Do what’s right ... honor your contract and be responsible

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Do what’s right ... honor your contract and be responsible

Opinions

Friday, 03 December 2010 10:06

Ken Jackson
Staff Writer

I read a recent study that said 80 percent of folks in Arizona, Nevada and Southern California who took out a mortgage in a period around 2005 — the recent real estate “boom” — are now “underwater”; they owe more on their loan than the property is worth.
It’s common with cars. But ... your home? Your castle?

The housing industry has never seen such an inverted market — and that study shows it’ll change later rather than sooner, if it ever does. We’ve dug ourselves a pretty deep hole.
Consumers did their share of shovel-swinging — but so did the banks and market speculators.
Sure, there are those people who bought right before the peak, who paid $140,000 and put 20 percent down. Now the house is worth $132,000, but because they were sensible they only owe $82,000 today.
So, what’s Rule No. 1 of holes? If you’re in one, quit digging.
People made bad financial decisions based on the greed-fueled expertise of banks and lenders making bigger, badder financial decisions, but they had the capital to cushion their falls a bit. Plus, the big boys still got the government to take care of them with all that bailout cash.
Nobody held a gun to borrowers’ heads while they spent $300,000 on a home really worth about half that, then qualified based on income figures supporting the lower amount. They leveraged the higher number with interest-only payments that made them smile — then cry in three years when they “popped” to a higher rate.
I saw both sides of it. Led by real estate agent friends, I held a mortgage broker’s license from 2004-06. I heard a bigwig from Countrywide Home Loans say, “If you’re only offering fixed 30-year loans, you’re doing your customers a disservice.” (They were one of first lenders to go under, by the way.)
My office had a loan program for someone one week past bankruptcy. It wouldn’t do FHA or VA loans because, “There’s no money in it.”
For a while, everyone involved in the loan process printed money. It, like the property bought with it, quickly lost value.
My wife and I also purchased a home in 2005. We didn’t get our first choice, even though our offer was higher than the bid that actually got the house — that offer was all cash, from an “investor” with sights on flipping it. (I drove by it not long ago. It’s empty.)
We bought our current house at market value and secured an interest-only loan with an equity line of credit thinking we’d pay to principal as we saw fit.
In 2007, we were high on the hog. In 2009, we were drowning.
Thanks to the Obama plan, we were able to work with our lender to re-finance, eliminate the equity line and shift into a fixed, 30-year loan with a better rate. The thousands we paid in closing costs was our penalty.
Some people took money out of their artificially-inflated home equity — money they later discovered really didn’t exist — but didn’t fund an IRA or pay bills or renovate the kitchen.
They took vacations, got plastic surgery or sunk it into other depreciating products like cars or jewelry. In the process, they learned what should be common sense: your home is not an ATM machine.
If we penalize the banks, and the people who walked away from the obligations as an act of cowardice, maybe this can be partially prevented in the future. To fix the banks, we should let bankruptcy courts reset existing mortgages for a qualified segment of people to 80 to 90 percent of a current appraisal, but only for buyers who didn’t take equity money out or miss a payment at their original payment amount. These lower loans would carry a higher interest rate, two or three percentage points above the going rate, which these days is miniscule anyway.
Banks would find fewer defaulting payers, and the number of short-sale properties would drop. People would stay in their homes, and while occupying them, mow the lawn and trim the bushes, giving some subdivisions instant facelifts.
On the other hand, deny consumers who were foreclosed on in that period the right to enter into another residential real estate contract for five to 10 years. Add stigma to it.
I realize it would be difficult to determine who lost their homes to a bad note with a ballooning payment from those who just walked away, but to make an omelet, you gotta break a few eggs.
Honor your contracts, people. If you walked, you’re not a victim — you abused the system. Accept that you bit off more than you can chew. Some of us who did are handling it with responsibility.
If you have one of those bad loans, work with your lender — if you approach them they might be more flexible than if they have to track you down. Get a fixed-rate loan and hang on. By making good decisions industry-wide, we can get out of this.
And if you have the means and haven’t already, buy a home. There are great deals now in the market that won’t be seen again on this scale.
But whatever you do, be responsible — even if those around you won't.