Putting foreclosure on the table as an option for the first time

Mundane Pointless Stuff I Must Share (MPSIMS)
#1

I’m sure lots of you can relate. Times are tough. Personally, I’ve never even considered foreclosure a viable option. All else aside, I believe signing on the dotted line is a promise and it’s my responsibility to keep that promise in all but the most dire circumstances.

But times are tough.

We bought a little over 2 years ago (May, 2006) at very near the top of the market. People had been telling us - respectable, intelligent people - for years to get in while the getting is good. You’re throwing your money away renting. Buy now or you’ll never own a house. Real estate is never going down.

We searched patiently for about a year and a half while prices soared. Finally we bought the first house we could afford that wasn’t in a bad neighborhood. It’s cute. Pool, good location, decent-sized yard for the city. Tiny, though. Two bed, 2 bath, and only just over 1,000sqft. It was triple what we were paying in rent, but it was ours and, hey, we weren’t throwing our money away anymore. Except we are. We took the 10 year interest-only option, of course, on a 5-year ARM.

At first it wasn’t difficult at all. We had been saving a ton of money renting and were still able to pay all the bills here and add to the savings account every month. Then, 8 months later, I got laid off. I worked in the mortgage industry, see. I never finished college and it was the only “adult” job I’d ever done, aside from a few months as a computer tech several years ago.

So we decided together that my wife would pick up another job and I would get a part-time job and go to school (she already has 2 degrees and is in her career - I still don’t know what the hell I want to do.) It’s been tough, but it’s kind of sort of working out for us. Our savings account is no longer growing, and it shrinks everytime an unexpected expense comes up, but in a regular month we make just enough to scrape by. And I’m doing great in school. I should have an associates degree as early as this fall; next spring at the latest.

The house, though, is in disrepair. The pool needs to be acid washed at minimum (several hundred dollars), but realistically it needs to be re-plastered and re-tiled (several thousand.) The deck needs to be painted. The pump will need to be replaced soon. The air conditioner has broken down 4 times in 2 years. All the appliances are wearing out, except the new washer and dryer we bought we we moved in. The exterior paint is fading and chipping, the shingles on the roof are fading and warping, the windows are downright drafty. The garage door is warped, as are the double-doors leading from our bedroom into the backyard (the Phoenix summer does brutal things to a house.) All the cabinets, countertops, and lighting fixtures are showing their age. I think the carpet might be original to the house (1985). These are all things that would need to be fixed before we could sell.

And it’s dropped $42,000 in value since we bought it.

And we just found out we’re having our first child.

The pregnancy was unexpected, but we’re absolutely thrilled about it. Very excited. But it could not have come at a worse time financially.

I’m not saying we are going to let our house go into foreclosure, but we had our first serious discussion about it last night. We could be stuck here for 10, 15, or more years waiting for it to appreciate enough to sell, while meanwhile the payments eat us alive. And it’s not like this is the only child we want. We can’t raise a family in a 2 bedroom, 1,000sqft house. A lot of my friends’ apartments are bigger.

Just some random musings. I don’t feel so comfortable talking with my real life friends and family about this, so thanks for reading.

#2

A good article about it from NPR

#3

I considered starting an “Ask the mortgage crisis victim” thread…but you went first. I’m a few steps ahead of you in the process, and my story is a bit different (we used to be able to afford our mortgage, but re-fi’d into an ARM that went through the roof). Our house is now up for a short sale, and we’ve moved into an apartment.

I definitely feel your pain, FWIW. And would be happy to take questions.

#4

Sorry man. The first thing you need to find out is whether you have a recourse or non-recourse loan. IMO foreclosure is not a moral decision but a financial one. The asshole who put you into a ten year interest only five year A.R.M.sure isn’t losing any sleep over it. Nor are the thousands of lenders who put people into sub-primes without telling them they really qualified for conforming loans that were cheaper. You owe the motgage industry nothing you owe your family everything make the decision that makes the most economic sense, that is what the lenders will do.

#5

You sound like one of those couples that the gov’t is aiming to help - have you looked into Fannie-Mae, Fanny-Pak, whatever it’s called?

I’m sympathetic on the unexpected life situation change issues, but those home repairs you mention are just part of the bargain no matter what. Click and Clack talk about that re: buying a car, they say to really pay attention to small maintenance issues - otherwise you wind up buying high and selling low, because ownership of something in disarray is depressing and you want to walk.

#6

I have been in real estate for over 20 years. Never believe “real estate is never going down.” Real estate always goes down, and then goes back up and then back down. It is the nature of the beast.

See if you can refinance. If not, see if the bank will accept a “short sale”–taking what they can get for your house and forgiving the rest. Either option is better than foreclosure.

Remember, if the bank doesn’t get all that you owe when they sell the foreclosure, they still have a lien against you that can mess up your future in a big way.

#7

We looked into lots of refinance options but unfortunately you cannot refinance a house that is worth $42,000 less than what you owe on it. And our rate isn’t horrible - even if we could refinance at the best rates going today we’d save about $70 a month. That’s a drop in the ocean.

#8

If you don’t sell, much of that sounds like maintenance that can be deferred.

You don’t need a pool – let it sit. And the deck & pump, too.

Appliances may be wearing out, but as long as they still work, keep using them. You could reduce energy costs by investing in newer ones, but you don’t have money to ‘invest’.

As long as they still close, warped doors are not a serious problem.

Things “showing their age” are just cosmetic – you can’t afford to worry about that right now.

Much of this you can live with if you stay in the house. And that’s still probably cheaper than renting.

#9

Sure, I have very little problem living with most of this stuff. The point was, though, that potential buyers would, and in this market they can afford to. If I ever wanted to sell for anything close to “market value”, these are things that would need to be taken care of first.

:confused: I was not speaking figuratively when I said our mortgage is 3 times what we were paying in rent in our last apartment, and our utilities are more like quintuple.

#10

Cisco, the value of your house and the cost of repairs is only relevant if you need/want to sell. Your problem isn’t so much the investment, as it is your budget. Does your monthly cash flow allow to stay (assuming you slice your budget and defer any non-essential maintenance)? Then hang on and ride out the downturn, and hope that your family income goes up.

If not…then bail.

#11

I’m in the same boat as the OP, minus the expecting a kid part.

Even though this is Texas home of cheap housing, we’re still getting hit hard in places. 9 years ago a friend’s father bought a 3 bdrm. 2 bath townhouse w/small backyard for 20,000*.

You will never see a steal like that ever again.
*I’m absolutely serious.

#12

To whom do you feel you made that promise? If to your wife, then ignore the rest of this.

But if to your bank, then hey. It’s a business decision, whether or not to continue paying for something you purchased that you can’t afford anymore. You don’t owe anything intangible along the lines of “honor” to the seller. If you had bought a car on time, would you feel you had some kind of honorable obligation to the car dealership to keep up the payments, even at cost of great financial hardship to yourself? I doubt it. You know perfectly well they’ll just repo the car, then re-sell it to someone else. Maybe they’ll take a small loss as it’s no longer brand-new, but hey, that’s how the capitalism cookie crumbles sometimes. Same with your bank–they’ll foreclose, and the next day have it back on the market, sell it to someone else.

And you may be sure that your bank doesn’t feel even the tiniest smidgen of some kind of honorable obligation towards you.

You owe them nothing. If letting the house go makes financial sense for you, then I say go for it, and devil take the hindmost, the hindmost in this case being the bank.

Only downside is that it’ll go on your credit record, but that’s another problem and another thread.

Personally, I’d hang onto the house as long as I could. We’ve rented, and bought, and trust me, bought is better. You’re building equity even though the real estate market may be currently having a hissy fit. Not so long ago, the real estate market was busting out all over–this too shall pass, and the pendulum will swing the other way, and you’ll be glad you kept your house.

I’d let the purely cosmetic maintenance go, and just focus on what needs to be done to keep the house from catastrophic failure–generally this is things like the roof and the foundation. Everything else–drafty windows, warped garage door, deck, interior doors, old kitchen–is purely cosmetic and doesn’t affect the structural integrity of the house.

Even the exterior can be safely ignored for quite a while. It may start looking increasingly tatty and white-trash, but eventually you can pop for vinyl siding, and painting is incredibly expensive.

A/C probably has to be dealt with, as you live in AZ. However, if the windows are drafty, you’re basically cooling the great outdoors if you’ve got HVAC, so you might as well store that, too, and just get yourself a couple of inexpensive window units. Since it’s a tiny house, window units aren’t a bad idea.

The roof you definitely want to keep up. So earmark any kind of money you have leftover for that, because you’ll need it in 5 to 10 years. But, again, it can wait, especially as you’re not in a heavy snow load or rainfall climate.

I’d put the whole pool situation on Hold. Later on, when you’re more solvent, you can stage a Rescue. But for now, I’d drain it and cover it. You can’t afford to maintain it, so store it (so to speak).

So, really, there’s a ton of expenses you can put off. I don’t see that you need to lose the house at all. It won’t take “decades” for the real estate market to shift and your house to start to appreciate. I’d give it a year, max. Keep it.

And yes, people do raise families in 1,000 square foot living areas. See “Housing, Manhattan” for references. :wink:

#13

It seems like you are really close to having your degree. Once that is in hand, hopefully you’d be able to get a full time job (and not have school expenses). Wouldn’t that help stabilize the finances? And it sounds like it might happen before the baby is due.

Sure, the place is small, but you’ll likely wait a couple of years before the next kid, right? And you can get by in your current place with one kid, even if that’s not ideal. In a couple of years, hopefully the housing market will have improved. Not to the point of closing a $42k gap, but maybe narrowing it enough to give you more options. And if finances really stabilized, maybe keeping the place and putting on an addition would be an option.

Seems to me like a big reason to refinance isn’t to lower your payments. It’s to get into a traditional mortgage where you are paying into the principle. That will help narrow your $42k gap as well.

Finally, are there any expenses you can cut out of your budget? You might already have done so, but I’m amazed at the number of people who consider cable tv a utility, for example. It’s not. It’s a luxury (unless you live someplace so remote that you literally have zero tv without it, but even then, you can get by with no tv). I’ve never had cable, and went without tv for a while–and that’s one of the reasons I’ve weathered some very tough times when my health problems left me unable to work for months at a time.

Also, if you have both a cell phone and a land line, get rid of one or the other. If you really must have both, drop all the options on the land line–they add up. Answering machines are cheap. Voicemail isn’t when you’re on the financial edge. And pre-paid cell phones are inexpensive if you only use them for emergencies.

Anyway, just some things to consider. I have no idea what the best course of action would be, since I haven’t been there. Sorry things are so tight right now. Feeling owned by your belongings is not a happy place to be.