Shorting

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.