Archive for the 'mortgage' Category

Date: December 10th, 2007, Filed under mortgage, foreclosure, bankruptcy, short sell, Dave Ramsey

Zion, IL
By A.B. Dada
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While watching the Dave Ramsey show last night, I caught one caller’s question and I definitely had a agree/disagree scenario over what Ramsey recommended to the caller.

The gist of the caller’s problems revolved around the caller losing their job (making $250,000 per year or so), but having a large mortgage payment. The caller believed that their home was worth $1.2 million, although I’m not sure how the caller came up with those figures. With property values falling in most areas, going by recent appraisals or even worse by Zillow’s figures can be very wrong. The caller said he owed $900,000 or so on the mortgage, and was hoping to acquire a new job at significantly lower income (in the low $100,000 range if I remember correctly). The caller had about $150,000 invested in stocks, and ask Ramsey what he should do to ward off foreclosure.

Ramsey’s advice was to sell the stocks and put the money towards paying off the loan while the caller was still unemployed. To a point, I do agree with Ramsey: if you took out a loan, you should take every step possible to make good on your promise. I find bankruptcy very immoral in most situations, where people have other opportunities to pay back their promises, such as selling other assets, getting a second job, and reducing spending. For many people who borrowed a mortgage in the form of a toxic loan, the likelihood of a short sale and even a bankruptcy is reality, but that still shouldn’t meant that they take the immoral route before looking at other options.

I do disagree with Ramsey on some other notes. In many areas, renting a home can be far cheaper than borrowing to own one eventually. When a house’s price is more than 120 times the monthly rental, owning is usually a worse position. Once you add in the cost of taxes, insurance, and upkeep/maintenance, it becomes obvious that homedebtorship is a losing proposition, especially in a market where the price of the home is decreasing as each day passes.

My opinion, and order of operations, for the caller is this:

1. If the caller truly has equity in the home, they should sell it immediately, pricing it at the bottom of the market of comparable properties, to move it quickly. Whatever equity they end up with (meaning, any money left over after selling the home, paying commissions, and paying off the mortgage) should be placed in a savings account to pay for future rental expenses.

2. Upon selling the home, the caller should rent immediately. During the moving process, they should also sell assets that wouldn’t be used while they are renting. I would also advise the caller to rent a home or condo smaller than they currently use, even possibly slightly smaller than they believe they need. The caller should also locate a neighborhood that is close enough to where they hope to work, but far enough away that they can save money even over the added cost of gas and time spent driving. The caller might be shocked that they could rent on their same street or in the same neighborhood as their current home is in for a fraction of the cost of borrowing, once you consider the tax/insurance/maintenance costs associated with living in a mortgaged property.

3. The stocks should not be touched if the caller can extricate themselves from the home. In the event that the caller can not sell the home for the value of the mortgage, only then should the stocks be sold to pay the difference, plus a little extra to pad a savings account with at least 6-12 months of the total cost of renting a home or condo. The total cost of renting should include the security deposit (registered as a savings account in their budgeting and accounting software), renting costs, insurance, and utilities. By providing for a safe living arrangement, the caller can then focus on acquiring a job, or better yet two, to get back to financial prosperity.

4. In the event the the caller can not sell the home for the payout of the mortgage plus their stock value, the caller is in trouble. At this point, making a mortgage payment out of their stocks will still have them upside down on their total equity. Only in this case would I agree with Ramsey that the caller should liquidate their stocks equal to 12 months of mortgage payments, insurance, maintenance and utilities, and work to find a job that can pay more than those amounts.

5. In no situation would I recommend bankruptcy or a short sale, as this pushes away the moral responsibility to paying their debts. If the caller ends up liquidating all their stocks and then running out of money, only then should the caller inquire to what they can do to resolve the situation as morally as possible. In some cases, the bank may allow a short sale if the caller also acquires a personal unsecured loan to pay back the difference between the mortgage payoff and the short sale figures. I highly recommend working out a payment plan for any difference in a short sale — anything less is an immoral procedure, one that can and should riddle the borrower with guilt for ripping off a bank and the depositors that funded their loan.

While I admire Ramsey, I believe some of his recommendations ignore other obvious first steps that should be taken, as I lined out above. He jumped to step #3, rather than look at the first two steps as an obvious and more moral solution that should reduce the long term risk of staying in a home with possible equity.

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