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Saturday, October 10, 2009
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60 comments:
Friends, please weigh in on something for me. Remember my very religious friend who is $250K underwater, and has been trying to do a loan mod through their bank? They were turned down for the 5th time recently. They have an adjustable rate mortgage that is OK for now, because of the low interest rates, but even so, their monthly payments are over $4000 just for the mortgage, and they only began paying any principle last winter, after 5 years of making payments. Their housing costs are more than half their income. Here is what they asked me today:
"I have received the name of a devout Catholic who does loan modification mitigation. I feel like we are running out of options and this seems like a decent one. Any opinions about hiring someone who will work with the mortgage company to force their hand to work with us?? I have had a brief conversation with the gentleman - basically we stop paying our mortgage and they hound the mortgage company day in and day out on our behalf. Thoughts?"
Any and all input would be greatly appreciated.
Historically? People approaching church members have an extremely high likelihood of being a scam artist.
This is not to say that they shouldn't stop paying the mortgage and hound the bank themselves. But either way their credit will be trashed, so I see no reason to trust this process to someone who might be trying to take them for a ride. "hiring" is a big red flag.
Cara, I see the risk of a scam, but putting that aside, they have been trying to do something to change their situation with the bank for two and a half years, to no avail. I think it's because they continue to pay their mortgage, even though it's taken all their savings and retirement and loans from family, and they and their four children eat very little and scrimp and save in every possible way. So the real question I'm looking at is whether it is worthwhile for them to stop paying their mortgage to try to force the bank's hand? If so, is there anything they can do in the meantime to lessen the impact on their credit score/other finances? And since they have been no good at being their own advocate, would a third party possibly be useful?
Tabitha,
If by "worth it" you mean do I think it will work, in that they'll get to keep living in the same house? No. I don't think so. Not after 5 tries.
A better approach would be to stop paying the mortgage while simultaneously applying to do a short sale. Approach a real estate agent about this, they will get paid if and when it goes through. The banks will probably let them continue to live there while it's listed, and while they are considering the offer. The loss mitigation department and the investors can then determine from their short sale package that actually a principle reduction modification to the current owners is a better deal for them than any offer they've received and they might get to keep the house. But they need to be willing to let go of this albatross if someone is willing to buy it for a price the bank will accept.
Will the bank try to go after them for anything they've saved up in the mean time while not paying? Possibly, but that just means its a good time to pay back those loans from friends and family as tax policy allows.
Yes, I know people hate the prospect of renting for 5 to 7 years while their credit is repaired through time, but it's got to be a better financial move than having zero money to save each month until your salaries catch up to the house payment.
Tabitha, tell them to quit paying. Simple as that. Really in the scheme of things who is the criminal here, 5 years at 48,000 a year and nothing, absolutely nothing to show for it with a house that is 250,000 underwater. Tell them to STOP NOW save that money and do not move until they shows up to evict. Take the hit on the credit or sue them for loan sharking. I'm not an advocate of walking because you simply don't want to pay for a house that is underwater but this is ridiculus as far as I'm concerned the bank that wrote this loan to a family of four is evil.
I second what Arkey said.
Tabitha, if they are nervous about simply stopping payments, I would encourage them to talk to a real estate attorney who is experienced with this kind of situation and have that attorney discuss options and their rights and risks. Under NO circumstances would I hire a non-attorney to try to work with the mortgage company.
You might also suggest that they watch Suze Orman (on early in the AM weekends and sometimes on Sat. night). Or they could check her website. She frequently fields similar questions, and her advice is free. Your friends can then weigh it as they wish.
Tabitha,
I really feel for this family.
I assume they have weighed the costs of letting this house go and voted against it. It seems like they are really hurting themselves and their children by scrimping so hard; I assume they are in love with their house or their neighbors/school for the sake of the kids, or they wouldn't be putting themselves through this.
They can and should not outsource any of the mortgage negotiations, in my opinion. Any of that sort of thing just leads to ruin. I've seen it so much. There's no fix for credit problems except paying it off.
It sounds like they are making some progress -- they are paying towards the principal now. That's good. Yet they are $250K underwater. That's bad. But if they default now, the income, credit, and lifestyle consequences might be worse than staying put. If they have a 2nd trust, then they probably have a recourse loan. So once they default, the creditors will still want the money, and they will probably declare bankruptcy.
If there's no way out at all, a short sale, to me, seems like their best option. But they must only use agents who are completely competent and who get results in short sales. No "friends of the family" or "members of the congregation" real estate agent in a case like this.
The other option is: can they possibly come up with another $12K a year in income or savings? Have they cut out everything nonessential? Can another family who's hurting move in with them . . . can their kids sleep in bunk beds to make room for some renters . . .
No offense to anybody on this blog, but how does this guy being a "devout Catholic" add any credibility to this situation?
Your friends need to keep this situation in perspective. Their credit is the only thing at risk. It could be a lot worse. Credit repairs itself in time. In fact, it sounds like this family could use some time in a cash only household.
Jaime-
Many people particularly religious people think that it is there responsibility to pay back debts. It's not just there credit risk. If you borrow money from someone and don't pay it back many consider it stealing, which obviously violates one of the 10 commandments. So their religious views might impact how they consider debt.
I am not religious, but I would not default on debt if I didn't have too. I have ethical issues with giving someone (including banks) my word that I would pay them and just deciding not too because it didn't fit me needs.
Thank you so much for all the opinions. Please keep them coming. In the morning, I will share more details, but it is too late for me to be anything but incoherent.
Quickly, though, as to the religious aspect:
This family feels very, very strongly that they should not default on a debt as long as there is the remotest chance of being able to repay it, no matter how much it hurts them to do so. The original debt was not at an adjustable rate. It was a fixed rate that would become adjustable in the future, if they did not refinance. They thought it was five years fixed. At closing, everyone verbally referred to the rate as a five year fixed. But in writing, it was a three year fixed. So it reset to adjustable before they expected, and then it was too late to refinance, because the market had dropped horrifically.
SO they have this combination of not exercising due diligence, which they feel responsible for, and bad luck, which they feel is a "cross" the Good Lord has given them. And all this overlays the moral responsibility to repay your debts.
Finally, they have been looking for an "honorable" way out, and praying like crazy, and asking God to guide them to an answer. So hearing about someone who shares their moral values who might be able to help them sounds like an answer to prayer.
This might sound completely hokey to y'all. And I know full well that people who profess deep and sincere faith can be total frauds. I understand all this. But these facts inform the way this family makes their decisions, so they are relevant.
Again, please, keep the input rolling in. They really are desperate right now.
Housebuyer...
My point had more to do with how this guy being a "devout Catholic" makes him a more credible arbitrator for the family than say a real estate lawyer. It gets my hair up on end when people use religion as some sort of litmus test for being honest or qualified. These people would be extremely naive if their only criteria in finding help included whether the person was a "devout Catholic" or not.
As far as walking away from debt, in my nonreligious mind, both parties assumed a level of risk and return when they entered into the mortgage contract. If the family walks away from the house, they are leaving the asset with the bank, which can hardly be considered stealing. This is particularly true if the family had some skin in the game and basically is forfeiting that investment. It also seems to me that it is a pretty uneven playing field when the bank doesn't have to meet the same religious conviction as the family does.
What does their priest think?
Tabitha,
Thanks for the background. It is easy to read too much into the situation. Hope they find a way out, such that they can live with themselves down the road.
Tabitha, if it were anyone else, I'd call housing-doomer-BS or math-challenged, but since it's you, I respectfully ask that you please provide clarification and details.
5 years, 250K underwater, fixed converting to floating at 3 years??? What are the numbers?
To be 250K under water, that place must have been over a half mill to 3/4 mill and way the heck out there in one of those McMansion 'hoods. 5 years puts the purchase at 2004 as this is 2009. What is the assessment history? What was the original price and general location? What is the current assessment? That may provide a clue as to whether it's worth keeping.
Floating interest rates have plunged over the last 5 years. Plunged! My bank(s) offer LOC for about 3.5%. Of course, they pay a big 1.0%. An adjustable could have been a good thing. Why wasn't it?
Did they HELOC out a hundred grand?
If they are religious, send them to Dave Ramsey.
OK Tabitha, here are some guesses.
PMT(3.5%/12, 360, 850000)
The Excel formula solves for
$850K, amortized for 30 years, at 3.5%, Interest Only payments are $3,816, close?
If they are a quarter mill underwater, that puts the current assessment at $600K. Is that in range?
That price drop suggests 15+ miles outside the beltway. It does not "feel like" closer-in parts of Fairfax and is definitely not Lyon Village in Immunington.
Not to ping on anyone's choices but $850K bought a nice place in Immunington or Immundria in 2004.
I wish them well but they have hard decisions to make.
@J@-
I think Tabitha told us where they lived a long time ago. I think it was PWC, although it may been Loudoun. Either way it was a place that crashed pretty hard. Although you could get a decent house in Arlington/Alexandria for that money a lot of people don't want to live in these areas. My guess is they wanted a nice yard so their kids could play outside. If they wanted an acre to play soccer on there is zero chance they could get that inside the beltway for $850K. They may also be working in somewhere like Reston making inside the beltway a bad location.
I think it is a bad assumption assuming everyone wants to live near DC. I could easily afford a reasonable house in Alexandria/Arlington, but prefer the feel of Vienna so I will buy out here. If I had a couple of kids I would probably move closer to Fairfax Station where you get more of a neighborhood feel and you can get 3/4-1 acre of land.
Tabitha, does the wife work? I assume she doesn't with 4 children. There are still services she could provide. I know as a previous working Mom I would have loved the option of contiuning supervision of my son after he turned 12. Starting a homework center for biys between the ages of 12-14 is a very good niche and a void that needs to be filled. They could consider foster care. I would have loved having sick mom care. I would have gladly put someone like her on retainer to have the option of having someone picking up my son at school espically a Mom with 4 kids to let me know immediately if they needed a doctors appointment. She could tutor, babysit or even run errands. Again, I would have put a trust worthy person on retainer to do my honey do jobs like getting the car inspected or an oil change, picking up a store delivery anything that frred up a saturday morning and fighting traffic or sitting waiting on something. Anything she makes plow right into the mortgage or second. Is this the couple in Breamar? I wouldn't take tax assessments as a true number on being underwater. Those homes/developmet have great resell potenial and are regaining their value. I'm not saying they will be whole in 5 years but long term they should do ok, not make a profit but sell without a loss 7 years out. I appreciate and respect their relgious views on debt and rpayment. Maybe GOD is teaching them money mangement the hard way. I'm sure this a lesson they will never forget but they need to be open to all answers they receive. Their insticts are saying tough it out or is that GODS answer to their prayers. I don't know. I guess first the need to identify which loan to eliminate first and if its only the second then take action to get it paid.
This is a minor point, compared to all the factors weighing on them, but it might be a little comfort for them to remember that their fed. and state income taxes paid were much lower because of paying $48k per year in interest during these years.
OK, here are some more facts:
They bought from the developer in Braemar in PWC in 2004. 4BR, 2.5BA, 2000 sqft, unfinished basement, no upgrades, no garage, cute little house on a culdesac just like every other one on the street. Put some $ down, paid about $425K total. Fixed rate for THREE (not five, as they thought) years, interest only. Saw the other homes on the street selling for $500K, $575K just six months later. Took out second mortgage for a little less than $100K, paid off student loans and car with that. Now owe just under $500K for 1st and 2nd mortgages combined.
Both are adjustable rates now. That is a good thing for the moment, since rates are ridiculously low. But once they started having to pay more than interest only, and lost the intro teaser rates, their payments jumped from under $3000 for both to over $4000 for both. And that's with crazy low interest rates.
(Small correction: they did start paying the principal when the loan reset a couple years ago, but have made insignificant inroads into it.)
House currently assessed for $272K, but last three sales on street, for houses with upgrades and finished basements and extra bathrooms, were in the $260Ks. Now, Braemar has definitely been hopping, so maybe they could get more than $250K. But a bank would need to appraise it for more than that.
In the meantime, husband changed jobs, making pretty good money, but still paying more than half of monthly income to mortgage. Not including insurance, taxes, HOA, utilities, etc.
Wife has worked several jobs from home, like Mary Kay and such. And she is brutal with their expenses. They really are doing their best. Have begged and pleaded with the bank for two years for help.
I just don't see their house EVER being worth half a million dollars. It is a neat little cookie cutter on a small lot. They have no money for groceries, much less home improvements. The others on their street actually paid more for their houses from the builder--most sold for about $500K--so they are all in the same boat. I don't know what ANY of them are going to do. A handful of houses have already gone through foreclosure.
Does anyone here really think they could regain that much value in the near (5-7 year) future? I just don't see that kind of appreciation happening in PWC.
Again I second Arkey if there's anything more lucrative she can find. For instance my sister did the accounting for local small business freelance for years when my niece and nephew were little (she does have a CPA...)_, my best-friend took a copy-editing course (not for everyone) and pulls in a tidy 12k a year in freelance. Let me know if this is an option for her and I'll see if I can get you an in. (our friend is a head copy editor at Penguin NY)
Is the husband's job contingent on security clearance?
So as per your description, what they really want is a 30 year fixed on say $300k with the rest of the principle in forbearance with no interest accruing until the end of 30 years or when they sell. That's a very specific mod, and I don't know if the bank will care about their religious obligation enough to cater to this, but it could happen. I still say the short is the most likely way to get it to happen.
But as to minimizing the damage. Are the two mortgages separate payments? Consider paying the second position mortgage only. Or the first position only. Figure out which one of those two makes sense for avoiding being foreclosed on and parties agreeing to the short. Someone should have an answer to that.... Once they stop paying the mortgage.. First if they have any non-revolving debts who's interest rates could rise as their credit deteriorates, pay that. Make sure their declining credit rating won't result in higher interest payments on other things. Maybe they have none, since they took out the 2nd mortgage, but I doubt that given that life still happens in the intervening years and they are hanging by a thread. After all CC debt is discharged, use only 1 or 2 cards sparingly to keep them active and only at a rate that they can pay off fully each month. Build up a 2 month's salary cushion, so that they are prepared to live all cash as credit will become expensive. Then honestly, start paying back the family and friends. Why? Because they owe their family more than they owe the bank, morally, and because if the bank manages to take their assets later these friends and family will be in a better position to help them out again later if they've been repaid now. Besides any money they have is more money the bank can come after. Once that's done, then start putting aside the full amount of monthly mortgage into a savings account such that at any point in time they could become current again. (or closer thereto). bringing the loan back to current may be required at the time of the modification if they are offered one.
A suggestion on short sale agents? Check out Jobin Realty. I see their name next to almost every single successful short sale in my neck of the woods and I know they operate out in Prince William as well.
Tabitha, go to frankly and look at solds, yes it most certainly will be worth 500,000 in 5-7 years. If Peabody can sell for 400,000 cash/investor (I say this because it closed so quickly) I assume they plan on popping it back on the market around 550/575 in spring. PWC county is projected to grow till 2012 and that was before the Obama increases in Federal employment.
Arkey,
Holy cow, did Peabody really sell for $400K?? How did you find out?
I think there was something funny there. The house was for sale for three years, the poor widow who owns it is way underwater in her new house, the house is a time capsule for the late 70s, then it sells for that much? I'm thinking maybe it was a family situation, children taking care of their mom or something. But even if they went in and updated it, I don't think they could get $500K. Owens Woods is the best neighborhood in Manassas, but Trusler Court was twice as big and 20 times as nice and sold for $525K last winter.
And Braemar is not Owens Woods. These are stripped new developer neighborhoods with bad traffic and scary HOAs and more than a hop skip and jump from the VRE. You really think that in five years, there will be people willing to drop half a million dollars on a little starter home with no garage?
The other question is how long would it take for his raises to make their payment bearable? or affordable?
If it's half their take home income now, and if bearable would be 40% of take-home then 5% raises takes 4.5 years to get there. If "affordable" equals 1/3, that takes 8.5 years to get there at 5% raises. or 13+ years at 3% raises.
years = log(needed salary/current salary)
-------------------------
log(1.0X)
where X is the assumed annualized raise percentage.
Tabitha,
I think you're being too harsh on their development. It's still a nice cute 2000 sq ft house out in the semi-rural rolling hills of PWC, right? While it may not be going for $500k in 5 years, it'll be closer to that than it is to $250k.
Partially, that's because of her neighbors. Everyone there was able to handle in some sense or other a nearly half a million dollar mortgage. That's a strongly middle class to well to do neighborhood. As different folks get raises and promotions somehow this will be reflected in the ambience.... How? I'm not sure...
How much it will go for depends more on the rate of inflation, and the continued growth of the DC area than anything else. Both of those are hard if not impossible to predict. But the $250k they're seeing now is an overcorrection, due to the general distressed nature of the market. They will be back up to $300k next spring, if not $325k. That's the basis to think about appreciating from. So at 7% per year appreciation, it would take 5.9 years to reach just under $500k.
7% appreciation is unusual and possibly overly optimistic, but if inflation starts running at 4-5%/year, it could happen.
What's important to keep in mind? Is that the "long slow flat period" only applies to areas for which the bubble bursting didn't bring the prices down to the trend line.
Cara,
Thank you so much for all those thoughts. I know they are Dave Ramsey followers now, so they have already cut up all their credit cards. All the other calculations are fantastically useful.
Arkey,
I checked out Frankly, and you are right about Peabody. But it just emphasizes to me that something strange is going on. 9569 Park sold for $305K in Sept., and it's bigger, on a bigger lot, with an in-ground pool and upgrades. Like you said, SOMEONE paid cash, but for what purpose? Flipping, really? I think they will be sorely disappointed.
(And to think the poor 9569 Park people asked for $680K last spring before it fell into a failed short sale attempt and foreclosure.)
Is part of the problem on the loan mod. that they used the 2nd for student loan and car loan repayment, i.e., they would have had that obligation regardless of the drop in housing values? In other words, they are really "only" $160K underwater on the house itself.
I suspect the main issue is that the bank believes they can and will continue to pay.
If your friends contacted their Congressperson, could the staff help by telling them about any legislative changes that might induce the bank to work with them?
tabitha,
How long until all the kids are in school full time, and she could get a part-time job? If she's home-schooling that may simply no longer be an option for them financially... at least not once the youngest could be in pre-K or kindergarten.
The problem is, while inflation is what will bring their house price back up, interest rates will also eventually rise after inflation has gotten underway, so they do need the mod nowish in order to fix their interest rate.
Depressing but are there any near future prospects for large cash infusions like inheritances? Which they could use to pay off enough of the principle to be eligible for a refinance? Or something more drastic than the assistance from family they've been getting so far, more like your own situation where another family member owns 1/4 of the house, which would essentially act in the same way as the modification described above, except that that $150k would be owed to a family member upon sale or eventuality?
Cara,
Homeschooling is non-negotiable for them. The youngest is a baby, anyway, so it would be a long time before they could consider alternatives.
Her father is a retired general, his family is not well off. Extended family deeply involved in nonprofits. Emphasizes to me how lucky we are to have my husband's parents' financial help.
I will pass along every scrap of info you have all shared. I hope they make a good decision.
Tabitha,
In 4 years many other things will have happened so it's kind of moot.
The she definitely needs to look into a freelancing that will make better money than Mary Kay. If she's talented enough in English to teach four kids and grade their work, she should have what it takes to copy-edit. My friend literally works 5-12 hours a week and pulls in enough to make the difference on her mortgage. She could do it during those spells while her kids are supposed to be doing their own work. And sometimes it gets you early access to interesting books you would have wanted to read anyway (although the experience is quite different).
But if she can't make enough freelancing and homeschooling is non-negotiable then at some point, holding on to that particular home has got to be negotiable.
Tabitha said... "Saw the other homes on the street selling for $500K, $575K just six months later. Took out second mortgage for a little less than $100K, paid off student loans and car with that."
Did Jesus tell them their house was an ATM machine? Look at it this way, when they eventually default and sack the tax payers with the loss on the house, they'll still have their nice cars and student loans paid off. As a catholic, I can tell you this sin of mass robbery is repented through a confession and ten Hail Mary's.
Good points, Housebuyer..., really good points.
Here's a picture of a 'hood in immundria.
Life is a compromise. -sigh-
I can't imagine digging out of being quarter mill underwater. People have done it; it's just that the odds are against it happening.
If there is any hope that prices will increase, then sure, hang on. You can do anything for a couple years.
I'm not optimistic that prices will recover enough that they can refinance the full amount in the next few years.
Tabitha-
I truly feel for your friends situation. It is certainly a common occurence these days, but when you put a face and family behind it, it is all the more disheartening to hear about. I understand their commitment to repay their debt. Still, I think they can have the intent and follow thru to do this while considering a short sale or even personal bankruptcy. They could get out from under the financial weight of this house and still make a personal commitment to repay the debt, but on more reasonable terms. If I'm not mistaken, Dave Ramsey declared personal bankruptcy in his early days - it in part led him into the field he is in now. He made the decision many years later after the bankruptcy to go back and repay any debt that had been "forgiven". Believe it or not, he actually had a difficult time getting the bank to take his money after all those years. It could be something for them to consider.
As their income increases, it may take some of the pressure of, but I would hate to go into the next 10 years with an adjustable mortgage. The potential for signficant inflation in the coming years is certainly a possibility and the impact on their mortgage payments from increased rates could more than offset any increases in income.
I guess what is so annoying about their situation is that they did not have some sort of financial disaster that brought this on. We have two, presumably, educated (and english speaking) people who made some really poor choices.
I don't understand how one can not know they had a 3 yr ARM. The HELOC and the rest are equally puzzling. I would think that wrapping student loans and car payments into a mortgage would lower one's monthly expenses. It's not a prudent move to pay off a car over 15 or 30 yrs (understatement); but, what were they thinking when they bought this house? It appears unaffordable from day one.
There are choices. If home schooling and many kids is your priority, these should not be an excuse for not paying your bills.
They should do whatever is necessary to live within their means. If this means losing the house, so be it. We will all pay the cost.
Here is something VA_Investor and I can agree upon. It's unfortunate they're in this bind, but they sucked the equity out of the house, thanks to the bubble. Like I said before, they can take comfort in the fact that they paid off their student loans and got to finance their cars with what will probably soon be taxpayer money. Nobody gets chased down for recourse loans these days. Not worth the banks' time.
A few more thoughts:
I'm concerned that not paying the mortgage and "losing the house" isn't going to make the debt go away. I think there's a good chance the owner of the 2nd trust will sue. They may be able to garnish the husband's wages. I also think that in Virginia, the first trust isn't a recourse loan, and *that* lender could come after them, too.
No, they are not really $250K underwater. They still owe for the car and the student loan, it's just on the mortgage.
They have to live somewhere. With a family of 4, it's likely that they will have to rent a decent house, and that rent will cost $2,000 a month. They won't get a tax break on the rent. Then, they will still owe $250K. That could easily cost them an extra $2,000 a month.
I don't know if my facts above are correct, but a bankruptcy attorney would probably know.
So, they might not gain anything by giving up this particular house.
I'm not sure about bankruptcy laws working in their favor in this case. If one has a good job, like the husband does, it seems like the creditors will do all within their power to get their money. Seemingly well-off people who go into debt have few choices.
I think another idea would be for someone to step up and give them a loan. I am flummoxed by people paying double-digit interest rates to the bank for debt while other people search high and low for savings yields of more than 2%.
If they could get a loan from a private individual and pay off the 2nd trust (maybe at a rate of 4%), perhaps they could then refinance the first.
Also, I assume they have two vehicles. If possible, they need to drive a beater or have no 2nd vehicle at all. Sometimes extreme sacrifices are necessary. I used to walk to the store with my stroller for groceries once a day. There might be a way they could drop Dad at work once a week when they need the car for outings. Or arrange to get rides from someone else for individual needs like sports for one child.
Kevin,
I know a family who's getting hounded for the 2nd trust.
Tabitha
Strategic default.
Stop paying the second trust note entirely,
see if the notes can be negotiated.
I agree w/ VA_Investor - "They should do whatever is necessary to live within their means."
The numbers still do not ring true. These are Excel formulae, you can cut and paste into Excel and run the numbers yourself.
PMT(3.5%/12, 360, 500000) = $2,245
PMT( interest, months, amount )
A half mill, amortized over 30 years at 3.5% is $2,245 Principal and Interest. Add Taxes and Insurance and the PITI is way short of $4K.
4.5%, 30 years, a half mill.
PMT(4.5%/12, 360, 500000)= $2,533
Taxes and Insurance would not raise the PITI to $4K.
I doubt they are paying more than 4.5%, although it could be.
Very likely, the blend of the two loans is amortized over shorter period than 30 years.
The 15 year (180 months) formula:
PMT(4.5%/12, 180, 500000) = $3,824
"Close enough" to $4K
I'm guessing that both terms are shorter than 30 years. I'd tackle modifying the term.
An aside, I know someone who has a 15 year and then lost their job 20 months ago. They've been unemployed since and are running out of options. They whi-ine about their huge mortgage payment. A few years ago, they were bragging about how close they were to paying off the house.
I understand the goal of paying off your house. Why lock yourself into a 15 when you can take a 30 and bank the difference, that provides more flexibility.
If your friends like the house and neighborhood, then sure, stay there, if they can get the rate and term under control. Get the rate under 5% and push the term to 30 years to reduce their monthly outlay.
That may be hard to do with that assessment but who knows.
If they have the rest of their life under control, staying there is possible. I'd be less concerned about income from side jobs than exercising major budget control in the home, Freecycle, buy, sell, and barter through Craig's List, home cooking, home tailored and mended clothing, shopping the sales and thrift stores. Skip vacations and luxuries for a few years. Cancel the Cable, swap DVD's, $19.95 DSL is good enough if they can get it. Cheap used stuff is plentiful, just clean and polish it like new. But they know all that from Dave Ramsey.
If they are "handy", they can increase the value and marketability of their place with sweat equity.
Tabitha, your friends are not in that bad shape. It is bad but they can beat this as long as we don't have the, oh, the extreme doom and gloom, end of the global economy scenario that some here expect.
Keep trying for the loan modification. If not, scratch and claw to make the payments. Wait to see how the current mini-bubble plays out. Prices are rising and the near to medium term fundamentals are very strong for our area. Two to three years and I can see their house getting back to $425k, or, hopefully, for them, even higher.
If the scenario doesn't play out as I expect, then stop paying on the loans and save money until eviction. Then start looking for individual landlords. With the saved money, offer a large security deposit, say three months rent. Explain the foreclosure to the new landlord. Some won't touch them, but there will be individual landlords that will take a chance on them.
@Tabitha,
Late to the game, as usual. Several times comments have been made something to the effect of "As their income increases".
But what if it doesn't. What if we are in a period of 5+ years with NO or very little income increases, where your income increase is having a job.
I know, I know heresy b/c we all know inflation is coming and wages will rise . . . but what if it doesn't.
Look, very, very, very few people actually thought housing would drop like it did. Of course we now have hindsight bias where everyone and their brother says "well, of course housing was going to drop". Nope, sorry not true. That is one thing that makes bubbles interesting, everyone "knows" it was unsustainable after the fact. If that's the case then why did so many buy in '05, '06, '07.
What if the impossible happens, incomes stay the same and food costs rise.
Because they are living on the edge, so many things exist that could happen that would cause them to go into foreclosure anyways.
Which is better keep paying on a depreciating asset while living on the edge and default in 5 years or accept the bullet and default now.
I would also offer up another reason as to why they don't want to default. As humans it is very, very difficult to admit we are wrong . . . even for the very religious. We all like to tell ourselves we made the best decision and that it was right (and for the religious we like to tell ourselves that God helped us make the right decision). I like to believe that even if we make the wrong decision we can make the right decision as life is a learning and a growing process, without the wrong decisions we make it would be hard to learn, grow and become better.
Admitting the mistake is tough, is it possible they don't want to admit that buying that house was a mistake? If buying was a mistake then the way to remedy it is to get rid of it.
I like to consider myself religious, and I don't understand people's devotion to not foreclosing.
It's simple really, you rent money from a bank, in exchange you pay interest and you put the house up for collateral. If you don't pay, the bank gets the house. Closed case, morality doesn't enter into it.
Now if you knew beforehand you couldn't make the payments, yeah that's prob. not good.
Getting foreclosed on is a huge deal after paying for 20 years b/c you've got a good bit of money into it (one reason why IMO mortgages are a necessary evil to be paid off as soon as possible), but morally there is no difference between after 20 years and 2 years.
IMO you have to do what's best for your family while protecting property rights. I would also argue that not paying and living there "free" for a period is prob. not quite as moral.
So if they want to assuage their moral conscience tell them they should just stop paying and just leave.
But I bet they won't like that idea . . .why b/c (I'm making assumptions here) but what they really want is to live in the house cheaply, have someone else take the brunt of their bad decision (the bank, taxpayers, etc) and not take full responsibility.
The moral and fiscally responsible thing IMO would be to admit the mistake, admit it was unwise, accept full responsibility, acknowledge you can't make the payments and keep your family safe, recognize that trying to force the bank to reduce the mortgage IS NOT moral. Leave and rent someplace cheap.
IMO trying to force a loan mod, is extremely immoral.
How would they feel if the bank came to them and said heh housing prices have gone up so we are going to raise you mortgage?
A religious family . . . beh . . if they get a loan mod. they are thieves.
Let me also be clear that if a bank voluntarily w/o gov. influence or support did a loan mod where they and ONLY they took the loss, then it could possibly be an agreement b/w the bank and the lendee and there prob. wouldn't be much of a problem with it.
In that case, however I would doubt the lendee would want to accept the terms of the mod. as it would prob. be extremely tough over the long-term (maybe 40-50 year mortgage, higher interest later, etc).
That unfortunately is not the case. Lenders are being encouraged or forced to do loan mods. and the losses will be born by me and everyone else in the form of either/or/and higher taxes, lower dollar, higher costs of living.
So loan mods. end up rewarding those who made bad decisions (b/c the terms the banks will give would not be nearly as harsh if there was no gov. backstopping), while punishing the responsible along with everyone else. That IMO is immoral.
I agree banks are/were immoral, etc. The whole monetary system, banking system is corrupt and a den of vipers and thieves based entirely upon fraud, insolvency, and ponzi schemes.
How we choose to play our part in a completely dishonest system is an interesting question.
If they can't pay, they can't pay. I do think that they have made certain lifestyle choices that they deem more important than their mortgage obligation. I, too, am troubled by the pay-off of other debt and hope that they would make an effort to pay these obligations.
The "collateral" is not their sole obligation to the bank. It is not a case of "here's the house; too bad you're taking the hit for me Mr. Banker". When a person obtains a mortgage, there is also a personal guarantee - namely, the Note. When the dust settles, I am sure Lenders will be selling these debts to collection agencies (if they aren't already).
Since the wife is home already, perhaps her doing daycare could bridge the gap.
Harriet suggested private financing. The only people who would offer this type of loan are relatives and other very close friends. I think it would make sense for people to swap out CD's, but the reason that they are in CD's is that they are risk averse.
There are companies that facilitate converting a 401 into a mortgage. If older relatives want a steady stream of income, this could be an option but it can be a scary proposition for an elderly person to risk their retirement.
I agree with the comment about leaving rather than stiffing the lender while saving up a kitty to use to rent. Leave the home clean and marketable.
Harriet,
I forget the source, but I was reading the other day that for someone to actually get targeted for their second loans, it's like getting struck by lightening. It just doesn't happen. Sure, they'll harass you, but it stops there. They don't even bother going after them because in most cases, there's nothing to gain. They aren't going to get touched for stealing the banks' (taxpayers') money. We live in a society that rewards deadbeats, not one that holds them accountable.
Your friends did a good job of using their house to pay for their other liabilities. They'll get to walk away like bandits. Their rent will be so much cheaper than their mortgage, who cares that they won't get the tax deduction? All of a sudden home ownership is so sacred for a tax deduction, it is really silly. Think of the maintenance, upkeep, property taxes, etc.
I find it odd that renting could still be more of a stigma/hindrance at this point in modern history than owning, particularly when we're talking about people that are clearly not responsible enough to own.
Tabitha,
Do your friends have a 401k? College trusts set up? I only ask because of the people I personally know that might be looking at a similar future, they say "I have no way to pay this down." But when I ask what their 401k is worth they'll say something like "200 thousand, but I'm not touching that!" And that's not to say they're wrong, but it is very selfish. It's kinda like, well, you DO have money, you just don't want to pay back your loans.
Kevin, its my understanding that they have exhausted all savings and are borrowing from friends and family. They have 2 Adjustable rate loans. To me its futile if they can't afford their rates now and to expect the rates to adjust lower is very, very risky. There comes a time when you have to make lifestyle choices. They wish to homeschool and the wife thinks selling Marykay is her only option.
Regarding the possibility of claims on recourse:
Another contributor to the spread of strategic defaulters is the perverse incentive of so-called "no recourse" mortgage laws. In many states these laws treat mortgages differently from other types of loans, prohibiting a lender from pursuing the wages or other assets of a borrower if he defaults. In still other states, the judicial process is so lengthy and expensive that even when lenders can technically lay claim to a defaulter's other assets, they seldom do. Virtually unique in the world, these laws assure that the worst thing a deadbeat has to worry about when he absconds on his mortgage is his credit score.
link
I think a combination of what ace said and what gte said are important to keep in mind.
Restating Ace, these folks are not at a 50% front end DTI, they are at something like a 45% backend DTI it's just that they moved all their non-mortgage debt into being mortgage debt. They are not $250k underwater on their house, they are $150k underwater on their house with an additional $100k of debt that they have chosen to amoritize over 27-30 years.
Yes, it sounds horrible, but how many people on here have been offered 45% DTI loans even now? Scott for one, I forget the other who brought it up.
Right now it's painful, but it's not unheard of. The problems are, (1) they can't fix their rate to limit their future payment stream, (2) they don't know what inflation will do to their other costs or their interest rate, (3) they don't know if they will ever make enough money to live comfortably in this home, (4) if they were to tough it out, they don't know how long it will take before they have equity in the home. Regardless of anyone's market predictions after 30 years they would though.
But gte and tbw got to a number of central things. If they are going to fail sooner or later, better it be sooner. The sooner the 7 years of repair starts the sooner it's over.
They've tried for a mod 5 times. Obviously the bank doesn't think it's in their best interest. If your friends look back over their budget for the last year and see that they are going negative not positive, and can't find anything else to cut, truly can't. Then it's just a matter of time, and now is better than later. It's time to admit that buying a $425k house on one salary when you had $100k of other debts was a mistake. (or $80k of other debts and $20k of moving and furniture costs... whatever).
Again, thank you all so much for your comments.
I wish I could be more precise as to their finances, but for one, my memory is not very good, and for another, I only know what they tell me, and that may not be everything. There is a great deal of shame in being in their predicament, so I don't know if they kept some information from us.
I did look over their original loan documents, from when they bought the house. They had a 4% fixed rate at first, if memory serves. When it changed to adjustable, it was something like the base rate + just under 4%, to a maximum of just under 12% total. I went to the courthouse and looked at other people's mortgages from the same builder's lender, and it actually seemed like they were getting a better rate than other people buying the same houses. They put about $25K down (they were going to put more down, but at closing, the bank said they needed $12K more in closing costs than anticipated, and if they could not come up with the $ immediately, "there was a line of people waiting who would gladly take their house").
I never saw their loan docs for the second mortgage.
To borrow a religious phrase, as to their personal financial decisions, I really try to "judge not." I cannot try to say that I think they always acted prudently, but I can assure you they never acted recklessly or greedily. They are not materialistic. And I think back on all the stories I have read on this blog over the years, when people collectively thought they were making brilliant financial decisions based on the idea that housing would skyrocket for all time. They are not sophisticated people, and they were caught up in the same frenzy.
It is just my intuition, but I think their attachment to the house is far more emotional than rational, in that to let go of the house is to acknowledge once and for all that it was a mistake. They do not particularly love the neighborhood, they have already outgrown the house, and their kids do not attend the schools. And they could rent a bigger house in the same neighborhood for half their mortgage payment. Inertia is a powerful force. Easier to just bear the burden you know than to take on a new one.
But I am getting very theoretical. I do not know their thoughts or feelings, and I am just guessing. But for those who want these people to suffer for their failings, they have no savings, they have no retirement, they drive two old used cars, they live on the most stripped down diet possible, they avoid going to the doctor, they cut up their credit cards, and they are living in a daily stress I know intimately, from our early days in the Marine Corps when we could not sell the house we owned in Indiana, and the mortgage/ins./utilities for an empty house almost destroyed us. Living under a financial cloud like that, second-guessing your financial decisions endlessly, is just a horrible way to live.
Kevin,
I would love to know more about the Virginia after-foreclosure crowd and what happens to them in terms of recourse. I search for news/blogs from time to time but haven't found much on the topic.
I'm going on a local person's experience that I happen to know.
We are all looking at the potential risks. The inflation factor is a big question. I agree with gte that it might not happen. Here's someone in the news today who does think it's a risk: Fed's James Bullard.
Va_Investor - Daycare doesn't really work when you're responsible for your children's education at home. It's a full-time teaching, food-making, and cleaning job.
Cara,
A "back-end" of 45% is clearly not unmanageable. Is the loan mod being denied because they are seeking a principal reduction or just a fixed rate?
Has the husband increased his exemptions in order to bring home as much as possible? We had ours up to 10 when I was in Grad School.
Kevin's article on "strategic default" is a commentary on the demise of personal responsibility in our society. It used to be that having a second mortgage was shameful (they were referred to as "debt consolidation" loans). It used to be shameful to have children out of wedlock, to accept welfare, to file bankruptcy...
It's come to the point where "responsible" people are so fed up with subsidizing the rest, I fear for our future. Everytime I hear "tax the rich" I get more and more angry.
Harriet said...
"I would love to know more about the Virginia after-foreclosure crowd and what happens to them in terms of recourse. I search for news/blogs from time to time but haven't found much on the topic."
I know one deadbeat that bought a house, refinanced it and took out a heloc to play with the equity, and bailed. He got to keep all the awesome stuff he bought with the bank's money, and they never touched him. This was two years ago.
It's just anecdotal evidence of course, but I haven't heard of a single person that's been pursued so far. You'd think those stories would hit the news circuits, but it sounds like the extent of the pain that they are playing up is "renting sucks, and so does their credit score". Not a bad fate for sacking the banks with a few hundred grand. I'll take that money for a low FICO.
Tabitha,
My guess is that things are far worse than your friends are willing to reveal. Often people won't even tell their closest relative their true situation.
Does anyone know if the "safe harbor" for taxation of mortgage debt forgivness has ended?
Va_investor,
It's definitely not over yet. 2012 I believe, I could be wrong, but it's not 2009 or 2010. (I think you have to have bought before 2009?or 8 or something though)
gte811i: Look, very, very, very few people actually thought housing would drop like it did. Of course we now have hindsight bias where everyone and their brother says "well, of course housing was going to drop".
Not to nit pick, but this simply can't be true. Regardless of the data set used, the percentage of folks in trouble in regards to housing are in the 15%'ish percentile nationwide.
That means at least 85% of folks didn't buy into the bubble.
Me, I was clanging the alarm bell all by my lonesome back in 2002 and 2003 when all my Texas friends were upsizing to McMansions smack dab in the middle of McNowhere suburbs. The saner folks just stayed put through this whole mess.
If it really was a majority of folks who bought into the bubble, then the economy is in for a far worse reset that we've been told.
It's either one or the other, can't be both.
In CA, NV and FL I would concede that it appears that more than 50% of folks lost their minds, followed by their wallets and their a$$es.
Texas-
Many people bought into the bubble that are not in trouble. I know many people who thought that they were going to be able to use their house to pay for their retirement. So although these people didn't buy houses during the bubble, they truly believed the bubble was here to stay and that they did not need to save for retirement. It turns out they were wrong and although they are not near default they are going to need to work for several more years than they originally thought.
So I am not sure how you came to the conclusion that only people who are in trouble could have believed the housing bubble was here to stay. I do agree it is generally very easy to avoid bubbles as long as you understand fundamentals (price/rent for housing, price to earnings for stock, price/ cost to make for trendy items...) The main thing is if everyone knows something is a great deal and worth any price you can almost be sure buying it is a bad idea, although it is always hard to fight the trend...
housebuyer,
I agree and that is "the wealth effect". This caused people to spend alot of money that should have gone to retirement savings. They thought their home equity was a lock.
housebuyer, I've never understood how people like that were doing the arithmetic. Were they planning to live in a box after retirement? The only way that plan could work - even assuming they held onto bubble gains - would be if they moved to a much less desirable or smaller place in their current community or moved to a cheaper community. Since most people don't plan on doing that, I don't see how their houses can pay for their retirement. Well, I guess there is always the reverse mortgage option - IF they have enough equity.
I have noticed that house prices and real estate industry is coming back to track from past few months and hopefully in coming months we shall see the real estate market back to its normal state.
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