Most of the time, the talk about the housing bubble and the credit crisis and the faltering U.S. economy seem rather abstract to me, as if people were discussing a problem in Canada or Mexico. Or Norway. I’ve spent the past four years focused on my own financial situation, ignoring the outside world. The national economy often seems remote from my own personal economy.
But there are millions of average people who have been affected by this country’s fiscal woes. My little brother, Tony, is one of those average people. He’s in dire financial straits.
In 2004, Tony bought a house in Portland for $415,000. In 2006, he got a new job in central Oregon, so he moved his family to Bend. He put the Portland house on the market. He intended to rent a place in Bend until his existing home sold, but then he found a house he liked. He applied for a loan and was approved. He bought the house.
The house in Portland never sold.
For the past two years, Tony has been making $5200 in mortgage payments every month. Or, lately, not making the payments. He ran out of money long ago. Tony agreed to let me interview him yesterday in order to share his story with GRS readers.
Note: Tony knows he made some poor choices, and he blames himself for his current problems. He’s candid that he should have been paying more attention to his finances. But looking back to 2006, he doesn’t understand why the bank approved him for the mortgage on the Bend house before the one in Portland sold. It seems like the bank was betting on that sale, too.
J.D.: How are things going?
Tony: What do you mean? They’re not going very well. The house in Bend was foreclosed on yesterday. The one in Portland is for sale again.
J.D.: You weren’t able to sell the house over there, huh?
Tony: No. Plus we consulted with a lawyer, and he said we should just give it back because of the tax ramifications.
J.D.: I don’t understand.
Tony: Well, it would be a short sale. To give you an idea, we put the house up for sale at $299,000, and we paid $380,000 for it. So what you do is you do a short sale — the mortgage company has to agree to it — but the government considers the difference as money that was given to you. It’s taxable income.
J.D.: When did you buy the house in Bend?
Tony: It cost $380,000 in September 2006.
J.D.: And how much was the mortgage?
Tony: Roughly $2400 a month. There were two mortgages.
J.D.: When the bank forecloses on it, what happens?
Tony: We’ve been out of the house for a while. We’re living with my wife’s parents. From what my lawyer says, there’s nothing the bank can do to us. They’ll essentially just take the house and then auction it off at the courthouse steps. There’s no other ramifications to me. There are several houses that are being foreclosed on in our neighborhood. One that went to foreclosure and was auctioned off sold for $230,000.
J.D.: Was it the same kind of house that would have gone for $380,000 in 2006?
Tony: Yeah. It’s the exact same house as ours except it has a two-car garage and ours was a three-car garage.
J.D.: Holy cats. That’s like a 40% drop in two years!
Tony: I know.
Note: In 2006, Bend had one of the hottest real-estate markets in the country. Now it’s fallen on hard times. Again, most of Tony’s problems come from the fact that he gambled by not selling his first house before buying a second one. Back then, this didn’t seem like it would be a problem.
J.D.: You wouldn’t have been in such a bad situation except you haven’t been able to sell your Portland house, right?
Tony: Yes.
J.D.: And how much did you buy that house for?
Tony: We bought it for $415,000 at the end of 2004. We still owe the bank $367,000. We’re paying $2800 a month.
J.D.: And you tried to put it on the market when you moved to Bend, right?
Tony: Well, on the advice of our Realtor, we put it on the market for $585,000, because that’s what she said that it would go for.
J.D.: And that was in the summer of 2006?
Tony: Yes. Then after the house had been on the market for a month, we got an offer at $500,000.
J.D.: And you turned that down?
Tony: It was turned down but not by me. The Realtor got it as a verbal offer and said that she told them “no” because she could get more for it. She informed us that they had made a verbal offer a week after they made it. Then last September we almost had it sold at $480,000 but the deal fell through because it was based on whether or not the couple sold their house. Guess what didn’t happen?
J.D. And that’s when you started renting the house. [For the past year, Tony has been renting the house to a friend, trying to defray some of the mortgage expense.] What do you have it on the market for now?
Tony: We have it on the market for $499,000. We just put it on the market last weekend, but we already have somebody interested in it.
J.D.: If that sells, does it get you out of your bind?
Tony: It helps, but it doesn’t necessarily get us out of the bind. Some of that money would go to the Realtor. Plus we owe money to other people. [Tony borrowed money from various family members.] And then there are our normal bills, which are behind. So even if we sell, it doesn’t solve the problem, but it does help.
Note: You know how the power of compound interest can help you save? Well, it works in reverse too. People in credit card debt understand that. Tony’s learning that the damage from mistakes can compound, too. What started as a small problem — needing to sell the Portland house — has mushroomed out of control. Things just keep getting worse…
J.D.: A couple months ago, you mentioned that you’re doing some sort of consumer credit counseling or something. How does that work?
Tony: Not very well. It’s not a debt consolidation place, but it kind of is. These guys are for profit. They piss me off. They told me they settled a Bank of America account for me, but I keep getting letters from Bank of America saying the account is not settled. So this place drafts money out of my account every month to pay the people we owe — it’s kind of forced savings, in a sense — but I won’t let them draft any more until they give me written proof that they’ve settled with Bank of America.
You know, this is my own frickin’ fault for not paying attention to exactly what was going on. I want to repay everyone because it’s my debt, but at the same time, it’s so frickin’ huge, I don’t know how I’ll ever do that.
J.D.: Why do you think you got in debt? Do you think it’s because of the house? Or do you think it’s other stuff?
Tony: There are several reasons that got us into debt. The first time we put the house on the market in Portland, we used credit cards to fix it up. We put a fence on it and that sort of stuff. The move here probably cost us $8,000. The idea was when we the house sold, that’d be paid back right away. The house never sold. Then we got ourselves into a situation where we had double mortgages.
J.D.: Oh yeah. What was the mortgage on the Portland house?
Tony: $2800. You do the math there. So, we had double mortgages, and we’re doing whatever we can to pay them both, praying that the house in Portland will sell. So we borrow from people. Slowly but surely, the amount we can beg, borrow, or steal keeps dwindling. I finally said, “This is is not going to work. We’ve got to do something different.”
J.D.: Were you having problems with debt before?
Tony: Before we moved from Portland? No. We were actually okay. We were financially okay. Did we have credit card debt? Yeah. Was it manageable? Yeah. Could we make all our monthly payments? Yes. Did we have extra spending money after we made our monthly payments? Yes. We weren’t paying off our debt extremely fast, but we weren’t building debt. You know what I mean?
J.D.: To me, you guys typify all the problems that are going on with the economy at large. You guys are the ones we know most being affected by it. Do you pay attention to the economic news at all?
Tony: Hell yeah — every day!
J.D.: What do you think about it?
Tony: I was just talking about this with my wife the other day. I don’t know if it’s because of what I’ve been going through or what, but my personal opinion is that we’re not looking at a recession. We’re looking at a depression.
J.D.: And what’s going to happen for you guys if there is a depression?
Tony: To be honest with you, I have no clue. I’m scared.
My heart aches for my little brother. Obviously, Tony is not a “victim” — I don’t think he’d claim to be — but he is one very real part of the ongoing credit crisis. To me, he’s the average American. He wasn’t pro-active. He was eager to have a new house, so he bought one before the old house sold. He didn’t have anything in savings, so he took a risk by financing his move on credit. Now, along with many others, he’s paying the price. I just hope he comes through this okay. Photo by respres.
This article is about Debt, House and Home, Real-Life
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One thing that strikes me is that Tony could’ve avoided alot of this heartache had his realtor not held out for a better offer when she had one.
Yet another reason to distrust the incentives and advice of realtors
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I’m mixed on this one. I think you are giving your brother a slight pass because he is family, especially since you make a contradictory statement “Tony knows he made some poor choices, and he blames himself for his current problems…But looking back to 2006, he doesn’t understand why the bank approved him for the mortgage on the Bend house before the one in Portland sold.” Being approved and actually taking out the loan when you can’t afford two mortgages at the same time are two different things. Although you made a fine print summation, which I thought was good, a lessons learned summation would be nice and perhaps help your brother out, too.
you don’t go into what he means by “making monthly payments” if it was paying minimum, although it kind of seems like it since they weren’t being quick to reduce their credit card debt which seems to have been around $20k? and there is no mention of other loans.
and what is with the kind of debt consolidation place? it does not sound like a consumer credit counseling service, because if it was, they ccc would have received written acceptance from BofA before including it in the program.
hope things work out.
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Sadly this is happening all over the country to good people who just wanted to participate in the American dream. It was proliferated by money hungry brokers who made deals that they never would have made in the late ’80s or ’90s when the market was more sluggish. Greed trumps all, always has, probably always will in a capitalist system.
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My experience with them, when I worked in the collections industry, is that they take money from their clients, take a hefty percentage off the top, and then allow all the accounts to charge off so as to negotiate a settlement. Often the settlements offered are in the range of 10 to 15 cents on the dollar, which no creditor will accept until the debt is, say, six years old and has been sold multiple times – each time reappearing on his credit report as it is owned by a new agency.
I always thought they were incredible scumbags and crooks. Through slick salesmanship, fast talk, and the desperation of their clients, they convince people that they can settle for pennies and everything will be rosy.
I’ve never seen it work like that. If he needs help from an agency, he can talk to a nonprofit CCCS group who may or may not be able to help him at this point. But even if they can’t, hell, better he let accounts charge off with that settlement company cut still in his pocket rather than theirs. He can negotiate a settlement just as effectively as those roaches can.
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Tim wrote: I’m mixed on this one. I think you are giving your brother a slight pass because he is family.
Yeah, I’m aware of this danger. Kris and I talked about this a lot as I was prepping this post. I mean, I know that Tony did some dumb things (he knows it, too), but at the same time I feel sorry for him, especially because he’s family.
Though it’s not reflected very well in the post, I believe he’s reached a point where he’s ready to stop letting other people (the bank, the realtor, the credit counseling place) tell him what he can and cannot do, and simply decide for himself.
I think too many people (and I’ve been one of them) find themselves thinking that “oh, if the bank says it’s okay, then I should do it”. That’s simply not the case. It’s like using credit cards. Just because you have a $20,000 credit limit doesn’t mean you should use it! Just because a bank says you can buy a $380,000 house when you haven’t sold your $410,000 house, doesn’t mean you should do it.
Anyhow, I think Tony sees that now, but it’s too late to do any good in his current situation.
So, yes — absolutely a situation of Tony’s own creation. Others may have helped lead him there, but he had the responsibility to say, “Wait a minute — is this really right?”
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Thank you, Tony, for being brave and sharing a hard story like that.
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I know I harp on personal responsibility a lot, but it’s not because I don’t think the banks deserve some blame or that they aren’t predatory, it’s only because there will always be bad business practices and scams out there, and the only way an individual can protect themselves is to get informed and make good choices. Even if the government regulated, say, credit card companies, there would just be some other industry preying on consumers. Tony’s situation is very unfortunate.
Tony–It might be worth exploring whether you can make a case against the realtor who didn’t present the offer to you. Even if you wouldn’t have taken the $500K, it could have opened up negotiations. Realtors have to carry errors and omissions insurance, and while I was only in real estate for less than a year (couldn’t stand sales), I do know it is an agent’s fiduciary responsibility to present ALL offers to the seller, unless he/she was directed otherwise. In other words, if you said you didn’t want to see any offers below $550K, THEN the agent can reject the $500K offer, based on that instruction.
It might be worth seeing if there’s enough of a case. I may not have lasted in real estate for long, but as a former realtor, this is just appalling. I know people are wary of realtors, but some DO put their client above their commission and save the client a lot of money and headache…it’s just hard to know if that’s the type of realtor you’ve hired.
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A few thoughts:
1. Sad. I’m sorry for him.
2. Yes, he contributed to much of his own pain. But there are many people who did “everything right” (in that they simply went along with prevailing market thoughts at the time) and are getting burned.
3. This crisis is hitting close to home for me too. Not a brother, but close friends are leaving their home for the bank.
4. Isn’t there some sort of legal action that can be taken against the realtor? Doesn’t a realtor HAVE to share any offer with a seller?
5. “Holy cats”? Is that really an expression or were you cleaning up your real words?
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I believe a combination – of mortgage company greed AND lack of personal responsibility – is to blame for the current financial crisis / meltdown. I too have a family story to tell.
In March 2004 I bought a single family house with my partner, and we had 2 townhouses to sell. We bought the new house before 1 of the old houses was sold … and took an expensive 10% mortgage out on the new one until we could re-finance after the 2nd townhouse sold. Luckily it sold quickly, we re-financed the new house on a 5 3/8% mortgage. We had great credit. It worked smoothly. We had planned on renting the townhouse if it didn’t sell, to cover the extra mortgage.
My brother, on the other hand, did nearly the same thing (bought a house before selling his old one – both for around the same $$ amount) around the same time period. He had poor credit, and had already asked our parents to finance a $20k car loan so it wouldn’t show up on his credit report, so the bank would loan him the $$ for the new house. He dragged his feet for MONTHS getting the old house ready to show/sell (he’s a lazy slob). I even loaned him $$ until he finally sold the old house about 5 months later. By that time, he’d missed mortgage payments and his credit was worse, and so they were stuck with the 10.5% mortgage, which they could barely afford.
Fast forward a year – his wife got fired, and several really bad financial decisions (including keeping 2 kids in full-time daycare for 9 months while his wife stayed home to look for work – and continuing to run up credit card debt for stupid things), numerous (still unpaid) loans from family members (myself included) … and now they have gone through foreclosure 6 months ago and are currently claiming bankruptcy.
Was I just “lucky” that I didn’t fall in the same trap? My house value has plumetted $100k+ as well, but I have no plans to move and can still afford the payments so it’s a moot point for me. If one of us had lost our job we would have rented a room out for extra cash. I would have done anything to keep my home. My brother has made numerous bad financial decisions, beginning WAY before his home purchase in the Spring of 2004, which most certainly contributed to his own mess.
If the banks chose safety & reasonableness over greed, they wouldn’t have loaned my already financially-risky brother the money for the house before his old one sold, and the bank would be better off now. In hindsight, so would my brother, in his old house. Multiply that times a few million, and you’ve got your current financial crisis.
(And personally, I’m a bit “peeved” that I will end up paying for his (and millions of others’) bad financial decisions – and the greed of the mortgage lenders.)
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@FMF
Though I did clean up some of the language for this post (I’m no angel), I did, indeed, say “Holy cats”. Perhaps I shouldn’t admit it, but I say “holy cats” all the time…
@Lilblueeyes
I’ve been so focused on Tony’s story that I forgot I had one of my own. Except with mine, the numbers are much smaller. In 2004, we bought this house for $280,000 before we sold our existing home (on which the remaining mortgage was $70,000 or $90,000 — cannot remember off the top of my head). I financed a lot of the move and initial remodeling on credit, too.
We were fortunate, though. Our house was on the market for one day before it sold. This was at the front of the housing bubble, which helped.
All the same, I still felt pinched by the new payments and all the expenses. In fact, this was what led me to finally get serious about my debt….
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Holy cats. Heh.
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Wow, sorry to hear about his problems… the thought of trying to move from our current house, find two new jobs, sell our house, and buy a new one all at the same time is terrifying.
But I can see how in the past it would be seen as “oh yea, no problem!”
I wonder if he has any legal grounds with the realtor for not bringing the offer to them? Idiotic realtor.
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A $415,000 mortgage (2004 Portland or elsewhere) is heavy, heavy debt. Think about it, his mortgage payment alone was $2800 per month. If your brother followed the golden rule of 33% NET regarding home loans, then he would need to be making $150,000+ year income to be comfortable leaving about $5900 per month for other expenses. Was his income even close to this? If not, then his first mistake was living beyond his means, even with the first home in Portland!
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You know, one question I should have asked Tony is: “Would you have taken the $500,000 offer if the Realtor had told you about it?” I mean now he thinks he would have, but that’s with two years of hindsight. What would he have done back then? What did he do back then?
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I fail to see how it’s possible for so many people (on such a large scale) to end up foreclosing on their home around the same time within the last year. Year after year for decades, people have been paying their mortgage as usual. Job market has been bad before. If people were to lose their job and were unable to pay their mortgage, shouldn’t there have been a steady trend of foreclosures instead of everything happening within the last year?
That said, mortgage don’t change that much (especially if you’re on a 30-yr fix) or even if people who are on ARM loans which can last anywhere between 3 yrs or longer. That said, people on these loans would make the SAME monthly payment they always make. Sure there are certain exceptions and unplanned events that causes the market to shift but even for non-investors and primary home owners who only have one home (eliminating your brother’s case out of the picture since he had two homes), why is it all of a sudden no one is able to afford to pay their mortgage just this last year on a large scale.
I understand there are those who walk away simply because their home value dropped below the value of their loan but that makes no sense for the mass majority who actually lives in a primary home, has the same pay, and yet somehow between 2007-2008, added to the huge crisis. Sure investors who have more than they can handle, I can understand. Same goes with people who have certain circumstances such as the predicament your brother got into. But otherwise what else is going on that’s failing these people so badly that it all adds up to this one point rather than a steady trend of foreclosures year after year?
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I admire both your and your brother’s honesty. It gives a real feel for the pain that people are going through.
I have to agree that most of us are so wrapped up in our own little worlds with our own economies (as you put it) to ever notice how the people around us are coping.
Sure Tony is not free from responsibility here – but I don’t think there is a whole lot to be gained by engaging in self flagellation. Hindsight is 20:20 and we would all be millionaires if we could see into the future. I try my best to play the hand that I am dealt and not worry about the past mistakes. We have an opportunity now in the present to make amends for them.
I hope that Tony and his family get through this okay.
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The only people I feel bad for are those who were responsible enough to sit on the sidelines during this bubble. Now they get to pay to save the banks, cover everyone else’s bad mortgage and, if they’re lucky, help to maintain propped up housing prices so they still can’t afford a house while the irresponsible keep their gains.
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Wow, it is amazing how banks were just throwing money around. This also shows how we are all just impatient. That is why the title of this blog is so fitting, Get Rich Slowly.
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I hope you’re helping your brother in some way – there is NOTHING in life more important than family, especially your immediate family.
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Thank you for sharing Tony’s story with us. I hope he makes it thru this and winds up in decent financial shape at the end (with a brother like you helping, I don’t see how he couldn’t).
It also hardens my resolve to stay out of the real estate market. Right now (single, no kids), renting is so much cheaper and if I want to move I don’t have to worry about selling a house.
I also agree with Seth tho, those like me that have stayed on the sidelines will end up footing part of this bill.
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I have a friend in Chicago who is sitting on two mortgages as well. They purchased a house about a year ago and hoped that their other house would sell quickly since it was in a prime area.
I’m not sure how much longer they can hold out. They’re now looking to rent the house, but the house next to them is up for rent too and no takers.
My husband and I made that same gambled four years ago when the market was hot and we sold our house by the second month. I would not take that gamble today.
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Hey JD
Tough situation for your little brother. I have a little brother too, and here is exactly what I would tell him if he were your brother.
LOWER THE PRICE!!! There is a reason it has taken two years. If I read correctly, they forclosed on one (Bend), yet will not lower their price on the other (Portland) even though they have $132,000 of equity. Doesn’t make sense.
He states they owe $367,000 on the Portland house (paying $2800 month) yet they have the house for sale for $499,000. While waiting their other house went into forclosure.
Drop the price to $450K, or $419K or even $399K if they are really serious, which they shoud be. At $399K, they still clear enough to pay of the balance plus 8K extra to pay for the repairs put on the CC.
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The reality is that this is a common situation. Whether you are “giving him a pass” or not, everyone makes mistakes. It reminds me of congress and the bailout issue. This is not the time to try and place blame. That’s for later, when the crisis has passed. I’m sure that there are many things that your brother would do differently now. It’s very sad, and I can see how it happens. Thank you for posting this.
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Tony: Your real estate agent owes you fiduciary duties, and by failing to tell you she received an offer it looks like she breached those duties. And I bet she and/or her brokerage have insurance that would kick in on a breach like this. My advice — go find a lawyer and kick-start that process. Best of luck to you.
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FYI – but Congress passed and Bush signed into law HR3648 at the end of 2007.
Basically – the ‘phantom income’ from short sales doesn’t count as income anymore.
http://activerain.com/blogsview/317772/Great-News-IRS-Revision
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Troy – I’m with you completely.
To me, if there are interested people when the price is well north of what you owe, and even of what you paid, the housing market there must be substantially better than here. I live in Michigan and know of quite a few people whose homes are either on the market currently or sold in the last couple years. My husband and I even asked our realter to tell us what she’d list our house if we decided to sell (which we didn’t). Here, I don’t know of a single person who lists their house one cent higher than what they paid for it, and, if they bought it during the boom, they list it for lower than what they paid. And that’s just the list price – my sister’s house sold for $160k and she’d paid $200k five years before. My brother-in-law’s house has been on the market for a year – it’s currently listed at $170k and he paid a little more than $200k and hasn’t had any offers yet. Our realter wanted to list our house for $8k less than we’d paid just three years earlier, and we’ve done a lot of work to it. We decided against it. I don’t even want to think about what it will go for when we *have* to move in two years…
I knew things here were bad, but I thought the rest of the country was catching up to us. If people are interested in your brother’s house when it’s listed almost $85k more than what he paid, that’s amazing to me. I’d lower the price to sell quickly and use the proceeds to pay whatever he can. He’ll still be in rough shape, but it’ll be better than it is currently.
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There are no winners here. The only winners maybe are those who sold there homes in 2004 for overinflated prices.
I live in a somewhat rural area, and I see a lot of new homes that have sat empty since 2005. The area I live in has the average wage of around 10-12 dollars and hour, and they are asking 189-275 thousand for these homes. Most of these homes are owned by speculating builders or real estate agents.
In my town the average wage earner is at 11 dollars and hour which equates to 22,800 a year. Even if two wage earners are in the family that makes it impossible to afford something like this.
It is hard to keep things in perspective, just because someone will give you the money for something does not mean you can afford it.Complacency is the root of this evil. We are a nation of payment buyers, as long as we can afford the payments we think we are just fine.
Now that everyone can not get access to credit lines, were in panic mode, isn’t this is what got us here in the first place?
http://downwithdebt.today.com/
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If Tony cannot work out a workable loan modification with his present mortgage company, let the house go. Let them both go. File bankruptcy as well and get rid of all other debt while he’s at it. Then start over again. With two foreclosures, Tony might as well file BK and start out with a clean slate. That’s what I’m going to have to do myself. It’s pretty much cut and dried. I can’t afford to keep paying greedy lenders exorbitant mortgage payments at the expense of everything else. I should never have been approved for the mortgages in the first place because it was obvious that I couldn’t afford them but the bank didn’t care about that back then. The stress isn’t worth it.
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I moved to Phoenix in 2006 and bought a condo. I was fresh out of college and accepted a job making mid $30k’s. My realtor was showing me around town when she goes “Good news! I saw you were approved for up to a $500k loan! Should we start look at homes in the mid $400′s?”. I nearly fell out of my chair. I knew damn well I could only buy a $200k condo(I was putting 20% down).
Just goes to show you how the US got in this predicament in the first place.
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A lot of people do not understand how mortgages work, period. People always get upset when they take their monthly mortgage payment multiply it by 360 and realize that it is 2-3x the cost of their house. I suspect that the world would be better off, if people knew more information about the technical side of debt and interest.
-ThatGuy
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“Tony: No. Plus we consulted with a lawyer, and he said we should just give it back because of the tax ramifications.”
Two things. 1. Your brother’s lawyer gave him lousy advice:
“Tony: Well, it would be a short sale. To give you an idea, we put the house up for sale at $299,000, and we paid $380,000 for it. So what you do is you do a short sale — the mortgage company has to agree to it — but the government considers the difference as money that was given to you. It’s taxable income.”
Yes, it is taxable income, but President Bush took the lead in having Congress pass very recent national legislation (December, 2007) providing for a moratorium on taxation from the difference. So, between now and sometime in 2009, I believe, you can short sell and not take the tax hit, while still deducting mortgage interest. Happened to me. I wouldn’t be surprised to see an extension on this, given the current state of the economy, as well. A short sale is marginally better to your overall credit rating than a foreclosure. The difficulty he will have is getting someone at his mortgage company to actually approve it, as they are flooded. He needs to be persistent with them and demand help to negotiate their labyrinth. The companies are NOT forthcoming about this option, as you can imagine. Because of the tax legislation, I would think twice about handing over the keys and try to sell it at any price. He should talk to a tax accountant who could run some numbers for him, and perhaps find him a refund within potential scenarios. Our numbers were so similar to his it’s scary and we had several thousand dollars refund, recouping the interest we had been able to pay. It really helped.
2. As a former Realtor, I am appalled that an agent would refuse any offer out of hand, even a verbal one, and not even present it to the client. Perhaps the laws and oversight are different in Oregon, but in my state, she would be wide open for an ethics complaint with the Board of Realtors and the State Dept of Commerce.
@Steven Why did so many foreclosures happen at the same time? Simple. ARM resets. Look at the amount of refi’s 3, 5, and 7 years ago. Those little chickens are coming home to roost. Not all no-doc and low-doc mortgage holders are potential deadbeats. There are lots of self-employed folks (like me) who couldn’t get one any other way, and who weren’t scamming the market value for cash-outs. The issue is when the loan resets, what index is it tied to? No doc loans were/are often tied to “more exotic” indexes that fluctuate wildly, and mortgage payments (like mine) can shoot sky high (double or triple) on a reset. With tightening credit, it’s more difficult for these loan holders to re-fi into a fixed mortgage than ever.
So what do you do? Like Tony, and myself, you pay one or more mortgages as long as you are able, often times in excess of your income, until you can no longer do so. Or, if you don’t give a rip about anyone other than yourself, you move out, save the money you would have spent in the first scenario, and leave the key under the doorstep for everyone else to wind up holding the bag.
I wish Tony the best. It’s an enormous hole from which to dig yourself out. We’re not there yet. There are many days I wish we had mailed the key to my house in instead of hanging on for over a year making payments on two houses. But that’s not who we are, as my wonderful husband keeps reminding me. We ruined ourselves trying to do the right thing. In 2006, when this happened to us, all this wasn’t even on the mortgage companies’ radar. Nothing like being ahead of the curve.
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“Tony: Your real estate agent owes you fiduciary duties, and by failing to tell you she received an offer it looks like she breached those duties. And I bet she and/or her brokerage have insurance that would kick in on a breach like this. My advice — go find a lawyer and kick-start that process. Best of luck to you.”
Eric is right. I don’t know what the code is like in the states, but in Canada it is against the realtor code of ethics to NOT disclose every offer received to your client. Your realtor may have done something completely illegal here. Realtors are obligated to present every single offer to the client and represent the client’s interests no matter if she disagreed with them. Whether Tony would or would not have taken the offer is irrelevant, I’d think, because he was never given the choice. Talk to a lawyer, talk to that brokerage because at the very least i do not believe you owe this person commission.
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Sorry I skipped some comments here because I really wanted to say this before I have to actually start working (dumb)
Tell your brother, if he has not already surrendered his house to the bank, to negotiate a “Cash for Keys” settlement with the lender/mortgage servicer (and if the servicer is Wilshire Credit have him email me, I know most of their foreclosure team).
It won’t be a lot, but the basic premise is that if you leave your house vacant and in occupiable condition they’ll give you $1-2K for saving them the trouble of trash outs/repairs/eviction proceedings.
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“I believe he’s reached a point where he’s ready to stop letting other people (the bank, the realtor, the credit counseling place) tell him what he can and cannot do, and simply decide for himself.”
good! that’s one of the most important lessons he can learn.
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First, best wishes to Tony and thanks for sharing his story. I find myself in similar, but not so dire circumstances. We found our dream house, and the market was still hot, so we put our house up for sale and made an offer, with a contingency on the sale of our house. So far, so good. Then the market started to slip. All thetalking heads made it seem like just a temporary setback, we had plenty of equity and could afford to take a cut in our asking price, so we waited. The market collapsed (we’re in southern CA). The only houses selling were short sales, for way below what we were willing to take. The sellers of our house were getting antsy. They didn’t have any other offers, but our original offer had expired – it had been 6 months – and they wanted to take the house off the market and rent it out. We had a offer come in, it was good enough, and everything looked good, so we started forward on our purchase. Then the problems began – our buyer had problems with his loan. First, we were told that there was an issue with identity theft, and as soon as he cleared that up, things would move forward. Next we heard that his mortgage company had failed and he was looking for other financing. This was just as all the news about problems with stated income loans was coming out. We eventually found out that the buyer was one of those people and had stated that he earned $150k/yr working as a janitor. With the tighter credit, he wasn’t able to obtain financing. At this point we were already commited to the new house. Further marketing of our old house didn’t help bring in any offers – there were still too many short sales and foreclosures that were much lower than we wanted or could afford to go. Eventually we found renters. They’re good folks and we hope to sell to them eventually, but they are in the same boat. They still have a house in Phoenix they couldn’t sell when they moved here, and they are renting it out.
Long story short – we’re stuck with 2 mortgages, but we’ve been able to (just barely) keep our heads above water for now. We’ve cut back our expenses (which is one reason I read here every day, thanks JD!), and if nothing major blows up on us, we’ll make it out the other end ok. The best thing out of this whole mess is that our new house is really our dream house and we do enjoy it very much.
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this story about your brother made me really sad.
even when people make dumb decisions, I think that it is very important that we all have compassion for our fellow human beings at this time, especially when it’s someone you know and care about.
most people reading this blog are the lucky ones- we know financial basics that a lot of (good) people out there just don’t have a good grasp upon. it’s important that we try to lead by example and to hold out a helping hand if we are able to.
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As an average American, it grates a little to hear people like your brother described as the average American, even though you’re probably right.
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I think we’ve passed the peak of the permanent house. People are moving more for jobs or just for better job prospects. People also move in search of the cheaper property costs, etc.
The days of being able to expect you’ll work for the same company for 30 years is gone, and with it, the expectation that you’ll be living in the same place for 30 years will soon follow if it hasn’t already. Somehow the Donna Reed / Pleasantville suburban ideal is still embedded in much of the American psyche.
Clearly house-hopping is no longer a reasonable expectation (if it ever was).
Labor mobility is becoming increasingly urgent, but our hangups and our laws simply aren’t keeping up.
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At least he is a MAN about and fessing up to his own mishaps and not blaming others.
Rule 1 don’t buy a new house until the other one has sold.
We learn from our mistakes.
Two years from now he will be alright!
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Being an International reader I just have to leave a comment on this mortgage-related issue.
You Americans should consider yourself lucky that a foreclosure on a non-recourse debt means that the bank can’t claim the value from other assets and the debt is considered paid in full even if the sale price is less than the remaining mortgage. At least in Scandinavia (and I suspect much of Europe as well) this is not the case.
Over here if the foreclosure doesn’t bring in enough revenue to pay for the mortgage the borrower is still required to pay the mortgage in full. This means that the bank can take a significant amount from your paycheck before you get it or repossess your car or other property.
A lot of people struggled with paying their mortgages for 10 years after the house had sold in our 90′s depression for a third of the mortgage value.
So you should consider yourself lucky that you can speculate on a house investment with lended money with no actual risk if the investment goes sour.
*trying to show the silver lining*
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For lesson’s sake, this is not the depression, where almost 10,000 commercial banks disappeared from 1929 to 1934, we had 23% unemployment, and people were standing in line for a loaf of bread.
In this current “financial crisis,” we’ve had about 15 bank failures, around 6% unemployment, and no breadlines I am aware of.
Perception is reality but they have inverse relationships: Tony perceived times were “great” two years ago but “real risk” was actually high. Now Tony perceives times are terrible, but “real risk” for financial markets is much lower now than it was two years ago, and even two weeks ago…
If we learn lessons, we will be stronger going forward. It just doesn’ “seem” like it now…
“To make no mistakes is not in the power of man; but from their errors and mistakes the wise and good learn wisdom for the future.” ~ Plutarch
“Perception is strong and sight weak. In strategy it is important to see distant things as if they were close and to take a distanced view of close things.” ~ Miyamoto Musashi
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Alex, the notion that a mid-30s income means one can afford a $200,000 condo is ridiculous. We’ve been in our house for 19 years. At the time we were buying, the rule of thumb was that you can afford a house that is no more than 2.5 times your gross income. When did that change?
Interst rates have been so low the last few years so perhaps that has changed the thinking. When we bought, the loan rate for a 30-year fixed was 9.75% (our current 10-year mortgage is only 4.625%). On a combined gross income of $56,400 we could have bought a house for $141k. However, we’d prepared a budget and knew how much we were comfortable spending after putting 10% down. After all, we also needed to furnish and heat the house, pay for maintenance (house built in the ’20s), food, clothes, transportation, and just maybe, go out and have fun. So we bought a house for $130,000, put 10% down, paid cash for closing costs, and had to pay PMI. No big deal, we could afford it although it left our savings account with about $600 after closing. At the top of those closing papers are the words “FannieMae.”
It was a great deal for us. We didn’t buy a starter home but one we’d be happy in for a number of years. We also bought a smaller house in the best neighborhood (two blocks from Lake Michigan and the million-dollar mansions on Lake Drive) rather than a bigger house in another neighborhood. When rates declined in a couple years, we refinanced for 7.75% and had enough equity built up that the PMI was dropped. Over the years, we refinanced twice more – first to a 15-year mortgage, and finally to a 10-year mortgage. With 5.5 years left until it’s paid in full, we’re planning to pay it off even sooner for peace of mind in the current economic climate.
During our years of home ownership, between the two of us, we’ve weathered 4 periods of unemployment – some for only 2-3 months, some for 16 months. But because our expenses were lower as our incomes went up and because we had adequate emergency savings, losing our house never ever was a possibility.
I understand that most people don’t stay in a house as long as we have. You have children and you need more room, you get a great job offer across the state or country and have to move, etc. I think, however, too many people have been sucked into thinking of their houses as a way to get rich rather than their homes. We see our friends in new construction with the walk-in closets, the tricked-out entertainment centers in the lower level, the granite counters & stainless steel appliances in the kitchen and think we need that, too. Shows on HGTV certainly feed that feeling. But what we want and what we need are two different things. One thing this current recession and dropping home values may teach all of us, is the joy of financial solvency and owning our homes outright and that our houses are not ATM machines with cash available for upgrading bathrooms and European vacations and new cars. We need to listen to ourselves and crunch our budget numbers and ignore the voices of the real estate agent who wants to show you something bigger than you dreamed of owning or the mortgage broker who approves you for a loan you know in your heart you can’t afford. People need to educate themselves about basic finance and not accept what the “experts” tell them.
I feel sorry for anyone else who bought a home that is now worth much less than they paid for it. But for those that don’t need to move and can afford to ride out the market, stay there and it will come back one day. Our little $130,000 home is now worth about $285,000. Sure we live in a part of the country (Milwaukee, WI) that did not have the huge bubble in rising home prices, but that just means we didn’t crash as hard as other places have. I’ve never liked roller coaster rides, anyway. What I do like is being debt free. It certainly makes sleeping at night much easier.
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The saddest thing about this whole mess is how preventable it was.
If only people had been listening to the “whackos” out there that were trying to warn everyone of the dangers of the housing bubble back in 2005 and 2006, we could have avoided the problem entirely.
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J.D., you and the other personal bloggers out there should totally have courses, maybe at a university, maybe even for free, to teach people about personal finances! It’s tough looking backwards at people’s problems and fixing what’s already done, but maybe doing some preventative courses would steer the next generation of adults away from poor money choices, or at least educate them better.
It’s unfortunate that people who have done all the right things (saving, staying out of debt, living within your means, etc.) still end up getting screwed over, either by paying for others’ mistakes, or having lower savings interest. This is one of those times when another person’s actions DO affect everyone else around them. So it would be awesome if people can be helped out prior to those mistakes being made.
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Economic Depressions: Their Cause and Cure, by Murray N. Rothbard.
http://mises.org/story/3127
A lengthy, but valuable read.
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One of the biggest lies we tell ourselves is that we can afford something just because we can swing the monthly payment.
I feel for your brother, but this is entirely his fault and he can work his way out. He signed for the loans they SOLD him. Mortgage brokers are sales people. If they don’t close a deal they don’t get paid. He could have chosen to get advice from someone like a CPA who would have painted this dark picture for him BEFORE he did it.
When we decided to move we put our house up for sale. We didn’t sign for the new house until we had a done deal selling the first one. This meant moving into an apartment for several months. Was it inconvenient to move twice? – yes. Did people think we were out of our minds? – yes. Did we ever worry about the money? NO.
Perhaps the bank was betting with him that the house in Portland would sell, but that in no way gave them a green light to say that this is a good idea.
LAST AND MOST IMPORTANT…there are tax ramifications for letting the home go into foreclosure. The difference between the amount owed and fair market value is taxable income. The Portland home may not qualify for the exemption because it isn’t their residence.
I suggest that your brother get some tax counsel ASAP. It is generally better to take the tax hit on a short sale over a foreclosure.
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1. I used to work for a mortgage lender until they left the market (it was a new market for them) when the mortgage bubble burst. What some don’t realize when things like a forclosure happens, it stays on your credit report for years, severely limiting your ability to purchase a house in the future. Things like “bridge loans”, or financing a house when the other hasn’t sold is not a good idea unless you can carry both for an extended period of time! The lending institutions generally try to keep your mortgage debt under 45% of your income or so, depending on the lender. This amound does NOT include living expenses!!! Tradition dictates that mortgage, insurance, maintenance, etc…should NOT exceed 28%. That is a HUGE difference. As a general rule, do not buy a house based on what you qualify for. Buy a house based on what you are comfortable with.
2. I live in Texas, and am a licensed realtor. Here we have a law that a realtor MUST disclose ALL offers to the seller and can not under any circumstances speak for the seller on if the offer is too low or to high, etc. There are legal ramifications if you do not comply with this, and money due the injured party. You might look into local laws and see if a)your realtor acted legally and b)if you are due damages. In Texas you do not even have to go through a lawsuit necessarily, but you lodge a complaint with the Real Estate Council. Regardless, it may be worth lodging a complaint as it sounds as if they did you a disservice.
Good luck! And don’t worry, through planning and a little bit of sacrifice, you will get out of this before you know it.
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I can relate completely to your brother’s feelings of frustration, anxiety and overwhelming stress.
In 2006 we bought land as an investment property. Real estate was booming around here. We were making more money than we had ever dreamed of and had been doing so for a few solid years.
A year after buying the land, my husbands company “restructured” and our yearly pay was cut by $60,000! That made things tougher, but it was okay because we had an amazing investment that gave us a huge monthly return. We used that to pay this loan on the land. We put the lot up for sale. (it’s been on the market for over a year and a half now) Exactly one year after my husband’s pay was cut, that investment company went belly up and we lost another $55,000!
Well, that was the straw that broke our backs. We could no longer make the payment on the land and were really struggling to pay our own mortgage now and had to use credit cards to make some payments on cars and to even buy food sometimes.
We talked our bank into letting us do a short sale on the land. We thought that was an answer to our prayers. Well, the market crashed and now comparable land is going for almost $100,000 less than we owe on ours. We had offers early on after buying the lot but turned them down (of course, just our luck) because things were good then and we had no idea what was in our future.
Now technically, we are in foreclosure on the land. It’s our worst nightmare come true. And almost ironic because my husband works in the credit repair industry. We have always had amazing credit our entire adult lives. We worked hard for it… and now this.
The foreclosure hasn’t actually gone through and isn’t on our credit yet because the bank is holding off on completing it. Apparently banks get rated by the government and too many foreclosures isn’t good for their record.
We just keep hoping and praying that the right person will come along and want this land and we can somehow stop the foreclosure even though we haven’t been able to make a payment for 7 months now.
It feels awful. I find myself thinking back, going through my mind all the “what ifs”. What if my husbands work hadn’t done this to us? What if we hadn’t lost all that money in the investment deal? What if we’d sold the lot to the first person interested? What if I had just kept driving through the round about and hadn’t done that second loop around just so I could write down the phone number I saw advertising this land for sale in the first place? That is the biggest what if at all. I picture myself driving in my car that day in my mind and will myself to keep going, like that could change history.
Assuming things change in the future and we are ever able to invest in anything ever again…I honestly don’t know if we will. This experience has changed us. I don’t know that I am willing to take risks anymore. Not even educated risks, because both of these ventures were not dumb decisions at the time. We had no way of knowing what was going to happen. That doesn’t mean I don’t take responsibility for what has happened. I regret making both decisions immensely.
Anyway, that’s our story..just one among millions.
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I’m with FHF (#8) – I think the realtor bears some responsibility – it seems she was trying to maximize her commission at the expense of your brother’s best interest.
I don’t know that it would do him any good, but he might look into it.
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