'Upside Down' Home Sellers Owe More Than They Get

A nontraditional mortgage and a prepayment penalty mean Kimberly Pexton and her husband will owe $28,000 at closing.
A nontraditional mortgage and a prepayment penalty mean Kimberly Pexton and her husband will owe $28,000 at closing. (By Kevin Clark -- The Washington Post)

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By Nancy Trejos
Washington Post Staff Writer
Friday, April 20, 2007

Jeffrey Taylor and his wife bought their dream home in Purcellville for $538,000 last August. Now they have to sell it because they are getting divorced and neither one can afford the mortgage alone.

The most they could get for it was $430,000. After paying all the real estate commissions and taxes, they will still owe the bank $118,000.

"Five months later, I lose $100,000," Taylor, a high school teacher, said. "I don't think I can take $100,000 into the stock market and lose it faster."

Such a scenario, known as a short sale, was unthinkable during the real estate boom of recent years. In the course of five months, a person could buy and sell a property and walk away with tens of thousands of dollars. Now, instead of receiving large checks at the settlement table, many sellers are writing them.

"It was unheard of three years ago," said Kevin Connelly, a mortgage banker for Pinnacle Financial in Vienna. "Everyone was doubling their money, and suddenly the tide has turned."

The Mortgage Bankers Association does not keep track of the number of short sales, but real estate agents, settlement attorneys and some lenders said they are happening more frequently, especially in areas where prices appreciated rapidly, such as the Virginia exurbs. "Oh my God. Have we seen it? We're closing probably three or four a month like that," said Sherry Wilson, a real estate agent with Re/Max Leaders in Purcellville.

The people most vulnerable are those who bought their homes within the past two or three years and now want to sell, either because of a life change or a financial problem. Prices in some places are notably lower than they were at the peak of the market, and the costs of selling can eat up even more money.

The last time large numbers of sellers found themselves "upside down" on their mortgages, or owing more than their houses were worth, was in the early 1990s, when the recession dragged property values down in many parts of the country. But several real estate agents and settlement attorneys say they are bracing for worse this time around because prices rose at an unprecedented rate and people eager to get into the market took out nontraditional loans to pay the inflated prices.

Thus, there are many homeowners with mortgages that allowed them to put little or no money down or to pay only interest in order to keep their monthly payments low. Others have adjustable-rate mortgages with low introductory teaser rates that have increased. Because they have little or no equity, such homeowners can't refinance. If they can't refinance, they have to ask the banks to modify their loans.

If that doesn't work, they have to sell their homes at a loss or let the banks foreclose on them. Given the choice, most real estate agents and financial advisers say selling is the way to go because foreclosure ruins a person's credit for years.

For Tara Snow, selling a one-bedroom condo in the District's Kalorama neighborhood will be the end of an ordeal. Paying her mortgage was not a problem because she had a traditional loan, but a job relocation forced her to sell as quickly as possible. She bought the condo in June 2004 for $390,000. She put it on the market in November for $430,000. She eventually got $375,000.

When she goes to the closing in two weeks, she will have to write a check for about $15,000. She plans to pay it outright.


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© 2007 The Washington Post Company

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