other flippers. That had to stop.

From 2000 to 2006, home prices in this country increased almost 90 percent. In Los Angeles, they shot up 173 percent. So by the spring of 2006, the Phelans' three-bedroom, three-bath place that they paid $445,000 for was valued at $1.2 million.

Here's James Phelan.

James: In isolation, it was high. It was very high. But when you look at the comps, that's what the comps were pointing to.

The Phelans were about to start a family. So, looking for a bigger house in a better school district, they sold Lot 354 at pretty much the top of the market. Whether it was really worth more than a million dollars?

Christian Stevens says the sticker price didn't really matter.

Stevens: I don't believe that we were in a "what's it worth" market. People were buying a payment. They weren't buying $1.2 [million]. They looked at their agent and they go, 'What's my payment?' And the payment's $3,782 a month. 'Great, I'm in.'

The tale of Lot 354 continues with the couple who bought it from the Phelans, Jin and Chong Lee.

Posner: They more or less kept to themselves. When they first bought the house, it was the husband and wife who were living there. And after a period of time, actually, they sort of disappeared.

Wendy Posner has lived across the street from Lot 354 for 12 years. She's met every family that's lived in that house since she moved into the neighborhood. But to really understand what happened to the Lees, you have to look elsewhere.

Real-estate documents are public records. You can go down to the county courthouse and find out who paid how much for which piece of property and how much they borrowed to do it. But that doesn't mean anybody has to talk to you.

We reached out to Jin Lee four times for an interview. Each time he declined. His only comment to us was that his experience with the Point View house was nothing more than a bad memory.

The Lees took out two loans from Washington Mutual to buy Lot 354. The first was for more than $900,000. The second was a line of credit. In all, they borrowed as much as 90 percent of the home's value. It seems foolish, but real-estate agent Christian Stevens says you have to remember the times.

Stevens: The qualifications for a loan were going down steadily. And we really drove a segment of the market that had never been in homes before -- suddenly were able to buy homes with no money down and the tagline was why rent when you can own, for probably less money than you could rent the place.

Mitch Reiner: There was a joke in the industry if you can fog up a mirror and have a credit score of 660, you could basically get a loan.

The guy with the joke is Mitch Reiner. He runs his own mortgage bank, Mortgage Capital Partners. He didn't handle the Lees' mortgage, but he can help us understand it.

The loans they got came from Washington Mutual. The Lees had a something called a pay-option adjustable rate mortgage.

Reiner: It was a loan that was originally developed for a borrower, who truly needed help with cash flow. A self-employed person who quarterly had different needs as far as cash. They would pay their minimum payment and when they had money they would pay the loan down.

These kinds of loans weren't all that unusual during the boom. But they became a problem because of that pay-option part. The Lees had three different ways to pay every month. One was to make the full payment plus interest, the way most people do -- for the Lees about $5,500 a month. Another way was to pay just the interest. And the third choice -- and this is where it gets dangerous -- was to pay just a portion of the interest. Except, that last option doesn't cover all the interest owed on the loan. And the difference, for the Lee's -- about $1,600 a month -- was added to the principal balance.

So even as they made payments, the total amount they owed kept growing.

Ryssdal: So in the case of the Lees, they borrowed $918,000. That balance due could have been at the end of five years, could have been a million-ten-thousand-something, right?

Reiner: Correct.

Still, Christian Steven says, those kinds of loans made sense if you believed -- as almost everybody did back then -- that real estate prices were never going to fall.

Stevens: The smartest people on the planet were telling us that it only is ever going to go up again. So it wasn't important what you paid. It was important to get in, because whatever you paid today was going to be about 30 percent more in a year.

Until, it wasn't. In 2007, risky mortgages started defaulting, lenders were going belly up and the housing market started to crack. By 2008, it was worse.

TV CLIPS: Sources tell CNBC that senior management at Bear is actively shopping the firm... Lehman Brothers has filed for bankruptcy.

Bear Stearns and Lehman Brothers and Washington Mutual, which held the Lee's mortgage, went under. It was sold to JP Morgan Chase.

NEWSREEL: Right now. Breaking news here, stocks all around the world are tanking.

The Great Recession was on.

In March of 2009, the Lees put the house on Point View up for sale. The listing price was one-and-a-quarter million. No takers.

In July that year, the Lees got a notice of default. They were $21,000 behind on their payments. Lot 354 -- this great little house, in this great little neighborhood -- was in foreclosure.

Former owner Shawna Phelan.

Shawna: It's sad to see a house that you put so much time and energy in, to go through foreclosure, and know that someone went through probably a very stressful time in their life. And it's not how you want to remember a house that meant something to you.

This is, on the face of it, a story about just one house in one city. But the misfortunes of Lot 354 helped trip up the entire American economy.

Washington Mutual sold the Lees' mortgage out into the bond market. It was bundled with other risky loans and became a mortgage-backed security.

Jesse Torres, the CEO of Pan American Bank, puts it this way.

Torres: The buck was being passed, where someone was taking their risk and passing it on to the others. Where the mortgage banker, once the loan was originated, sold it off to the investor, and at that point, wiped their hands clean of the risk of the downside.

So all those toxic assets you've heard about? Bonds that went bad and helped push the American economy right to brink? Mortgages that were dreamed up by bankers and pooled together on Wall Street and sold out to investors worldwide. This little Spanish bungalow was one of them.

Torres: I think in this whole episode there are a lot of bad guys. There are banks that certainly acted in a greedy fashion. But along the way we have appraisers, investors, hedge funds. And quite honestly -- and a lot of times we don't like to say it -- but, the consumers.

The Lees were evicted last spring, owing more than a million dollars. After the bank repossessed the house in May, it was Christian Stevens' job to find a buyer. The bank listed it for $847,000 last August.

But as Christian Stevens points out, buyers -- not the sellers -- set the price.

Stevens: The $40 million Picasso you have on your wall isn't worth $40 million until somebody's willing to give that to you.

The bank couldn't find anybody that was quite that willing. But Christian's colleague, Eitan Dagan, did have a buyer in mind.

Dagan: I'd been working with Christian Stevens. I actually knew of it months before it actually hit the market. And I took Eric and Alison by to take a look at it.

Eitan thought the house was great. But for Eric and Alison Feinberg, definitely not love at first sight.

Alison: Everything was dark and dingy. And there were very ugly curtains up there.

Eric: It turns out that when we walked in the door, the two of us were aligned on our view of it, which was dirty, dingy.

Alison: Absolutely no way.

When you buy a foreclosure, you typically get it as is: dirt, damage, leaky roof and all. The Feinbergs didn't quite see the potential in this house, but Eitan Dagan kept taking them back.

Eric: The pieces of advice that we got, from my father, was at some point in your life you're gonna have to take a risk.

Alison: Yeah, and we hadn't, so...

Eric: And that was great advice and love him for it. And her dad gave us another bit of advice when he walked in, 'This is a great house.'

A great house maybe, but at more than $800,000, the price was still high.

Eric: But our broker, real-estate broker, was smart enough to say, 'It can't hurt you to put in an offer -- whatever you want. It can be 10K lower. It could be whatever you want.'

So the Feinbergs put in a low bid. The offers went back and forth, each side looking for that price where they'd be happy -- the price where the sale made sense for the bank and the buyers. Then they got the call, the house on Point View was theirs for $765,000. So if you do the math, that's almost a half-a-million dollars less then what the Lees paid four-and-half years ago.

Ryssdal: Did you guys get lucky?

Alison: I think we did.

Eric: Totally.

Alison: Totally.

Ryssdal: Did, not the fact that it's a foreclosed house, but the fact that this was a house somebody lost ever come into your minds in this process?

Alison: Somebody did lose this home. I don't know if I will ever reallly get over it. Again, I just feel this is where we're supposed to be and...

Eric: To me, we just honor the home.

Alison: Yeah, and honoring the home -- that's a good thing.

The hardest part of the housing recovery is still to come. Finding buyers for houses that aren't quite as charming as Lot 354.

Stevens: I think even at cabinet level, the White House now understands that the market is not in correction mode. We're not coming back the way the stock market did. We're not going to have all these properties suddenly cure.

For the house on Point View and for the Feinbergs, the story has ended, and ended well. But there at least five million homes in this country in some stage of foreclosure. When their stories come to an end, that's when the economy is going to start to get better.

Eric: We live in this space -- this physical structure that we're in, this plot of land. You know, 6,500-square feet of earth that we are now, you know, holders of. People lived here before. People are gonna live here after. And we know that we've got a spot in history. And we're just going to really enjoy it. That's the only thing that I know that we can do really well right now, is to live in this home.


Ryssdal: Our story, Lot 354, was a collaboration with SoCal Connected, that's a production of Los Angeles public television station KCET. We do television, too. There's an extended TV version of the story on their website. It's KCET.org.

And the tale of Lot 354 lives on online. Our website has an interactive map of the anatomy and the aftermath of the foreclosure crisis. There are videos and all kinds of good information on there.

Megan Larson, Nancy Farghalli and Jonathan Karp produced Lot 354 for Marketplace. Celeste Wesson is the senior producer of the program. Our web team includes Matt Berger, Dalasie Michaelis and Daryl Paranada. Special thanks to Deb Clark and Corelogic. Also, Rick Wilkinson and Lata Pandya and the staff at KCET.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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