What happens when you’re stuck with two homes and can pay the mortgage on only one? Just as John and Susan’s new Colorado home was almost ready for them to move in, they faced two unexpected developments.
In the first part of Caregivers Nearing Retirement posted last week, we met Susan and John, and his mom Betty who had suffered a stroke but was but was able to manage on her own with some assistance. Please read Caregivers Nearing Retirement: House of Cards?
First, Betty suffered another stroke. This one left her unable to talk clearly enough to be understood. Furthermore, she could no longer coordinate her arms and walking proved to be too much of a challenge. Approaching eighty-nine, Betty was tired of struggling. Her once independent spirit gave way to depression. John stayed home to care for her.
Second, California’s economy (and most of America’s) sunk even lower. California’s Governor initiated budget cuts that sliced deep into the bone of the state’s services and agencies benefiting from state funding. Susan’s working conditions grew unbearable.
RESPONSIBLE CITIZENS WEIGH
As responsible citizens, John and Susan knew that they couldn’t afford payments on their California mortgage if Susan stopped working. She faced two more years of work given their plan. Yet, Susan began getting sick more frequently, which surprised John because she rarely got sick. Then Susan suffered a nervous breakdown. They wondered if she would survive Betty.
Caring for his mom and now his wife, a very strained John suggested that Susan retire. Her life was not worth saving the California home, which now has declined to less than half of its peak value.
IN RETIREMENT THEY CANNOT PAY
The high mortgage they hold is secured by their California home, previously valued at $500,000. They’ve used over $200,000 from this loan to buy the Colorado property and pay for most of their newly built home. Additionally, they purchased a car with the proceeds. Now, their California home is valued around $200,000.
John and Susan (now retired) considered two options after talking with local realtors and their lender.
One, do a short sale if they can find a buyer. If they do, the lender will have to agree to take an almost 50% loss on the loan. John and Susan will lose everything they put into their California home over the past decade. Plus, they may be liable for the tax on the difference. For more information read: Tax Consequences of a “Short Sale” of Real Estate vs. Foreclosure.
Two, they’ll simply walk away. If a buyer cannot be found for a short sale, they will lose their home by foreclosing and ruin their credit rating.
WHAT TO DO ABOUT BETTY?
They still have not decided what to do about Betty.
As of this posting, they are sorting out the details while moving into their new home. They brought Betty along during one of their trips to Colorado, but the travel was too stressful for her. Now, they arrange for respite care at a local nursing facility, using Betty’s late husband’s Social Security benefits.
IMPACT FELT 100,000-FOLD ACROSS AMERICA
As I mentioned in the last post, John and Susan (names changed) are my dear friends. Yet, as an investor, I can’t help but wonder, what will be the impact of similar actions multi-fold? How many other Americans are in this same situation?
Imagine the ripple effect of a $200,000 loss multiplied by 100,000 Americans in a similar situation. That amounts to a lot of zeros! Ten zeros to be exact or 20,000,000,000 (Twenty Billion Dollars!)
WHO PAYS FOR THIS?
You and I do! Taxpaying Americans. Stockholders. Housing values will continue to decline until the inventory of unsold, foreclosed, or short-sale homes are exhausted. Banks and lenders will continue writing off bad-debt against their quarterly earnings. (Just wait until quarterly earnings, starting with General Electric’s report on Friday, April 16.)
Critics argue, “Too bad, the executives will still collect their multi-million dollar compensation packages.” True and executives should feel the pain that everyone else does, but that’s not the point here. If you hold a 401K, IRA, mutual fund, or any other asset that invests in stocks, your portfolio will suffer even more. My dear former caregiver friend, who invests in JP Morgan for her retirement may suffer if JPM reports lowered earnings due to write-offs.
John and Susan, meanwhile, will survive, even if they foreclose or do a short sale. However, those who try to follow in their footsteps by buying property and a car with a mortgage loan secured to another property may not be as lucky. We cannot escape these market cycles and nor the next “sure bet” investment/lending scheme that will separate the masses from their hard-earned dollars.
WHAT WE NEED
What we need are fundamental lending policies and sound borrowing practices.
Years ago, we’d put 20% down on a home loan and make sure our monthly mortgage didn’t exceed 25% of our monthly earnings.
At the height of the recent real estate bubble, loans were approved with no money down and at 50% of gross income.
I asked several who happily moved into their five-bedroom mansions: How can you afford to pay taxes and insurance, clothe and feed your family, much less put gas in the car on such a major portion of your family’s income going toward a mortgage?
They replied: “Everyone else is doing it and they’re managing!”
And when their adjustable-rates started rising, these families were caught short. Plus, some didn’t plan on getting laid off or having their hours cut back.
When the markets recover, as they always do (in California it took a dozen years last time), we will need to be vigilant about sticking to the principles of sound financial planning.
In a way, John and Susan, like others, did make a few smart moves given the way the system was designed. However, the next generation who tries this will likely lose their second home and their new car.
As for Betty, I hope they’re able to work out a loving solution for John mother’s care as she struggles to live with severe limitations following her second stroke.
Brenda Avadian, MA
Caretaker to The American Dream
Founder, TADWU.us and TheCaregiversVoice.com