Underwater in Phoenix: Real-Life Tales of Surviving a Short Sale

Scott and Shantal Murphy relocated to Phoenix in 2006 and bought a home in nearby Mesa, Ariz. for $325,000 at the height of the real estate market. By 2008, when the family decided to pack up and move to Texas, the home was only worth $225,000, leaving the family so far underwater that the only way out was a short sale.

Scott says that he and Shantel -- pictured left with their daughter, Macie -- were some of the first homeowners in Phoenix to request one.

It's no secret that the Phoenix real estate market has suffered more than most, but few outside the area realize how bad things have become. Some 66 to 67 percent of Phoenix area homeowners are underwater on their mortgages. A recent report by Jay Butler, head of realty studies at Arizona State University, shows that Phoenix still may not be out of the woods. Home foreclosures may be leveling off, but for the homeowners who have to deal with it, here's what they experience: conflicting advice, reams of documentation and hours upon hours of phone calls.

HousingWatch spoke with three Phoenix-area families who have experienced the short-sale process.
The short sale experience was a living nightmare, from beginning to end, says Scott Murphy, a former Naval officer who worked for FedEx. His Realtor was just beginning to know what a short sale was, and his lender didn't even know what he was talking about. "I called [the bank] every day for three months," says Scott. And he guarded his credit.

But the paperwork on the short sale was the real killer: Scott had to document his entire financial life, obtain a letter from his new Texas employer, taxes, everything. He submitted it again and again, but bank reps kept saying that they never received the package. Finally, the bank accepted a $199,999 cash offer for the home.In the end, it took him two years of renting in Dallas before his credit rating was good enough again for him to buy another home.

Surprise Rate Increase in Surprise, Ariz.

For Sandie and Julian Sado, of Surprise, Ariz., outside of Phoenix, it was property taxes and a mere 1 percent increase on their mortgage interest rate that sent them spiraling into a short sale. The Sados moved to the Phoenix area from California in 2003, when the Phoenix market was sizzling. Julian trained mortgage loan underwriters for Wells Fargo in nearby Tempe. The area was so home-loan-thirsty that he taught 200 neophytes about underwriting guidelines in just six months. The couple bought a modest 2,000-square-foot home for $153,000, which they sold in less than two years for $253,000, pocketing a $100,000 profit. They reinvested that equity into the Surprise home, which took a year to build.

Owners Sandy and Julain Sado were forced to put their home up for shortsaleBut after they moved into the house in the Copper Canyon Ranch development, their finances began to unravel. Julian left his bank job for higher-paying contract work, then landed as a training director for a subprime wholesale mortgage company called MLN Mortgage Lenders Network. MLN basically wrote, he says, bad loans -- "criminal acts with approval." The company went bankrupt.

But MLN offered great mortgage perks to employees, subsidizing 1 percent of the interest rate on all loans, and covering all closing costs. The Sados enjoyed this perk, until the failed company's assets were sold to Wilshire Credit. Wilshire upheld the loan agreement, but not the subsidized rate (6.25 percent). So the Sados monthly payment on that dream home began to increase, even though they had a fixed rate of 7.25 percent.

Then came the tax errors. Their escrow account for property taxes had initially been miscalculated by MLN. Phoenix taxes are based on property values two years prior, so as the county caught up, the Sados began getting notices from the new lender that their monthly mortgage payments were going up.

"Wilshire changed our escrow twelve times in one year," says Julian. It fluxed from a low of $10 per month to $200.

Once upon a time, the Sados thought the Phoenix real estate market ruled. Not any more.They still live in their 3,900-square-foot dream house, pictured above, but they no longer own it.

The Sados are leasing it back from an investor after selling their $379,000 home in a short sale earlier this year, for $200,000, and until they find another home.

McMansion Meets Bank Loan

Lawrence Cade, 69, and his wife moved to Copper Canyon Ranch in Surprise in 2005. Like the Sados, the Cades bought a lot and worked with a builder to erect what he calls his "McMansion." He also paid $379,000, and spent another $100,000 on a pool and spa.

That $479,000 investment, says Larry, is now worth $168,000. "Anyone who bought a home in Phoenix between 2004 and 2008 is now underwater," he says.

Unlike the Sados, who put almost zero down on their Copper Canyon Ranch home, Lawrence Cade laid out a 20 percent down payment on his dream home. A former POW who worked as a mortgage broker in California, he has a Phoenix real estate portfolio that might as well be called The Titanic. His downfall came when the market crashed and banks took loans in-house, no longer using independent mortgage brokers. Thinking it a great investment, he paid $259,000 for another home in Surprise to rent out in 2004; it's now worth $123,000.

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"I went to the mortgage lender and said, I can give you the key," Cade says, "or you can work with me to lower the payments so my rent covers them." The lender offered Cade a 40-year mortgage with low interest rates. The monthly payments fell from $1,800 to $954 a month. Larry found tenants and signed a two-year lease.

Cade was not as fortunate with the lender of his Copper Canyon McMansion. Knowing that money was tight, he leased the home in 2009 and went to live in his San Diego condo. He obtained a six-month forbearance that lowered his monthly mortgage to $1,259. But after completing the modification package for the Florida-based lender, he was told that his mortgage was based on a primary home, and they could not help him because he was not living in the home. Get rid of your tenants, move back into the house, the lender told him, and let's talk again.

Which he did. In July 2010, Cade was told that his modification was approved, but for a monthly payment of $1,789 a month because his debt ratio was suddenly too large. His tenants had been paying $1,695 -- the tenants he turned out so that he could move back in to qualify for a modification.

"You talk to the mortgage companies, they don't have anyone qualified to answer questions or make decisions," says Cade. "The woman on the phone actually asked if there was anything she could do for me." Help save my home and $200,000 in equity, he told her. Cade is now working with an attorney, and living with two underwater properties has changed his attitude toward real estate and the system.

"It doesn't make sense," he says. "The bank will sell my house at auction for less than $130,000. All I wanted them to do was reduce my monthly payment."

And he knows that every penny he puts in the home is a loss -- why, he says, should I keep pumping money into it when I know the value is not going to come back in my lifetime? He plans to cut his losses and move on, something that his attorney says he maybe should have done sooner rather than work with the bank. The ordeal has been psychologically taxing and his physician has had to double his medication.

"The feeling around here," he says, "is you get rid of your home like a bad stock. Why worry about paying back the banks when they got bailed?"

For underwater homeowners in Phoenix and elsewhere, letting go of their houses -- no matter how much of their initial investment they have lost -- is often liberating. And as painful as the short sale process has been for most, almost all say that they will one day own another home.

"There is a sense of freedom and relief of not owing money, of not being tied down to those bills," says Sandie Sado. "But at some point in time we want to buy again."

Additional reporting by Sheree R. Curry.

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