Shorting

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I want to tell you a story about how we tried to do the right thing and were told it wasn’t possible.

We moved into our California home ten years ago this Halloween. For eight of those years, we have been upside down.

For a while, in 2009 and 2010, we were more than $200,000 upside down.

The money we spent on the house—every paint job, every built-in, the house fan—we could have just set it on fire and gotten the same return. But those upgrades were not about making money. They were about making the house a home.

In March, when we knew our move to Oregon was a go, the comps in our area had the house selling at about what we owed. But through the spring and into early summer, the market slumped. When we put it on the market next week, it will be listed $20,000 below what we owe on it.

A short sale, but we did our due diligence.

We would lose $600 a month to rent the home.

If we took out an unsecured personal loan to cover the difference with our secondary lender, they were happy to let us have it at 10.25% over 60 months, approximately $1100 a month.

Armed with market comps, the letter from my husband’s company stating that we were being moved and the net sheet from our realtor, I tried to negotiate.

“David, this is clearly a hardship for us” I told the nice young man representing our secondary lender. “We cannot keep the house. And that personal loan puts our family in an insecure financial position. Can we think outside the box? The home we purchased in Oregon already has equity. Can we bridge the old loan to the new property to keep the interest rate low and the term longer?”

No.

“Ok, can we extend the term of the unsecured loan to lower the payment to something we can handle?”

No.

“Ok. Is there anything else you can think of that we can do to honor this obligation? I am willing to do it several different ways. But you guys have to be willing to let me.”

Ma’am, I’ve been doing this a long time. Just short sell the house. It’s better that way.

Before I hung up, I made sure to request that he document our conversation in the file. Then I called our realtor and told her “We have to short it.”

Since then I’ve been thinking about the morality of this whole thing.

The only way to understand the bottom line is to look at the numbers, so in the interest of blowing your mind, I am going to disclose the actual numbers of our loans. (Keep in mind these are Southern California numbers, so they may look stupidly high to some of you elsewhere. But we bought a lower middle of the road priced home in a less desirable part of So Cal on a teacher’s and an insurance adjustor’s income in 2005.)

We paid $383,000 for the house. We put down 5% so the actual amount we financed was roughly $360,000, in two loans we affectionately call “the big one” and “the little one”.

Over the last ten years, we have paid $218,160 in monthly payments towards the big one, and $56,160 towards the little one.

We still owe $315,000.

If we sell the house at $294,000 and the lenders split the price along the same percentage as the original loan structure, the owner of the big one will get another $235,000 while the owner of the little one will get $58,800.

Bringing the grand totals of money repaid to $453,360 for the big one and $114,960 for the little one.

This will get reported as a default on my otherwise pristine credit and stay there for seven years.

I just put some dirty laundry out there, but I don’t think it’s my dirty laundry, I think it belongs to the banking industry. In the process of our due diligence, we found out that our big loan, while serviced by a national bank, is actually owned by a group of investors.

Why would investors buy loans? Insurance.

It happened to our neighbors. Their loan was purchased by a group of private investors about a year before the ten year adjustable loan was set to adjust. For six months, my friend tried to work something out with the bank to avoid the $700 a month adjustment. HARP was useless since the loan was not backed by Freddie Mac or Fannie Mae. The investors refused to deal with her or even reveal who they were. Instead, they forced her into foreclosure, because it profited them to do so. She defaulted and they collected the insurance.

After everything they—the banks, Wall Street, investors, Congress—did to this country and the middle class in the late 2000s, this is still legal.

So what I want to feel, and say, is “Screw ‘em. We should have walked away years ago, when it would have cost them something.”

But I know that would make me as soulless as they are.

Instead, we’ll short the house and they’ll collect the insurance money and report us out as rats to the credit bureaus. We have our ducks in a row for the next seven years, because we knew this was a possibility. I’m not going to wear it on my chest like a scarlet letter because I know I did everything I could in this situation to honor my obligation in a way that protected me and the lenders.

That they did not return the consideration is Someone else’s problem now.

 

 

 

 

 

 

 

 

7 thoughts on “Shorting

  1. I hate the predciment that the housing industry has put on you, me at a time, and so many others. It’s not fair, yet still legal. Thinking of you as you start your new exciting journey!!

  2. It’s so complicated. I think selling a house ranks right up there with the worst stuff in life that can happen to you. And we’ve hardly begun! Just mention FHA and my stomach goes in knots…
    So what can be done? My daughter in NoCal can’t afford to buy a house, and she is making the best money she’s ever made at a great job.
    At least it won’t be a tax issue and you don’t have to claim that short money as income!!!
    Blessings on your new move and I hope your house sells fast!

  3. IMHO, there’s nothing immoral about not paying the loan back when the value of the home is lower than the price of the loan. It’s simply a business transaction, which is exactly the same way the “banking industry” treats the decision.

    I say that having worked in the “banking industry” my entire career.

    One major difference on your numbers however, is that you need to make sure to separate out the amounts you’ve paid for taxes and insurance on the property from the principal and interest payments you’ve made on the loans. They are for entirely different things (hazard insurance and property taxes) and go to entirely different places (insurance company and your state/local governments).

    Unless you had extremely high interest rates on both your loans, your numbers in the post currently include these items.

    • Good point. For the first seven years, our taxes were not impounded. We paid them. And the insurance is less than $1000 a year. Our interest rates are between 4-6%. More the point for us is that no one is losing any money on us. Just not making as much as they could have.

      • I realize you’re taking this from a simple perspective of cash out vs. cash in, but keep in mind that no one lends someone they don’t know money for 10 years without expecting some kind of interest on their money.

        So while the amount of cash you have paid out in total over 10 years might exceed the amount of cash you borrowed originally, it’s a hollow comparison.

        If you disagree, I’d be happy to hold onto your money for 10 years and then return it back to you with no interest.

        And this ignores the idea that “the bank” paid commissions to the sales people, salaries and bonuses to the operations folks that reviewed/etc all the paperwork on your loan, rent on their buildings, settlements and legal costs to all the people who (rightly or wrongly) sued over their mortgage. So it’s hard to say that “no one lost money” on your mortgage, because we don’t have all the facts on the other side of your example.

        All that being said, I think your desire and inquiry into trying to resolve the loan reasonably is commendable. No sense in feeling bad about it as it sounds like you did all that could reasonably be expected in the situation.

        And rest assured that much of the banking/mortgage industry is busily figuring out how to offer you new financing on your next house even before that short sale falls off your credit report in 7 years. There are simply too many people in your situation from these past few years to ignore for too long.

        I’ve already seen some folks take a new mortgage as short as 1-3 years after the event.

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