Friend Having Mortgage Problems - What would you do?

hobokenkitchenFebruary 9, 2008

One of my close friends is having problems with her mortgage so I thought I would ask for some advice/ opinions.

Background: They bought the house at the peak for around 800,000 and the house is probably worth 200,000 less than they paid.

They did an 80/ 10 mortgage(s) with 10% down.

They have been sporadically paying the mortgage and my friend was frantically looking for a job to help her DH pay the mortgage so it wouldn't foreclose. She did get a job.

Now the bank has put them on a one year plan to contune to pay their mortgage as well as paying off what they hadn't paid last year. It comes to over $7000 per month including the 2nd loan which has an interest rate of 12%.

They also have to pay car payments and college tuiton for their 3 children.

Knowing that the house is worth 200,000 less than they paid, what should they do? Try to struggle through 2008 to get caught up on the mortgage at 7000 per month, or try to get the mortgage company to accept a short sale?

My advice to her so far is to talk to the 2nd mortgage co about reducing the 12% interest rate and to find out where her payment would be after the year of $7000 per month so they can decide whether they can comfortably pay it afterwards.

Any thoughts? What would YOU do?

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Wow, what a tough situation. A couple of questions...

- How long has your friend been in the house? You say the house is worth $600,000. How much more than the $600,000 do they actually owe?
- Why the sporadic mortgage payments? Did they have an adjustable rate mortgage and the payments increased or did they just buy more house than they could afford?
- Does the $7000/month include the second mortgage or just the first?
- Have they done some hard-core personal budgeting to see whether they can afford $7000/month? Can they actually afford the house next year once they are back on regular mortgage payments?
- Are they planning on living in this house forever? If so, it MIGHT be worth trying to stick it out. If there's any chance they will sell in the next few years, it may make more sense just to get out of it with the least possible pain.

To me, the most important thing they can do is sit down and run ALL of the numbers. Hire a financial planner if they need to. Focusing only on the $7,000/month might make it hard for them to see all of the financial issues. And there are a LOT.

    Bookmark   February 9, 2008 at 1:15PM
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Any thoughts? What would YOU do?

1)I'd seriously get some financial counseling. I'd find the best fee based financial planner and have an honest consultation with him/her.

2) I'd lose the car payments. Sell them and buy beaters (or see if public transporation could replace one of the vehicles

3) I'd have a heart to heart talk with the kids in college. Tell them they want to help, but right now they have problems. The kids can get loans, get jobs, attend part-time; one way or another they CAN put themselves through. It CAN be done if they want it bad enough. If they don't want it bad enough, why should the parents lose their home.

4) I'd ask myself just how important it is to keep the house. Can they sell it for enough to pay it off? Or do they owe more than it's currently worth?

Very tough situation and calls for some very clear thinking and hard decisions.

    Bookmark   February 9, 2008 at 1:38PM
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Totally agreed with Grandma!

Time to pull-in-the-horns and tighten the belt.
The plain truth is that they cannot afford the lifestyle they have... no JUDGMENT here, just plain financial facts.

If they "struggle it out" they are far more likely to lose it all, than if they dramatically reduce their costs of living (moving is likely required) re-group and get a fresh financial momentum going.

While they are 'pulling every string' to stay above water... they are also NOT funding their future financial independence... in essence sentencing themselves to financial slavery the rest of their lives simply to maintain the current facade.

Tough times call for tough decisions (and tough love from tough but loving friends!)

Dave Donhoff
Strategic Equity & Leverage Planner

    Bookmark   February 9, 2008 at 6:01PM
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I don't know the answers to all the questions, but here's what I do know.

They owe quite a bit more on the house than what it's worth. Maybe by $100,000 or more. Their equity is gone. They can't refinance because it doesn't appraise (not even close).

The $7000 includes the second mortgage. They can afford to pay it but it will wipe out every cent they have.

I don't know if they want to live in the house FOREVER, they bought it hoping to sell it at a profit down the road, but I know they like it and don't especially want to move.

My friend is asking whether the 7000 is throwing good money after bad, considering they have already lost all of their equity.

They have lived in the house 2 years I think.

They fell behind on payments because my friend had a very tough year with work in 2007 and had basically no income. Her husband couldn't carry it all on one income so they started missing payments and it all adds up very quickly once you get behind. Then it starts to seem hopeless.
She did get a job within the time limit set by the mortgage co (just), but by then they were already far behind.

I know that their monthly outgoings were over $10,000 per month BEFORE the increase in mortgage payment. Now they must be at at least $13,000/ month. All savings went to mortgage payments before they stopped paying, so they have nothing for their future now.

Two of the kids are already out of college and they have their payments to make. One is still in college. One of the grads is living with them at home and is very angry about the situation and is giving his Mom a hard time about their poor decision making.

I think they should try and get the bank to accept a short sale and get out of it. I don't think they could comfortably afford the payments before without two incomes, and now that they are behind and have been on one income for a year, I think it has got away from them. It just doesn't seem worth it to me.

I know it doesn't sound like a big deal, but my dh and I have a lot more money than they do at the minute, yet when we go out to eat - their portion of the bill far exceeds ours. I don't think they really look at prices much. They used to live in a far cheaper area of the state and both had very well paying jobs - I guess it's tough to get used to a new situation.
Their cars are not super fancy, they hardly go on holiday and neither of them is a crazy shopper - but their monthly outgoings are just too high for where their income was last year and now it has spiraled out of control. I can see how it could happen to almost anyone and it makes me even more careful!

I think their biggest mistake was to buy more house than they could afford, thinking they would both get pay increases and the market would continue to go up. Instead she stopped earning and the market went down. Feel so sorry for them.

    Bookmark   February 9, 2008 at 7:40PM
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First, I'd charge that kid rent.

    Bookmark   February 10, 2008 at 5:34PM
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Two of the kids are already out of college and they have their payments to make.

Who is "they"? The parents are still making payments on the grad's education? What is the grad doing about making payments? Why can't the two grads chip in toward the third's expenses?

One is still in college.
That one could be told, "the bank of Mom and Dad is closed. You can get a loan, a job, get into a work/study program, etc."

One of the grads is living with them at home and is very angry about the situation and is giving his Mom a hard time about their poor decision making.

OK, that's just about as spoiled as they come. He/she needs to either pay rent and shut up or move out and stop being a burden. It's a wonderful gift when a parent can pay for college, but it's not an obligation nor is it a child's right.

    Bookmark   February 10, 2008 at 5:44PM
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Well, I think Grandma has the right answers. That situation is so far from mine that I have a hard time comprehending it. Especially the kids all getting their college education paid for, then coming back to the nest, and complaining about the situation. Or the parents being ready to lose their home and thinking they have to keep supporting their adult children. To me it sounds like a family where perhaps everyone is so consumed by having alot of things without regard for sound financial decisions. It's hard to imagine how they would suddenly change that way of thinking - or get their adult children to take some responsibility.

It's a rude awakening the first time one loses one's earning power unexpectedly. I'm sure there are many people living right up to the edge (or over) of their income - and they're just one illness or layoff away from something similar - it's frightening.

    Bookmark   February 10, 2008 at 9:32PM
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I don't know how to solve this problem. But if I were old enough to have grown children (and I am) and had nothing saved for retirement, I would be so terrified that no amount of medication would calm me down. And I would do whatever it took to bring my COL down to a place where I could begin saving for the not-so-distant future.

The children should be taking care of themselves and that ungrateful twerp needs to be out on his own. It is a tremendous mistake to finance college before one's own retirement.

    Bookmark   February 11, 2008 at 1:34AM
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I'm with Grandma and Dave.

They need a tough reappraisal, with a skilled professional.

Right now they can't afford to support the kids.

As for the young one at home - is s/he working? Paying every cent possible toward their home costs (never mind just "rent" - they paid most of his college ... so now it's pay-back time). Family solidarity: no luxuries at all for him, either! Either he makes a substantial net contribution to the family income ... or he's out the door!

As for his complaining ... (I agree - he's showing symptoms of being spoiled) that kid needs his rear end kicked up around the location of his ears ... it looks as though there's a hole there, now.

For one thing, I think that they should have a talk with the holder of the second mortgage .. along the line of, should they go bankrupt, which they're considering, that lender will likely come out of the situation a lot worse off than writing down the current interest rate substantially.

I agree with the person who said that they should downsize vehicles to (an) old vehicle(s) that they can afford to buy outright, with no more monthly payments. Suppose keeping those late-model cars is the straw that breaks the camel's back ... causing them to lose the house??

I suspect that the best thing may be to go bankrupt, now - quite likely, after a period, they'll lose the game, and be more demoralized than currently. And I hate like heck to even suggest that alternative, being as conserving of assets as is my predilection.

And what's this about eating out, and having a larger bill than their friends?

They can't afford to eat out!

Have the friends over - for pork and beans!

Good wishes to your friends for carefully, sensibly and *frugally* working their way through this mess!

ole joyful

P.S. Though I'm unfamiliar with the U.S. housing situation in general, including housing issues in your area, I have a gut feeling that they shouldn't be surprised if their house values don't break even for about 5 years (rough estimate) or so.

o j

P.P.S. I've owned stock, one of my major core holdings, in a Canadian bank for over 40 years which had exposure not only directly to the U.S. sub-prime mortgage debacle, but are guarantor for an insurance company that covered many of those mortgages, as well, which may be in danger of bankruptcy - stock price down 30% since last May.

But I can sit it out: I don't owe a lot of money - I'm not in danger of losing the whole ball game, as these folks are!

As I've said many times - learn how money works ... it's an interesting hobby, that pays well.

And make damned sure that you have all of the bases covered! Stick your neck out too far ... you may get it cut off!

Trouble is ... not many want to listen!

Like Dad used to say, "You can lead a horse to water ... you can't make him drink!"

o j

    Bookmark   February 11, 2008 at 2:32AM
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Two things your friends should look at, should they decide to stick it out, are property taxes and insurance. If they financed for $800.000, the house is probably overtaxed and overinsured.

    Bookmark   February 11, 2008 at 6:05AM
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The son who is living at home is paying rent - I think. He only recently moved back in and got a job around the same time as his Mom - around a month ago.

They had kids very young, so are now in their mid 40s. Hopefully time to recover from this???

Whether they have now asked the other kids to fund their own loan repayment for college, I don't know. I suspect they may have done but only recently once the damage was already there. My friend explained to me a long time ago that hse felt a debt free college was something neither of them had had and they had wanted that to be their gift to their children as they were unlikely to get a lot of inheritance.

I think there's more to this than I have been told (and I've been told more than anyone else). I just found out that they had an appraisal to try and refi last year which came out at $850,000 but they coudn't get the refi. I couldn't understand this, until she told me that they had an equity line of credit (ughh) on the house which they had been using for living expenses since she had been out of work. What I don't understand is where all the money has gone? If they weren't paying the mortgage regularly and had the husband's (quite large) income AND the line of credit, what were they buying? Their cars are not expensive - a Toyota Scion and something else, they don't appear to buy lots of 'stuff'. Believe me, some of my friends buy a $2000 + handbag several times a year and less expensive ones and $200 - $600 shoes ALL the time. This friend doesn't do that (and neither do I). So where has it gone??

I think I've reached the end of being able to help, because unless she wants to tell me every detail of their finacial lives - I can't really advise further. I've suggested that they really think over how long they want to be in this particular house. When I asked yesterday I said do you see yourselves in the house for 2 years or 10 plus years. She said 2 years.

SO my final question to try and help them is this... If they decide to try a short sale (their credit is already shot). Should they continue to pay the mortgage? I know morally the answer to this question is probably 'yes'. But at $7000 this just seems crazy. She thinks the house may actually be worth around $700,000 now, but isn't sure. Does anyone know how this works? Isn't it crazy having lost all their equity and to be taking a thumping loss to continue shovelling money into the hole? If they stop paying, what happens next?

Thanks for all the comments and hopefully they can get past this difficult time and move forward more sensibly in the future.

    Bookmark   February 11, 2008 at 1:35PM
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One of the grads is living with them at home and is very angry about the situation and is giving his Mom a hard time about their poor decision making.

I'd be kicking this kid to the curb!

And I'd be asking, "what you learning from this?"

Frankly, all of the kids could be working and pitching in. They benefitted from all the financial decisions their parents make; now that times are tough for the folks who fed them when they were little, and paid the college tuition, they ought to be giving back a little?

Two of the kids are already out of college and they have their payments to make
Which "they" is making the payments? I hope it's the kids, right? Not the parents?

I think I'd be w/ you, suggesting that they get out.

    Bookmark   February 11, 2008 at 1:41PM
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I know it doesn't sound like a big deal, but my dh and I have a lot more money than they do at the minute, yet when we go out to eat - their portion of the bill far exceeds ours.

Why are they still going out to eat?

    Bookmark   February 11, 2008 at 3:11PM
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Obviously, as her friend, you probably wouldn't be comfortable repeating some of the thoughts in the above posts.

As a friend, I think the best advice is for them to go to a professional financial planner (a certified one) and lay everything out. Two reasons: first, it's a complicated situation and the immediate question needs a lot more information than she has given you (and as her friend, you can't exactly pry)

Secondly, (and maybe more importantly) a Certified Financial Planner can and will be much more blunt with them than you.

I understand their feelings about a college degree (I'm working on partially funding a 529 plan for my grandsons), BUT, the best gift a parent can give their children is to avoid being a burden in their old age. Unless your friends drastically change their view of money, they may well end up financially dependent on their children when they are old. If he loses his job, it could happen sooner.

Your friends apparently are the kinds of folks (there are a lot) that money just seems to slip through their fingers without a whole lot to show for it. It's SO easy for money to disappear and for you to wonder "where on earth did it go???"

Obviously they don't track their spending - that's a huge eye-opener. If they are eating out, then they are in denial about their situation. You can't help them, but a good CFP can.

There are a number of great threads on this forum on finding a CFP.

    Bookmark   February 11, 2008 at 3:43PM
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I'm amazed that they are still going out to eat -- grandma's right that they're in denial.

My husband and I are trying our darndest to pay off a home equity loan. Towards that end, we have seriously cut out all non-necessary purchases, stopped going out to eat and doing our normal fun activities, and allow ourselves only a very small "fun" budget that we use to go $1.75 movies at the cheapie theater. We're not making _all_ the sacrifices we could (like cutting out cable, or living on ramen noodles) because we don't need to at this juncture. We're not about to lose our house, after all ;) But, we are able to set aside $2000 - $2500 a month to pay off this loan, and will hopefully have it paid off by the summer.

If you really want to make sacrifices, you can do it. It's not fun but it's doable, if it's worth it to you.

    Bookmark   February 11, 2008 at 4:37PM
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Paying for their children's college education is a great gift. But I think teaching them about sound money management and planning for your future would have been a better one. Sadly, it sounds like their kids don't have an appreciation for the gift they received, rather they view it like it was a no-brainer.

Sounds like they are probably keeping up the (unrealistic) lifestyle that they've become accustomed to. I think they need to realize that no one is going to bail them out and I'm afraid that will be one rude awakening for them. :(

    Bookmark   February 12, 2008 at 2:00PM
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they need to get their house appraised by several realtors. there are also bank programs right now for people who can't pay their loans (in BBC news today). if they can sell this house and not have to "bring money to closing" (short sale?), they might save their credit. ditto to getting a financial advisor! and yes, they need to make sure they are being taxed at what the house is worth today, not what it was worth years ago or when they bought it.

i wish them all the luck. you're a good friend to try and help them.

Here is a link that might be useful: BBC news re mortgages

    Bookmark   February 12, 2008 at 7:31PM
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" Isn't it crazy having lost all their equity and to be taking a thumping loss to continue shovelling money into the hole?"

They've only lost all their equity IF they get out now.

They'll have nothing to show for the downpayment they put down, they'll lose money on the sale and have no funds to buy another house or start again.

But if they could stick it out and stay in the house, the market will come around eventually. It sounded like a house they meant to stay in a long time, even though it sounds like a very expensive house to buy at a time when you've got three kids in college and probably about to fly the coop!

    Bookmark   February 13, 2008 at 4:59PM
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But if they could stick it out and stay in the house, the market will come around eventually. It sounded like a house they meant to stay in a long time,

The OP said that they only planned to stay about 2 years. I wouldn't count on the market coming back that much in two years. Especially if we are (or about to be) in a recession.

    Bookmark   February 13, 2008 at 6:25PM
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The OP said that they only planned to stay about 2 years. I wouldn't count on the market coming back that much in two years. Especially if we are (or about to be) in a recession

Ok, I missed that part about the two years. I think that's an odd time to buy an $800,000 house for only two years rather than staying put a couple of years when your kids are about to leave home, but that's neither here nor there.

While you're right that the market won't come back in two years, they'll have nothing to show for their $80,000 downpayment, nowhere to live and no money to buy anything else, plus ruined credit. To me that almost makes it imperative to try to hang on to the house, if possible, because there really isn't much of an alternative. And considering that housing prices nearly doubled around here from 2000-2005, it's not too unrealistic to believe that if they could get their finances in order they could one day have equity again. But it sounds like they probably bought way too much house and live a lavish lifestyle that will have to be substantially changed!

    Bookmark   February 14, 2008 at 12:14AM
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Grandma, where have you been?


In an election year (I hear rumours of one of them being in the offing).

Surely not!

Hardly ever have a recession in a major election year, right?

That said - I think that you're right.

Looks as though one is well started, now.

Nice to be retired and not worrying about the stability of one's job/position.

But if I owed a major mortgage, and with insecure income, I think that I'd be sweating blood.

I do hope that they can make it through.

And pleased that you not only appear to have a number of your ducks in a row ... but are enjoyiing life, as well!

Good wishes to you and yours.

ole joyful

    Bookmark   February 14, 2008 at 12:27AM
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Hello Joyful,
Yes, being retired does remove the worry about losing one's job. And DH retired at the end of Dec, so we are both entering a new phase of our lives.

But a recession could definitely affect my sons' earnings. Especially the one who works as a contractor. He's had fewer jobs this year. I guess one never stops worrying about their children, do they? Fortunately he bought his house about five years ago with a 20% down payment and a conventional mortgage. And he takes after me in his views toward debt... so he has no other debts.

I'm currently looking for part time work as I want to partially fund a 529 college plan for the grandsons - and that's outside what our current income will cover.

I digress from the topic at hand. I do hope the OP can get her friend to talk honestly with a really good CFP and they can get on track to a more solid financial picture.

As far as recession, our current administration seems to prefer bandaids rather than really addressing the root cause. We may well be in for a rough year, or two.

    Bookmark   February 14, 2008 at 10:20AM
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My guess as to "where the money went" is college and (possibly) new house expenses.

If they have two recent college graduates and one who's still in college, that's three tuitions. Just out of curiosity, I took a look at current expenses at my alma mater-- a state school. Expenses for in-state students were estimated at roughly $19,000 per year. For out-of-state students, the estimate is about $33,000. And an Ivy, like Harvard, has as estimate of about $50,000. Your friends may not need to have some other problem going on if they're trying to cover those kinds of expenses for three children. Especially if they had their children early-- if they started having children in their early 20s when they themselves still had college debt, they probably didn't have enough earnings to start saving for the kids' colleges when the children were young.

And that may also have set a pattern of them knowing that they could get along without savings. So when they bought a new house when things were good for them, they may have felt okay about buying new furniture or new electronics or whatever, and leaving themselves without much of a safety net.

If I were them, I think I would definitely shift the burden of college loans to their children now. It's loving of them to want their children to start their careers debt-free... but it sounds like the parents are starting to go under themselves. Would the older two kids rather pay their own college loans, or would they rather their parents and younger brother/sister have to move in with them?

Beyond that (as everyone else has said), they need to really analyze their financial situation, figure out what they can cut, and determine if they could afford the house if they were to change their spending. And if they can't, their choices are to sell it or be foreclosed upon. It's a hard situation.

As their friend, I would maybe think about ways to shift our socializing time to less expensive venues. It may not make much of a difference, but if I know that my friends were having problems I would feel more comfortable with visiting one another's houses or going on hikes or doing other activities where spending wasn't part of the environment. They don't need to know that you're doing it. It's just that that way, you'll at least know that you're not contributing to the situation.

    Bookmark   February 16, 2008 at 2:49PM
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Sovra, you may be right - I can see how college would suck up cash very quickly for three kids all going very close to one another, and they did start having kids very young. In fact I think they were both still at college themselves.

We haven't been out for dinner with them since we found out about their financial situation. Before that, we had no idea there was any problem. I don't think that they eat out a lot though. Right now they are both working like crazy so we don't see as much of them - especially since dh and I just moved. Hopefully we will remain in close contact with them though - I definitely consider them very good friends!

    Bookmark   February 17, 2008 at 7:38PM
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There could be other issues besides payments on various things including the house. Did the bank just put them on a payment schedule, or did they sign papers. I don't think any bank can just put them on this legally without signatures. Sad to say, it sounds like your friends are trying to live like the did before, but with less money and not sure how to adjust. I would suggest you just step back and not offer any advice, other than to suggest they get professional finanical help. No matter what you say or do it will come back to hurt the relationship. After only 2 years there are too many questions, not enough answers--even the though of gambling come to mind. And by the way, no way should you lend money or offer to pay everytime you do eat out together. In fact space might be a good thing for awhile.

    Bookmark   February 17, 2008 at 9:16PM
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well-one simple thing they could do is have a few renters in their home for a few years. They could get local college students or exchange students-but if they put some creativity into their thinking and this was a priority --then rent out some of this home until they are out of this bad phase.

    Bookmark   February 18, 2008 at 12:58AM
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