What's The Difference Between Working Out Your Mortgage And Going To War?

The subject of this article is a one-time business executive, successfully retired. He left the workplace, which for purposes of local identity let’s say is military. He was a General Officer, making over a hundred thousand dollars a year when on active duty. In retirement he still is doing well. Between inheritances and savings, he’s amassed savings of over a million dollars and has a monthly income that is assured and comfortable. During the first part of this decade he did what all Americans were urged to do: He bought real estate in projects that were a sure thing. He signed contracts to buy condominiums in North Florida. Each unit had a cost of 1.2 million dollars, and he signed 3 such contracts. The “investment” was encouraged by all his friends, his financial adviser, and his Realtors. His mortgage broker loved him because he could qualify for most any loan he desired, and the origination fees and commissions were wonderful. Then and now all who know him considered this man (and his wife, since he and she intended both to benefit fully in these investments), to be wise and thoughtful. In fact, he is.

Fast forward 3 years, and this man’s highly developed standards of honor and ethics have become like a suit too tight to wear. During 2007 or so most of us came out of a real estate cyclone straight into what looked like a financial wall. It was. Our general officer saw the same thing, but he and his wife dutifully closed on each contract. They did that not because they didn’t see the wall, or because they couldn’t have figured a way beat the contracts, but because they had always, throughout a long and honorable career, done the right thing. He paid debts. He honored contracts. He did what he told people he would do.

Now, each unit that they were told would flip and make money, or be rentable, is worth less than half what they paid. Because he did not ever expect to hold the units, they financed the purchase almost totally. Their total monthly mortgage payments exceed $30,000, and they have maintenance fees, taxes, and insurance, on the units. Their total mortgage expenses are $50,000/ month, and they have no hope of selling these units for an amount that would pay off the mortgages. If he paid the difference, he and his wife would owe more than their entire savings. He can’t hold the units for the maturity of the mortgages because his savings would be gone long before the mortgages were paid. He can’t file bankruptcy, because general officers, even retired ones, don’t do that. Even if he did, they would then lose everything in bankruptcy. He is truly stuck.

Change the numbers. Change the job from which this couple is retired. The real life examples are all different, and most don’t have numbers this big. But most examples have a few things in common. Each is deeply troubling emotionally to people not accustomed to emotional turmoil. Most involve honest people who are accustomed to living up to their commitments. Each example generally arises not from a dishonest effort to get something for nothing, but from people with a history of good, sound, financial decisions who got caught in a storm they could not know was coming.

Looking back, there are other things to see: This couple could never have closed and paid for these 3 units. The monthly payment requirements alone should have signaled to the mortgage industry that these loans to this couple were a horrible precedent, and disaster for them personally. Wall Street was packaging blocks of mortgages so creatively, and with such obscene profits that those who participated in the packaging even to this day have no motive to acknowledge that their actions were too dangerous to be written off as mere stupidity. They were fraud. That out of control system could only fuel itself on mountains of street-level mortgages created all over America, even at the expense of closing local mortgages that never should have been made.

None of this observation is insightful now, since it is all fairly well known. These examples of financial and emotional misery are so pervasive and so personal that each of us needs no reminder. If this analysis is to be helpful at all it is to prompt the question, like one hyped up on crack cocaine, how do we cope with the let down without killing the patient? The patient I’m concerned about here is not Wall Street, because for better or worse we’ve solved their problem with bail-outs (fortunately in time for those most fraudulently responsible to attain their promised bonuses). How do we deal with the real people, the ones described here, the ones Realtors and I see every day, for whom the federal budgetary bell can no longer toll?

I’m convinced that there is an irony at work here as old as Judas Iscariot. On the one hand we aspire to be honest, reliable people, who perform contracts and expect to be rewarded for following the rules. But the financial decisions that affect us most are played out on a level far above, in a world where the real winners play by their own rules. The traditional operation of the mortgage system benefited us by the free and secure flow of money. Wall Street changed that system to one which benefitted itself, at the expense of the entire rest of the world.

Again, and in spite of my philosophical ramblings, what can we real estate lawyers, the courts, and Realtors do for the people we are charged to serve?

  1. Get rid of these properties. The market is about as low as it can be expected to get. But these properties were never worth what this couple paid, and prices won’t come back to where they were. If you are the client I’ve described, you can keep making payments and hope for the best. In several years you’ll have used your savings, and then you’ll be foreclosed. On the other hand, you can keep your savings and work out your mortgage now. In almost every case I’ve not been able to even talk to a mortgage company unless the borrower stops making payments. You may be foreclosed earlier if you quit making payments, but until someone takes your savings by legal action, you still have it, and you have a chance of working out something with the mortgage company.
  2. Fight the foreclosure. Not blindly, and not with the thought of convincing a court that you owe no money. While you fight the foreclosure actively, work every day to get the property sold, or to modify the mortgage, (including an effort to get the mortgage company to reduce the amount owed), and deal with the deficiency to keep a judgment from being rendered against you.
  3. Live within your means. There is a vast difference between living on your own available income and living on borrowed money. If you’re doing the latter, no amount of mortgage restructuring should be relied on to solve the problem.
  4. Don’t give up.

In any office that works these problems, one side of the office uses its resources to fight foreclosures. Simultaneously, responsible law firms and Realtors will work together to short sell the property, give a deed in lieu of foreclosure, modify the mortgage, or whatever effectively fixes the problem. Good lawyers will not attempt to stall a foreclosure just to buy time. While available defenses are made they will actively deal with the debt and the security. We do the economy no good to artificially keep these properties off the market. We do the borrower no good to merely delay the inevitable

I began this article by asking the difference between the mortgage world I’ve described here, and war. In war you have friends.

The Wall Street markets that made these loans possible were not your friend when the loans were made, and they won’t be your friend now. There are good lawyers and Realtors who can help you, and the courts can help you, but you must be proactive and you must help yourself.

You are your own best friend. I’m betting that’s enough.