The cost of foreclosure

A sign is posted in front of a foreclosed home for sale in California.

Tess Vigeland: It's been more than a year since federal regulators reached a settlement with banks over foreclosures that should never have happened. This week, those same regulators issued new guidelines for deciding what kind of money home owners might get. If they were wrongly foreclosed upon, banks might have to fork over more than $125,000. Each.

Meanwhile, nearly three million people are wallowing in the muck that is the foreclosure process. And as Marketplace's Stacey Vanek Smith tells us, that process comes with a price tag.

Stacey Vanek Smith: Martha Wright has owned her home in the beach town of Avalon, N.J. for more than 10 years.

Martha Wright: I bought the dirt, and that's what we call it here, in 1998.

Wright had good credit and a job as marketing executive. She took out a jumbo loan -- north of $750,000 -- and built a barn-style house on the bay. She filled it with antiques she's been collecting and refurbishing for years.

Wright: This is my vision and I've been saving to build a house at the shore since I was 16 years old. I am 56.

Wright loves the house and living the bay, where she kayaks twice a day.

Wright: Hey Richard! Did you just catch a flounder?

Wright was making mortgage payments of over $6,000 a month. Then, four years ago, her salary got cut in half. She started dipping into her savings and applied for a mortgage modification. But she was turned down because she had too much money in the bank to qualify.

Wright: The second time I applied, I was turned down, because they didn't think I really lived in the house. They thought it was a vacation property.

Wright has applied for a mortgage modification five times. She says she's spent countless hours on the phone with different people at JPMorgan Chase, which services her loan. And then there's the paperwork, which Wright says takes a lot of time to prepare and fax -- and re-fax -- to the bank.

Wright: And you become the library weirdo who's always in there with her plastic file bucket. And then you're handing the fax to the person at the library at a dollar a page who can certainly read the fax. So you're now the town crazy woman who's losing her house.

After draining one of her savings accounts, Wright stopped making mortgage payments two years ago. Now she sets aside $3,200 a month, hoping to one day use that money to pay a modified mortgage. She says being delinquent has come with a lot of stress.

Wright: If I had to go away on business, I was worried I'd come back and find the locks changed and my cat gone.

Anxiety, health problems and marital troubles are things Sara Manaugh sees every day. She's an attorney with South Brooklyn Legal Services' Foreclosure Prevention Project. As far as dollar amounts? Manaugh says late fees and other bank charges can add up to thousands a month.

Sarah Manaugh: The interest accrues. Another cost is legal fees. The home owner also has to pay the legal fees that the bank incurs in the course of the foreclosure action. That's written into almost every mortgage.

Wright shelled out $5,000 to hire a lawyer. Her credit score has plummeted and she's been turned down for a credit card. She's taken freelance work to get extra money and keeps household expenses to a minimum.

Wright: OK, I'm not living large here. You've seen the place. I've done everything in my power to cut costs.

Chase told Marketplace that large loans, like the one Wright has, are harder to modify. Wright says she will keeping doing everything she can to work out a deal with the bank.

Wright: Oh, I'm not walking away from this. Absolutely not.

In Avalon, N.J., I'm Stacey Vanek Smith for Marketplace.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.
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Addressing the comments below, the couple above, as with most people who refinanced their homes had no idea that massive fraud was about to take down the economy. One would have to read the financial journals to know that. So, investing in home-improvements or thinking you can buy an investment house in an economy that average people didn't understand would end in collapse was not a bad idea. Had the economy only experiences a downturn which is for what most people plan, everyone had the expectation of working and managing the debt. Instead we get complete collapse brought on by fraud. Everyone knows these foreclosures and job losses are part of the DAMAGES from the bank fraud. That is why they expect help.

The media are failing to speak to one of the most costly side of this mortgage and foreclosure fraud in that the use of MERS to launder the fraudulent loans created a titling debacle that will costs hundreds of millions if not billions to correct. It is equivalent to an industry that enriches itself on its product and leaves the environmental cleanup to the taxpayers. Same thing. This titling disaster is part of the DAMAGES that the banks owe over and above the trillions in fraudulent profits. This is big news.....this subprime mortgage fraud is the largest movement of money by fraud in human history and yet the media can't make room for this news inbetween constant talk of unemployment. There is a simple reason for stagnant growth.....it's called global expansion of businesses with no intent to grow domestically.

These kinds of stories just blow me away. Why on earth do people think they are entitled to just have their debts forgiven when things don't go their way?

Here's the real lesson for listeners: Don't take on debts that you can't repay. Better yet, don't take on debts, period. For the amount this person likely had to shell out for her down payment, she easily could have bought a perfectly reasonable house with cash in a more modest location.

The world does not owe you a custom house on the waterfront. If you insist on taking risks like an outsized mortgage in order to get it, be prepared to take the consequences if those risks don't work out.

I'm trying to figure out what the lesson is here for listeners. I thought this show was about how to deal with the reality of the economic world.

If my income was cut in half and I was carrying what must be a million plus dollar loan I would bow to reality and put the house on the market and hope that in the future my lot in life would improve. Wright seems to believe that she is exempted from reality and now must bear the consequences of her decisions. I don't know why this story is relevant to listeners.

The untold story here is that a mortgage is a business deal and in business, deals are subject to renegotiation, particularly when circumstances change. The income of the owner has been halved and as attempts to modify the loan have dragged on the value of the home has dropped. In business one typically negotiates with a decision-maker and works out a mutually acceptable deal; with homeowners and banks the decision makers and the decision-making guidelines are not transparent - there is no real opportunity to work it out. In this particular situation Chase, the loan servicer, has put forth a “pay to play” offer which dangles an affordable payment but offers no information regarding the revised interest rate, term of the loan, etc. In order to see the complete modification agreement the homeowner must make three trial payments and if they find, upon receipt of the actual modification agreement, the terms unmanageable, they may elect not to participate. That is pay to play and that is an unanticipated cost of fighting foreclosure.

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