Professional Mortgage Matters

Earlier this week I spoke to a prospective borrower who wanted to refinance his house after an unusually long and drawn-out divorce which was finalized in July of this year.  He kept the house and she was awarded $25,000 in cash from the “equity” in the house which, I was told, appraised at more than $920,000 one year ago!  He “only” owed about $830,000 on his house, so “on paper” this looked like a pretty “fair” arrangement. 

The only problem with this “$25K-worth-of-equity-to-the-ex” scenario was that his house is now only reported to be worth about $780,000 on an online home valuation website, or about $50K less than what they collectively owe this house with 5 bathrooms which they bought 7 years ago for only $600,000.  His quandary was only further complicated by the fact that he has had a couple of recent business failures and had only just started another new business 3-4 months ago in a very fickle industry.  No wife, no income, no business and a house that is pulling him under financially – that he is stuck with!  This sounds like another country music song in the making!  Hold on….. I’ve got it!  “My Home is a Man-Wrecker!” (You heard it here first!)

Last month I attended a legislative work-session in Nashville with a couple of key state legislators and leaders from the housing industry (mortgage brokers, mortgage bankers, home inspectors, appraisers, and Realtors) to meet with an Obama-Harvard-Law-School-classmate-yearbook-toting-attorney-turned-Realtor-from-Illinois who was asking for feedback from several of us in the state regarding this very dilemna – couples (especially women, I assume) being wrecked by their houses after their divorce was finalized.  (Yes!  She REALLY carried in her yearbook and she was on the same page as the new Prez!) 

We were told that too many “newly-single, fresh-starts” tried to hold on to a house which was beyond their means and were emotionally unable to swallow the idea of ditching the “loser” and also having to move, at the same time.  The desire to keep the kids in the same school, the dog in the same yard and the satellite dish on the same roof tended to outweigh the conventional wisdom that, in most cases, one less income (even with some child support coming in) can not usually keep up with the same sized house payment.  We heard that the problem is that the remaining spouse is usually given 2-3 years to refinance or sell the house and maybe split some equity or to hand over the 401K to the departing spouse in trade for the equity to be realized by the remaining spouse at some time in the future.  (Sounds like a great deal, huh?!)

Whoa!  How ’bout that for a series of gut-wrenching assumptions in world which has turned topsy-turvey during the last 2 1/2 years!  House appreciation, job security, stock market stability, and credit profile integrity.   All of these can be uncontrollable variables which will either make it possible or impossible to ever get the departing spouse off of the mortgage – regardless of whether he or she “quit claims” (takes their name off of the house title work) their ownership interest to the remaining spouse.  This is a formula for certain financial ruin.  Why was it when a young couple stood before “God and in-laws” and promised “til death do us part” that we thought they meant each other rather than the half-million-dollar house they think they should hold on to even when the judge orders them to split it all and move on.  (Surely, he didn’t REALLY mean to get rid of the house!)

The Obama classmate was advocating new Tennessee laws to require divorcing couples to get “free” mortgage approvals, home inspections, appraisals, and title searches to protect the remaining spouse from future calamity because of unexpected deterioration of the house, liens against title, over inflated assumptions of value and the inability to qualify for a mortgage – any of which would ruin the hope of making the decision to keep the house a good one.  (That 401K or IRA is sounding better and better, even in this market!)

We didn’t all agree about which law would be best or even if new laws were necessary at this point.  We all agreed that this was a big risk and all that parties needed to be informed of the dangers of keeping a house after a divorce.  We just didn’t agree about what could be done and how much legislation should be piled on an already very litigious process where attorneys and judges are already deeply involved in the personal “affairs” (no pun intended!) of two disappointed adults who thought they could beat the odds and make it through the long haul - with their combined accumulated wealth intact to the end.

It seems to me that couples should usually get rid of the house – especially if there is still a mortgage on the property.  Cleaning up that kind of mess is never as easy as one might think and could often take longer than most second marriages last!  However, in this period of declining home values, limited credit options and an unstable employment market – buy and selling houses has almost come to a stand-still in some markets.  This will cause housing markets to be flooded with inventory and homes to stay on the market longer and longer – bringing down the sales prices of homes which “must sell” to make way for a final divorce decree and marital dissolution agreement.  Years of accumulated equity in the family home may be sacrificed and never regained if a home is sold – no matter what.  This causes the houses in the surrounding neighborhood to also depreciate in value and should remind all readers that a marriage failure does really hurt the WHOLE community in MANY ways.

In my 10 years of working with home buyers from all walks of life I seldom see one who comes out any better after a divorce.  The truth is – we’re all a bunch of rascals and we all blow it, from time to time.  Maybe this slow-down in the housing market will give some angry couples the opportunity to “cool down” and think through the consequences of throwing a marriage away while they wait for their house to sell.  Maybe they’ll realize that for the sake of their kids, their parents, and their own integrity that they promised “for better or for worse, for richer, for poorer, in sickness and in health” – not to the house but that one on the other side of their “sleep number” mattress.