Falling rents aid homeowners in mortgage trouble

Joyce Ann Cato is out of work and about to lose her San Bernardino home to foreclosure.

The 62-year-old special-education teacher filed for bankruptcy protection last April in a bid to keep her house, which is worth less than what she owes on a mortgage she can’t afford anymore. As Cato searches for another job, she and her daughter, Minjoy, have landed in a Pomona house that they rent for $1,795 a month, substantially less than the old mortgage payment but still a hefty chunk of the mother’s $2,500 monthly income.

“Well, it is reasonable because I don’t have to pay the house now,� Cato said. “I am able to pay that.�

Joyce Ann Cato is one of the many housing-bust refugees finding haven in Southern California’s weak rental market. Typically, rents and home prices head in opposite directions. But the glut of foreclosures that has driven home prices to some of their cheapest levels in years is also working in tandem with the ailing economy to send rents falling across the region.

For those like Cato who have emerged on the other side of the housing market’s wreckage -- their equity gone, credit shattered and pride bruised -- this increase in affordability is a thin silver lining.

Southern California rents peaked at $1,501 in the third quarter of 2008 after 12 years of consecutive gains. Since then, rents have fallen 4.9%, to an average of $1,427 in the third quarter of this year, according to a survey of larger apartment complexes by property research firm RealFacts. The drop came as the occupancy rate of the buildings ticked down 0.8% to 93.7%. The data don’t include homes converted into rental units or smaller apartment buildings.

Some lenders and policy experts are looking at the rental market as a tool to keep more foreclosures off the market.

Mortgage titan Fannie Mae recently announced a program that would allow homeowners who are foreclosed upon to rent back their properties at market rates. Another proposal being considered by the Obama administration would encourage banks to sell distressed properties to investors who would agree to rent the home to the previous owner.

The decline in prices marks a significant reversal from the boom years, when rents increased as people flooded into the Los Angeles area, attracted by a diverse economy. Now many of the region’s key industries -- construction, trade, manufacturing, tourism and entertainment -- are reeling. Los Angeles County’s unemployment rate soared to 12.8% last month, up from a revised 12.6% in September.

Job losses and competition from foreclosed homes have made concessions by large landlords common. Thomas Shelton, president of Western National Property Management in Irvine, said he was offering about a month of free rent for every 12-month lease signed. In some of the hardest-hit areas, particularly the Inland Empire, he said, he is competing with investors who are renting out condominiums and homes, undercutting market rates.

Timothy Suber, a real estate agent and investor, owns and rents out mostly two-bedroom condominiums in Riverside County’s Lake Elsinore area. Though prices dropped enough in 2007 to get him back into the buying game after sitting out the boom, Suber said he has not survived the bust unscathed.

He has dropped his monthly rental rates by an average of $150 since 2007 to attract new tenants and keep old ones. Potential tenants who can secure a loan from a bank -- those with steady income and good credit -- are shunning the rental market to buy, he said, leaving him to deal with the rest.

“They have foreclosures, bankruptcies; they have questionable credit,� he said. “That is kind of your captive market.�

This is good news for renters such as Thomas DeLong, 40, who said he lost five homes to foreclosure, including investment properties, an inheritance and the house he lived in with his girlfriend.

DeLong, who works the night shift for United Parcel Service at Ontario International Airport and plays bass guitar in a Linkin Park- inspired band called the Almighty Grind, said renting was a relief after years of worry and a financial juggling act that came crashing down all around him.

He walked away from the mortgage on his final home in September and began renting a house for about $1,400 a month, with utilities, in the high-desert area of Perris.

“You are trying to pay all these people, and unfortunately, you have to go through a process of elimination, and even though we did that, we still lost everything,� DeLong said.

Although the drop-off in rents is a boon for some, it’s also a grim indicator, underscoring just how severely the recession has struck Southern California households. The low rents are likely to continue if lenders step up their repossession efforts.

“The fact that rents are coming down is of course favorable to those who need to rent,� said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate. “But it is an artifact of larger economic weakness, and that larger economic weakness is not a good thing.�

Cato’s story is typical of the heady bubble years and their aftermath. The widow refinanced her San Bernardino house to pay down debts in 2006, taking out an adjustable-rate mortgage. At the time, she was working in San Jose as a special-education teacher, pursuing a dream of becoming a high school counselor. Her sister lived in the house, and Cato said she kept up on her mortgage despite having to also pay rent in San Jose.

“I wanted the American dream,� she said.

Then her mortgage reset. Last year her payments increased to $2,700 from about $2,300. A family emergency cut deeply into her income. Her sister moved out of the house. She was unable to make her mortgage payments.

Cato asked for a loan modification, and her bank lowered her payments to about $1,700 for four months -- an amount she said she could afford. Then the bank offered her a long-term solution: a 30-year, fixed-rate loan with payments of $2,100 a month. But with her newfound financial troubles, she couldn’t make that and sent the paperwork back to the bank.

“When they offered it to me I told them I couldn’t pay it back,� she said. “I could not handle $2,100.�

Cato defaulted on the loan. Foreclosure proceedings began. And as a sale date loomed in May, Cato filed for Chapter 13 bankruptcy protection in the hope of delaying the sale of her home by JPMorgan Chase & Co.

Things got worse.

In July, Cato said, her school district in San Jose assigned her a schedule loaded with algebra classes, which she said she didn’t feel qualified to teach. She abandoned her hopes of becoming a counselor, took an early retirement and began making plans to return to Southern California.

When the bank asked to be released from the bankruptcy proceedings, she relented. The home is scheduled to be sold next month and Cato is hoping to work out a short sale, in which Chase would agree to sell the home for less than what she owes.

“I was tired of fighting them,� she said.

For Cato, renting didn’t prove easy either, with the bankruptcy on her record. She found several properties, but as soon as landlords saw the bankruptcy on her credit file, they wanted more money than she could afford.

Her San Jose lease was due to expire Aug. 31 and she still hadn’t found a place by Aug. 30. Then as she and her daughter were walking out of a Century 21 office in Chino Hills, Cato spotted a Ford F-150 emblazoned with the website of an Internet rental agency, Renttoday.us, a citation for one of Cato’s favorite Bible passages, John 3:16 (which says in part: “For God so loved the world that he gave his only begotten Son�), and the agency’s phone number. They called, and by the end of the day, the two had a new rental home to move into.

It was a serendipitous encounter with the divine, Cato thought.

“When we saw that John 3:16, we saw that as divinely ordained and we got in touch with them,� Cato said. “Apparently it was so, because they were the ones who helped us.�

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