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What Would Horatio Alger Do?

Thousands of Americans are defying eviction notices and exercising civil disobedience.

Horatio Bernard came to the United States from Liberia in 1982 and followed the story of American promise. He went to school for civil engineering, worked hard to support his family and sent his kids to college. His most recent experiences now mirror the American tragedy.

Like millions of others, he took out a subprime mortgage and then lost his home to foreclosure. The bank, he said, refused to reasonably modify his loan despite a federal bailout. And so now, like a growing number of Americans, Horatio Bernard isn’t going anywhere.

“I don’t understand,” Bernard said. “The house will be sitting here for six months or a year. For what? I’m willing to pay for the house. Just adjust the rate. Why can’t they do that? And they got bailed out.”

For the past four months he’s been living — legally speaking — as a squatter in his own home. He doesn’t technically own it anymore, but the keys still unlock the deadbolt and he still pays the utilities. He doesn’t know when, but any day now sheriff’s deputies might arrive to escort him and his ailing mother from the premises.

There’s a lot about Bernard’s story, and the housing crisis in general, that defies logic. Why would the bank rather evict him and take a substantial loss than draw down the principal of the loan? Answers don’t come easy.

Like a Virus
If the sheriff does come knocking, Bernard says he’s willing to be arrested along with an on-call band of civic activists enlisted by the Maryland chapter of ACORN — the Association of Community Organizations for Reform Now — who plan to lock arms and mount a sit-in to try and save Bernard’s home. (ACORN is the same group that was criticized by Republicans during the 2008 election season over its voter registration drives.)

Across the country, ACORN activists started taking similar action in February as part of its “Home Defender Program.” In Baltimore, police arrested a woman who cut the locks on her former property in attempt to move back in. Thieves had already stripped the house of its copper wiring.

The idea, said Joe Cox, ACORN community organizer in Baltimore, is to stay in your home at all costs because up until then, there is still hope for a negotiated settlement. He’s urging the Baltimore City Council to pass a one-year moratorium on sheriff-led evictions.

Plus, there are benefits for neighbors who aren’t being evicted: Studies show abandoned properties bring down the values of nearby homes.

“Clearly the banks have not gotten the message that the modifications are both in the borrower’s and the lender’s interest,” said Cox.

Foreclosures are contagious, said John Harding, professor of finance at the University of Connecticut. While other studies looked at the relationship between foreclosure rates and a depressed housing market, Harding’s mid-2008 study specifically drew the conclusion that foreclosures, in and of themselves, led to declining home values. He found a direct relation between a property’s proximity to a foreclosed home and its drop in value.

“People spend 2 percent on average a year on maintaining the value of their home,” Harding said. “If you’re a homeowner in distress, you’re going to let that slide.”

Once a home is vacant, at least six months in most foreclosure cases, it can attract vagrants or bands of skater kids looking for the next epic pool ride, neither of which is going to help the neighborhood. In one case, a bobcat moved into an abandoned property.

There were approximately 6.2 million vacant homes in 2007, according to a study by the Joint Center for Housing Studies at Harvard University, and 19 million by 2008, based on U.S. Census figures. By any measure, that’s a lot of vacant housing falling into decay and burdening the financial markets. It’s far better to keep somebody — anybody — in the home.

But there’s a catch, said Harding. “One thing to worry about is that the people in the home have enough incentive to maintain the home.”

This suggests it’s probably not a good idea to fill the vacancies with homeless people, although groups like San Francisco’s Homes Not Jails and Miami’s Take Back The Land are actively doing this.

Evictions on the Rise
No one keeps exact numbers, but anecdotal reports show that sheriffs’ departments nationwide carried out a surge in evictions over the past year, and a rising number were at owner-occupied homes compared to renters. Some sheriffs unilaterally stopped evicting people, especially during the winter.

Opponents say a moratorium on foreclosures creates an incentive for deadbeats, further fostering an attitude of entitlement. “Isn’t it interesting how those who got us into this mess by borrowing irresponsibly are now demanding things,” wrote conservative blogger Texas Rainmaker, specifically tackling ACORN’s action in Baltimore. “It’s as if home ownership has become a God-given right.”

The Community Law Center in Baltimore supports the moratorium for its city as well as a similar measure on Capitol Hill. Robert Strupp, its director of research and policy, said nothing in the plan would let homeowners off the hook for paying their mortgage. Part of the proposal requires homeowners to make some form of payment during the moratorium.

“The amount of the mortgage, if you were not to pay it, would still be owed by you when the bank sits down with you to modify the loan,” Strupp said.  “It would be part of the formula to figure out what you’re new mortgage is going to be. All you’re doing is shooting yourself in the foot if you don’t pay anything.”

According to Tom Kelly, spokesman for JP Morgan Chase, the bank that now owns Bernard’s home, Bernard has very little chance — if any at all — at winning the house back. (JP Morgan Chase did enact its own moratorium on foreclosures, but that only lasted from mid-February to March 6.)

Failure to Modify
Bernard bought the narrow four-level row house in southwest Baltimore in May 2005 for $258,000 with an interest rate at nearly 8 percent. He thought he had a fixed-rate, 30-year loan, but in actuality the mortgage broker enrolled him in an adjustable rate mortgage, or ARM, loan.

In 2006, Bernard lost the haircutting business he opened as a side job, but he still held his position with the local water company — a job he keeps today. He continued to make $1,300 payments until early 2008 when his interest rate jumped to nearly 10 percent and the monthly payment ballooned to $1,900. Fearing he could lose his home, Bernard contacted the bank to modify the loan.

Finding who held his loan was no simple matter. He determined that his loan changed hands three or four times, like a hot potato, eventually landing in the bin of toxic assets held by Chase Home Financing, part of JP Morgan Chase.

“I wrote to Chase and asked for a modification when my subprime jumped and told them I was unable to make these kinds of payments,” Bernard said. “I told them I can make the payment as long as they adjust the rate and make it affordable. I want to save my home. I have nowhere else to go.”

He stopped making payments for three or four months hoping to modify the loan. Though no one at Chase told Bernard not to pay his mortgage, in some cases lenders require borrowers to default for 90 days just to start the process of renegotiation, according to Strupp.

Vultures Descend
Bernard did get a modification to a fixed-rate, 30-year loan from Chase, but with an interest rate at close to 9 percent, the monthly payment came out the same. Continuing to face foreclosure, a friend told Bernard about the federal HOPE for Homeowners program, which offers Federal Housing Administration-approved, fixed-rate 30-year loans for struggling homeowners. But the friend mistakenly gave Bernard the number to New Hope Modifications.

“I thought they were the ones helping you to save your home,” Bernard said.

Though it sounded similar, this for-profit enterprise based in New Jersey had nothing to do with the federal HOPE program — but they said they could help. More and more companies, Strupp said, are using “hope” in their name because so many nonprofit and public agencies use the term in their programs.

In September, Bernard paid the company a total of $1,800 upfront to renegotiate his mortgage. A representative with the company told Bernard not to make any further payments on the home. This put him back another three or four months. By that time, he still hadn’t heard back from the assistance company.

“The guy who I was involved with had already left the company,” Bernard said. “Somebody else took over, but I couldn’t get any good answers.”

Brian Mammoccio, CEO of New Hope Modifications, did not return a request for an interview. Meanwhile, allegations are accumulating about his company on a consumer protection Web site, Consumer Affairs, including those from a former employee who called his operation a scam.

Strupp said that companies like these are nothing new. Dozens have popped up seemingly overnight. Anyone who’s ever fallen into foreclosure knows the onslaught of advertising to buy the home or help modify a loan. “These loan mod schemes are rising,” Strupp said. “Unfortunately they’ve been fueled by the homeowners’ frustration.”

Finally, in November, Bernard received a letter from New Hope Modifications saying they’d worked something out with the bank and Bernard could save his home with a $5,000 payment by Nov. 28.

On Nov. 14, Chase sent a letter saying he had to pay — by Nov. 10. Bernard said a Chase representative told him that the letter was a mistake, and he had until Dec. 15. But on Nov. 28, with his family still in the home, the bank bought the property for $100,000 less than what Bernard paid for it.

Strupp said it doesn’t make sense that the bank would take over the home with a reduced value of $100,000 but was unwilling to knock that much principal off Bernard’s loan.

“There is a lot of what appears to be illogic going on in the whole loan modification process,” Strupp said. “My theory is that one of the reasons it isn’t happening is that it’s just too complicated for these servicers to sit down and try and figure out if this homeowner can fit into some kind of workout box. It’s a whole lot easier to say, ‘We’ll foreclose, get our 45 cents (on the dollar). So what?’”

Kelly, the spokesman for JP Morgan Chase in Chicago, said he couldn’t speak to a single case, but he noted that the bank helped more than 330,000 people avoid foreclosure in the past two years.

“We would like to keep homeowners in their homes when possible, but the payment they make must be reasonable,” he said.

Stories like Bernard’s led the Obama administration to push for incentives to have lenders modify loans. But so far, no government-imposed moratorium has taken place.

Strupp doesn’t hold out much hope for the Obama incentives plan.

Instead, he believes a moratorium on foreclosures would put pressure on the lenders to modify more loans, since the lost time would otherwise be lost money. Certain lenders such as Fannie Mae and Freddie Mac imposed brief moratoriums on their own, but the best JP Morgan Chase can offer now, according to Kelly, was that three-week moratorium it announced as it sorted out the kaleidoscope of federal policy.

Strupp has another idea. “The ultimate piece should be that the government would insure the modification. If the borrower fails, the government would make good on the modified loan. That would be a lot better use of spending the government’s money than buying all these toxic mortgages.”

Policy matters aside, Bernard — like so many others — desperately needs a bailout of his own.

“This is supposed to be a land of opportunity, where if you work hard you can achieve what you want to achieve as long as you’re willing to make sacrifices,” Bernard said. “I’ve worked here. My kids are going to college. Look at the situation I’m faced with. The American dream has become a nightmare. Where is the help?”

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