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?
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.
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.