In the brand new subdivisions in the Phoenix suburb of Ahwtukee, where red-tiled roofs sprung up like wildflowers among the cactus during the housing boom, Melanie Bruce found her dream home.
"I've been in here for almost two years," Bruce said. "The thing that struck me the most was the big, open floor plan."
The home has been everything Bruce, daughter Grace and husband Byron had ever wanted. But in just three weeks they'll have to leave. Melanie Bruce, who applied for the home loan herself, is "underwater" on her mortgage, meaning she owes more than her house is worth.
"You realized it's great. I loved it, but there'll be other homes ... you have to let go," said Bruce.
"This is unprecedented," said Mark Zandi, chief economist at Moody's Economy.com. "There's never been a time when so many home owners are underwater."
Mortgage Seemed 'Too Good to Be True'
Nearly one in six homes -- roughly 12 million households -- are underwater or "upside down," and it is a growing problem.
"All indications are that prices are still falling, and if they fall anywhere close to what the consensus believes they will, we'll have 15, 16 million homeowners underwater by this time next year," said Zandi.
"[Making] the decision initially is the hardest part when you have to admit that you failed," Bruce said. "You weren't able to make it with your house."
Two years ago, when Melanie Bruce bought her piece of the American dream, the market was booming. "The timing seemed sort of right because the real estate market seemed to be doing so well," she admits thinking.
It was booming so much that although Bruce was unemployed, she could still get a 100 percent mortgage on a $325,000 home.
"I didn't have a job," she said. "This is the crazy thing -- I didn't have a job. I was getting ready to go back to school. My husband wasn't even on the loan, so I was buying the house myself."
What she had was a year's worth of mortgage payments in the bank and got an 80/20 loan -- 80 percent at 8.25 percent interest, the rest at 13 percent interest.
"My mortgage guy, I told him point blank, I'd never bought a house on my own,'" Bruce recalled. "It seemed too good to be true to be able to buy a house, not have any money out of pocket and refinance in a year and have a payment that was half of your initial payment. I kept asking him point blank, 'Are you sure? Be honest with me. I'm really looking to you for guidance.' Basically I was told, 'You're fine.'"
Forced to Sell Home in Sinking Market
For a year Bruce managed to stay afloat with her mortgage. Then she started sinking.
"That's when you sort of realize OK, I'm having a problem here," she said. "I'm still a full-time student, I'm taking a double course load to get through, and my husband was between jobs at that point in time. I started calling mortgage companies, saying this is what I was advised by my mortgage person and now I can't get ahold of him and is there anything we can do?"
Bruce needed to refinance -- fast. Her home's value started to fall, down to $300,000, then even less. Getting nowhere with refinancing, she decided to sell.
"It's hard," said Bruce. "No one goes into a home purchase going, 'Yeah, I'm going to fail making the payments in a year.' I mean, you feel very silly, and you blame yourself."
Bruce called Willow Peacock, the agent who sold her the house, and asked Peacock to find a buyer.
"Hindsight is 20/20," Peacock says. "When she called me and she was in trouble, you know, I felt a little responsible. It was the market, and at that point my goal was to do everything that I could to help her out of that situation."
Peacock laid out two options: foreclosure or a short sale. Sell the house for less than the mortgage owed on it -- if the bank would allow it.
"A short sale is much easier and better on your credit than a foreclosure," said Peacock.
The Business Behind Short selling
But Bruce and Peacock said they had a hard time short selling the property.
"The bank was not willing to talk to our realtor," said Bruce. "She was met with hostility. We were not getting anyplace. We lost one buyer waiting on the bank. That's when we invited the National Short Sales Center to play."
Travis Hamel Olsen said four years ago he saw the writing on the wall. He and some partners opened the National Short Sale Center, which acts as a neutral third-party between homeowners and mortgage servicers to arrange short sales.
Their prescience has paid off.
"Business is going extremely well," said Olsen. "There are a lot of homeowners out there in need of a short sale, and fortunately we are in a position to help them out."
More banks are beginning to accept short sales as a way of stemming its losses.
"It is a win-win solution," said Olsen. "The banks, when they take ownership, contrary to what people believe, they don't' want to do that. When they take ownership, they lose a substantial amount of money. If they accept a short sale, they realize the homeowner is trying to have a proactive resolution to this problem, and the bank loses a lot less money."
Credit Report Clean Before Short Sale
"Short sales were very rare back a couple, three years ago," said Zandi, "and now they're increasingly common."
The National Short Sale Center was able to get the lender's ear and work out a deal so the company would accept a short sale buyer, and let Bruce off the hook.
Through the short sale process, the pain continues. Melanie Bruce had to write a "hardship" letter to her lender, ironically, sharing more financial information to get out of the loan than she did getting into it.
"I had to show surprisingly little to get the mortgage," said Bruce. "So yeah, inversely, when you write this letter of hardship you are really getting into your personal life."
"It is with great embarrassment and regret that I write this letter, as I have always prided myself on being responsible," Bruce said in the letter.
The lender approved a buyer at $66,000 less than the original purchase price.
"I paid $325,000 for it, and the house just sold for $259,000," Bruce said. "It's a real blow to your self-esteem. You could pull out my credit [and see] that everything is paid on time. This is the first blip on my credit report. You see this on the news and you think, 'Well, at least I'm not alone.' But it doesn't change the fact that you're in this situation. It doesn't change the fact that you have to make this decision. And your dream of owning a house has now fallen apart."
In three more weeks, Melanie Bruce and her family joined another burgeoning trend -- they're becoming renters and will walk away debt free.
"It's amazing what you can get for $1,000," she said. "There is one place with this granite kitchen and upgraded countertop. It's beautiful."