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Microcosm of Housing Crisis on an Arizona Street

Louise Story|The New York Times
Tuesday, 23 Mar 2010 | 12:47 PM ET

The uncertain line between hope and despair divides Cave Creek, Az.—an exurb of Phoenix—where the trim stucco houses used to sell so briskly.

It winds around the swimming pools and the pebbled yards of East Montgomery Road like a slow-burning fuse.

Cave Creek in Maricopa County, Arizona.
CNBC.com
Cave Creek in Maricopa County, Arizona.

On one side are people like the Setbackens, Gary and Cissie, who moved here from Washington State and, with prudence, have managed to pay their mortgage bill month after month. On the other side are those like Kelley Carter, who never dreamed that home prices would fall so hard, and got in over their heads.

Two in five homeowners in this sprawling development 30 miles northeast of Phoenix are underwater on their mortgages. And that reality is wearing away household budgets and people’s patience.

Arizona is one of five states that, with money from Washington, hopes to help at least some of these people hold on to their homes. Under a new, federally financed pilot program for the hardest-hit housing markets, state officials will decide who will get a homeowner bailout, and who will not.

The idea is as controversial in Washington as it is here. Do the neighbors next door who lived beyond their means — the ones who, say, bought that house they could not afford, or who binged on home equity loans to buy new cars and flat-panel TVs — really deserve to be bailed out with taxpayer dollars? Do they deserve to have some of their debts forgiven? And is that fair to the cautious ones who paid their mortgages?

For the people of Cave Creek, the answers will fall to state officials like Michael Trailor, the director of the Arizona housing department.

A former real estate developer, Mr. Trailor knows firsthand about the perils of the property market.

“I feel for all of them,” Mr. Trailor said of the struggling homeowners. “But we do not have the funds to help all of them. If we can help 6,000 people, which ones should we help?”

The federal government will pay for pilot programs in Arizona, California, Florida, Michigan and Nevada with $1.5 billion from the federal banking rescue. That figure is a small fraction of the funds that would be needed to help all of the people at risk. Arizona, for instance, received $125 million. If it allocates $30,000 of aid for each residence, 4,166 homeowners would benefit. But the Phoenix area is bracing for as many as 50,000 foreclosures this year alone.

Mr. Trailor said he was reluctant to help homeowners with “self-inflicted wounds,” like those who overspent or cashed out the equity in their homes during the bubble years. He wants the banks to match the public money being used for debt forgiveness, and he is focusing on people whose incomes have fallen but who still hold jobs.

He is considering an approach known as “earned forgiveness,” where the state and the banks promise to forgive mortgage debt later on, but only if the homeowners stay in their homes and keep making their payments.

The question of who deserves help rouses neighbors here. Not long ago, home values seemed to reach relentlessly toward the bright blue sky.

Then the boom went bust. Home prices in the Phoenix area have collapsed by 50 percent since mid-2006, leaving many owners with mortgages that are higher than their property values. One in 10 homes in this development in Cave Creek have moved through foreclosure since 2008, according to Netvaluecentral, a real estate tracking company in Glendale, Ariz. Half of the homes here are owned by banks or are being sold for less than the value of their mortgages.

“Underwater homes make it highly likely people will walk away, and if they do, these foreclosures are going to push everyone’s prices down,” said Brett Barry, a real estate agent here. “People need to realize that we’re in this together.”

The new reality is evident on East Montgomery Road, where the bust is playing out in a variety of ways.

There are the Setbackens, at 4355, who arrived in 1993 and paid down their mortgage even as home prices skyrocketed.

Across the street are the Chatburns, Tim and Leslie. They also arrived in the 1990s, before prices exploded, but struggled recently to keep up with the bills after an injury kept Mr. Chatburn out of work.

Mr. Chatburn, an air-conditioning repairman, used to say that bailing out his neighbors would be unfair, but he changed his mind after watching news programs about the rescues of big financial companies like the American International Group.

A little wine for the suffering neighbor

“I started thinking about all this money we paid as taxpayers to the banks,” he said, “and I thought, ‘Why don’t we take care of our own a little bit?’ ”

Ms. Carter, at 4344, arrived in 2005, as the bubble was inflating. She took out tens of thousands of dollars in home equity for repairs and other items, and by this year, she was underwater on her mortgage by $86,000. A single mother, she moved out this month, days before her home was sold in a short sale, which meant her mortgage lender allowed her to sell for less than the value of her mortgage and the lender took the loss.

And then there is the young couple with a toddler, at 4343. They moved out on the same day as Ms. Carter, before a scheduled foreclosure of their home that was $115,000 underwater. The couple, who asked not to be named, also bought near the peak and took out a home equity loan to pay off their student loans and other debts. Then, a year ago, they stopped paying their mortgage, after both of them lost their jobs for a time. They now have office jobs again.

Mr. Setbacken, a salesman, said he had warned his neighbors not to get in over their heads but they did not listen. He and his wife might have stepped up to a bigger house if they, like so many of their neighbors, had gambled recklessly on the housing market, he said.

“Everybody that I know that got themselves in trouble was because of one word: greed,” said Mr. Setbacken, 63, a former Marine who remains in tip-top physical condition. “I have no sympathy for any of them, on the financial end. When I hear about dropping the amount you actually owe, I could stick my finger down my throat.”

Then the doorbell rang. It was a young girl bearing Girl Scout cookies. “My adopted granddaughter,” Mr. Setbacken announced.

The 8-year-old is Ms. Carter’s daughter, Ava. Across the street, Ms. Carter was packing up the house.

Ms. Carter said she felt guilty about leaving. With her short sale, the price of the home went down to the benefit of the new homeowner. But it dragged down prices in the neighborhood, she said.

Ms. Carter, a mother of two and a real estate agent who poses as an angel with wings on her Web site, has been through hard times before. Years ago, she considered filing for bankruptcy but then changed her mind. She said she was accountable for her actions and was making what amounted to a business decision to leave her home.

“I had to take emotion out of it,” said Ms. Carter, 36. “If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.”

Sitting at her dining room table, before a large tank of fish, she recalled how she had made this a perfect home. It is one of the few on East Montgomery Road with grass in the yard, an expensive proposition in the desert. A Mercedes sits in the driveway.

She said she did not feel she deserved to have her debts forgiven, but added that if her mortgage had been lowered, she would have tried harder to stay. The worst part, she said, is that her decision will hurt Mr. Setbacken, who has watched out for her over the years. “For Gary, he’s going to have to deal with the ramifications of what I’m doing because I’m bringing his property value down,” she said. “I pray at church. I feel horrible for what I’m doing to my neighbors.”

Later, after Mr. Setbacken talked to Ms. Carter — she “cried and cried and cried,” he said — he had a change of heart. In an e-mail message, he said that perhaps wealthy Americans could donate money to aid homeowners. If he had more money himself, he might help some neighbors pay their mortgage bills.

“I have focused on the financial issues during these times and overlooked what was more important, the emotional stress that my neighbors are feeling,” Mr. Setbacken wrote. He walked down East Montgomery Road and gave a bottle of wine to the young couple facing foreclosure. It was, he said, “to help them pack.”

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