A Formula For Personal Disaster

Jerry Coffee
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Wednesday - April 09, 2008
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There’s plenty of institutional blame for the sub-prime mortgage crisis, two of the least known but most insidious are 1) Congressional pressure on lending institutions to provide “equal opportunity in borrowing” ie: loaning money to unqualified (low income) borrowers with no down payment and marginal means to repay, and 2) institutional pressure on appraisers to overvalue property as collateral for loans the institutions want to make.

But most troubling is case after case of personal irresponsibility by borrowers accustomed to living with mountains of credit card debt anyway. Following is a case in point known to me personally, but with different names.

Paul and Nancy lived in a small, Central California town where Paul worked at the local oil refinery while Nancy, a full-time mom, raised their three children - a typical middle-class family. As Paul marked his 25th year at the small refinery, a large oil company bought it and closed it down. Unwittingly, Paul tapped into his qualified retirement plan prematurely, moved the family to the coast, rented a too-expensive house and bought a too-expensive car, and soon found himself in debt to the IRS for taxes and penalties for unauthorized withdrawals from his retirement plan before age 65. Now in a bind with no new job, owing taxes and mounting penalties, and suffering from worsening genetic diabetes, Paul inherited, free and clear, his grandmother’s old house with three acres in a tiny town in the California foothills - a godsend!

Sustained only by a granite quarry and some cattle ranching, the town had seen better days and so had Grandma’s old abode. Like many in the sparse neighborhood, the shaky frame house sat precariously upon a foundation of cast-off granite blocks, and none of the wiring or plumbing met code. But the price was right.

Paul and Nancy both got jobs in the county welfare department and struggled hand-to-mouth as they paid off the IRS. The couple took out a modest home equity loan - the first of many - to fix the leaky roof, shore up the sagging floors and modernize the kitchen. Paul’s health continued to deteriorate with heart issues added to the diabetes.

Successive home equity loans continued to sustain the couple in a lifestyle far from extravagant, but more comfortable than they could afford on their salaries. Savings? None! Life insurance? None! Even though their IRS debt was paid off and their home continued to appreciate along with the surrounding real estate, their mortgage soon equaled the value of their home. A few years ago, Paul, now on kidney dialysis, took disability retirement and Nancy continued to work.

Last July Paul died unexpectedly from heart failure. Although he had always handled the family finances, Nancy recalls that in the previous few months he had seemed a little confused and had made some irrational purchases. But worst of all, he had not made the last few mortgage payments and had tried, unsuccessfully, to make the late payments and penalties, all without telling her.

In mourning, finding her home now in foreclosure and facing back mortgage payments and penalties of more than $5,000 and “foreclosure fees” (mostly pro forma - boilerplate - lawyer’s fees) totaling another $8,000, she sold Paul’s truck for less than Blue Book and a relative “loaned” her the rest to “save” the house. But the last home equity loan had been a sub-prime variable-interest rate loan (naturally) and the monthly payment has now increased by 50 percent. Without Paul’s pension and Social Security benefits she can no longer afford the payments on her salary alone. Her options are to renegotiate the loan to an “interest only” but affordable monthly payment, avail herself of the mortgage company’s sponsored sale of the house at less-than market value or, as many are doing, walk away. The first option would at least allow her to stay while “renting” the mortgage company’s house. She’s still deciding.

Of all the players in the sub-prime crisis - government, banks, mortgage companies and irresponsible borrowers - the only one over which the majority of us have any control is ourselves, the borrowers. Simply stated, even though they didn’t have to, Paul and Nancy used their home equity as a “cash cow” rather than an investment - a sure formula for disaster!

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