Divorce the House, too?!

November 12, 2008

bighouse1Earlier 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 capitoland 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!) 

obamaWe 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 promisedwedding-vows1 “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.

sleeping_couple-231x192In 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. 

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Bailing out the Auto Industry? I hear Starbucks is having trouble!

November 11, 2008

bucketThere seems to be a rush to bail out, yet, another industry.  Banks, Insurance companies, Fannie and Freddie and now, the “Big Three” auto makers.  How can this be “good” for our country and economy?

The mortgage industry applauded the bailout of the GSE’s (government sponsored enterprises) Fannie Mae and Freddie Mac.  They were already quasi-government agencies with directors and CEOs appointed by Congress (for better or worse!).  Unlike the insurance industry, no other company – government run or private – does what they do.  Unlike the auto industry, no other company – domestic or foreign – keeps our banks fluid and the housing market flowing.  Without Fannie and Freddie the wholesale banks, which buy the mortgages originated by mortgage brokers, would have no more money to fund the new loans.  Fannie and Freddie were put in place by the federal government to keep the market fluid. 

The Federal Government determined, over fifty years ago, that fluidity in the housing market was the key to keeping Americans buying their homes.  This strategy has worked for our country for the past several decades and has given this generation unprecedented opportunity to own a house (or two) when our grandparents seldom owned property and certainly did not buy without a 25%-30% down-payment. 

Fannie and Freddie (whether there should still be two of them is a topic for another day!) have played a key role in the “ownership society” announced by President Bush nearly 8 years ago prior to this recent unprecedented growth in home ownership among all Americans – including minorities, women and young people.  No one else has done or could do for our economy what Fannie and Freddie have done in giving Americans ownership, equity, property and a vested interested in a community.

circuit-city2So, many are now saying, “let’s take all hurting industries to the Feds and let them bail them out, too!”  Insurance companies (AIG is back for a SECOND round?!?), Wall Street Banks, the Auto Industry…. Why stop there?  Circuit City just announced the closing of 155 stores and that they will ask for Chapter 11 protection from their creditors as they reorganize and attempt to restructure their debt.  We’re losing our Circuit City (only 4 months old!) in the city where I live. 

Other retail chains are hurting, as well.  Starbucks was in the news earlier this week for posting a worse than expected earnings report.  Starbucks recently forced the closing of a Saxby’s coffee shop in our starbucks-cup-21humble city when they built theirs one block away from the newly finished Saxby’s.  Is the over-priced coffee industry hurting and should the Feds step in a bail out the Grande’s, Latte’s and Espresso’s of the world because many teen-aged multi-pierced, messy-haired servers and “Espresso-Masters” will be displaced?  I tend to believe that, as John McCain took a beating for saying, the fundamentals of the US economy will work themselves out – in the insurance industry, the banking industry, the auto industry and, need I say,  the gourmet coffee industry.  We must let the free market do its work and not let the Feds try to convince us that they know how to run a business and to micro manage these selected industries and our economy.

Is the mortgage industry really that different?  YES.  When it comes to competition and product availability, the secondary market of the mortgage industry is very different.  Fannie and Freddie play a role that no other private or foreign company or agency play and that is why it is not inconsistent to support the limited propping up of Fannie and Freddie (already quasi-government agencies) and be opposed to the Federal government picking and choosing which private company or industry to bail out.  Unions have made the US auto industry what they are today – unresponsive to market changes, overpriced, less efficient, dependent on foreign fuel, and not environmentally friendly.  The US auto industry must change at their core or they deserve to fade into the history books along with their union-thug bed-fellows.