Hang Tight -- It Can't Be This Bad Forever

By Ilyce Glink and Samuel J. Tamkin
Saturday, May 10, 2008

I'll admit it: When home prices were soaring in my neighborhood, it made me feel really smart.

Like so many millions of homeowners, we concluded that we chose the right house in the right neighborhood at the right time. And as the years went by, and all of us on the block could count our home appreciation month by month, all this paper equity made us feel financially secure -- as in "Now we know how we're going to pay our college tuition bills down the road."

But as they say, easy come, easy go. Home prices in our neck of the woods have been falling just as they've been falling around the country.

The Case-Shiller home-price index released last week showed that prices in the top 10 metropolitan areas declined more than 13 percent in February from a year earlier. Home prices declined in the top 20 markets, too, but if you own a single-family home in Las Vegas, Phoenix or Miami, you really got swatted. Single-family-home prices in those cities declined by one-fifth.

Worse, many economists don't think we've seen a bottom on housing prices. Some estimate that prices could drop 25 percent from their recent highs.

We've lived in our house for nearly 15 years, so if the price comes down even 20 to 25 percent, there's still an excellent chunk of appreciation to fund our preteens' college dreams. And we've been working hard to pay down our mortgage balance, adding to our equity. I still feel that we made a good choice.

But if you bought your home in the past two to three years, all of your financial hopes and dreams, not to mention a good dose of self-esteem, may have evaporated overnight.

And if you bought your house hoping to make a fast $50,000, you may find now that your home is worth $50,000 to $100,000 less than you paid for it. It may even be worth less than your mortgage balance. This is fine as long as you don't have to sell, can afford your mortgage payment and plan to live in your home for some time to come.

If the news isn't bad enough, I've been hearing from readers around the country who are in shock that their home-equity lines of credit have been shut off. Apparently, many readers missed the fine print on their loan documents that said the lender has the right to shut down the line of credit if the home falls in value.

And for those of you who are able to sell short -- that is, sell your home for less than what you owe the lender -- and you don't have the lender forgive whatever part of the mortgage balance you can't pay, you may find that the lender may come after you for its loss, or the private mortgage insurer that paid the lender its loss may come knocking at your new rental house door to recoup that money.

This is what a stuck housing market looks like. Nobody feels that smart anymore. So what's going to help?

At its most recent Federal Open Market Committee meeting, the Federal Reserve lowered a key short-term interest rate another 25 basis points, to 2 percent. The collective groan you heard was from those living on a fixed income, who know that the paltry sum they're earning on their savings accounts and CDs isn't enough to keep up with inflation.

But longer-term mortgage interest rates haven't quite fallen along with CD rates. You can get a 30-year loan for about 6 percent if you have excellent credit, which is a terrific mortgage interest rate if you look at it from a historical perspective but isn't low enough to compensate for the other mitigating factors.

The dramatic drop in home equity has spooked home sellers. Foreclosure rates have skyrocketed, setting records. Banks are still taking weeks to parse offers from prospective buyers. Buyers are getting fed up and are moving on to make other lowball offers. If you have a jumbo loan, in many cases you're looking at a rate above 7 percent, if you have good credit -- and more like 9 percent if you have mediocre credit.

Fighting through all this to get a deal done is like wading through Jell-O. Just ask any real estate agent who hasn't torn his or her hair out yet.

Meanwhile, consumers have been spooked by rising prices on the basic necessities of life. The cost of a gallon gas is roughly the same as the cost of a gallon of milk. (If you want to buy a gallon of organic milk, it'll cost nearly double.) News stories about how consumers are selling family heirlooms on Craigslist and eBay to put peanut butter and jelly on the table are laid out next to stories about how low consumer confidence has fallen. Yuck.

The good news is that, eventually, we'll move through the recession. We'll get through the presidential election (traditionally a drag on any real estate market), and people will start buying homes again.

Starting up a real estate market is a lot harder than getting the stock market rolling. But once it gets rolling, everyone is going to feel a whole lot better.

Q My domestic partner of 11 1/2 years and I have split. We bought a house in 1999. I am on the deed but not the mortgage. I have been contributing toward the monthly payments for the entire time we've owned the property. She wants me to sign a quitclaim so that she can refinance the mortgage to get a more affordable payment. Am I entitled to anything? Will she have to buy my half?

A I'm assuming that you and your domestic partner didn't prepare a business partnership agreement that outlined your financial responsibilities and ownership interests in your property.

Though I'm sure you thought your relationship would last forever (Who doesn't think that?), about 50 percent of marriages end in divorce, and it's likely that domestic partnerships are at least as susceptible to break-ups.

If you had a partnership agreement, it would have outlined what each of you brought to the purchase of the property, who contributed what, what percentage of the property each of your owned, and what would happen if you broke up or dissolved your partnership down the line. When non-married partners buy property, I strongly suggest, they should invest a few hundred dollars in a partnership agreement that covers all of these issues.

It sounds as though you're in a pretty good position. You're listed on the deed, but you're not responsible for the mortgage. If your partner wants you off the deed, you and she should have to agree on a payment that represents your share of the equity in the property.

If you own the property equally, you can ask a real estate agent to give you an estimate of what the property would sell for in the current market. You can even hire an independent appraiser (for about $250 to $350).

Then subtract the mortgage from the value of the property and include those costs that you would have had to pay if you and your partner had sold the home. The costs of the sale might include real estate brokerage commissions, transfer taxes and other fees that a seller ordinarily pays to sell a home. What's left is a number that you can split in half (or nearly in half, if you are factoring in the other costs of a sale). Or you can subtract the cash that each of you put down on the property and then divide the equity that remains.

This may not be an easy conversation for you and your ex-partner, but it's a necessary one. You should also discuss how the transfer of ownership would take place. I suggest that it happen at the refinancing table. You can find a mortgage lender who will work with you and arrange to have your share of the equity paid to you at the closing, which is where you would sign away your ownership interests in the property.

I have a neighbor who burns freshly cut and wet grass constantly. The spot she burns in is directly across the street from my house. It's on the back corner of her property, far from her house.

The smoke is horrible, and the smell is disgusting. It has caused me to have two asthma attacks this week. I can't let the kids out to play. We either have to leave the area or stay inside with all the windows closed. The fire lasts at least a week. It smolders, then a wind will start kicking up smoke again. The smell lasts the entire week.

We have tried to talk to her, but it didn't do any good. She has at least two acres, and she cuts her grass almost daily and bags and burns every bit of it. Her burning starts in the early spring and continues through fall.

We live in the country, so there are no city laws that apply to us. The county law states there will be no open burning: "No person shall cause, suffer, allow, or permit open burning of refuse composed of animal, fruit, or vegetable matter, garbage, offal, or any other nauseous matter of organic or inorganic matter at any time except within a furnace or incinerator, and then not in a manner which permits the escape or discharge of noxious odors."

And yet, my neighbor said the county health department said she could burn as much landscape waste as she wants. Is there anything we can do to stop this?

Why are you taking her version of what the county health department says as gospel? You already know what the law says, and if what you've quoted is accurate, it seems that she should not be burning grass clippings.

Instead of fuming silently, visit your county's health and building departments. Have a conversation about what your neighbor is burning, and ask whether it is against the law. You can provide photos or even a video.

You can push the county to enforce its rules, and perhaps it will fine your neighbor, but your neighbor still may not stop. At that point, you should sit down with a lawyer who can advise you as to your legal options, if there are any. In addition to the local ordinance, there may be other laws that could be used to challenge your neighbor's burning.

Finally, even if you are right and your neighbor is wrong, you may just have to consider selling and moving if the burning of her yard waste is making you physically ill. The most important consideration should be your health.

I live in California and plan on getting married. My boyfriend wants me to sign a prenuptial agreement. We're also looking into buying a home. His credit is awful, while mine is very good. We have both signed the loan papers for a preapproved bank loan, but now I'm having doubts about going through with the purchase. He makes more money than I do, and if he decides to leave me, I don't want to be stuck with a mortgage I can't afford. Is it better to take my name off the loan and still be on the title? Or should I just remove myself entirely?

In general, prenuptial agreements come into play when one person has a lot more assets (money, stocks, real estate, jewelry, etc.) than the person he or she is marrying. You have to decide first if you want to sign an agreement that will decide now how to divide all of the assets you accumulate together after your marriage.

I'm not opposed to prenups, and in fact I think they can be very helpful, particularly in the case of a marriage in which each person has children. I think you should consult with a lawyer who can advise you on whether the agreement protects you as well as your boyfriend.

Whether or not you eventually marry, you should be cautious about buying property as an unmarried partner unless you have created a legal partnership that governs the financial aspects of the purchase.

This partnership agreement will describe what each of you is bringing to the table and lay out the financial workings of the relationship, including what expenses each of you are responsible for and what share of the equity each of you will be entitled to in case the partnership doesn't work out. A real estate or family planning lawyer can draft a partnership agreement for you.

If you and your boyfriend do decide to get married, your partnership agreement can contain a clause that specifies what will happen to the property and your financial relationship.

Because you live in California, you may have some extra protections if you and your boyfriend live together for a certain number of years.

We have lived in New Jersey for five years and have been waiting for an opportunity to go back to Florida. My husband recently was offered a job in Florida that will pay $30,000 less than he makes now. He will start his new job in mid-May, and I will follow when our children get out of school. We signed a rental agreement for a home in Florida, but we can't buy at this time.

Our house in New Jersey is about two years old. Houses like ours in our development are selling for $60,000 less than we paid. We could do a short sale, but our credit score is close to 800 and we hope not to ruin it. Another option we explored was filing for bankruptcy protection. We met with a bankruptcy lawyer, and now I feel like that may be our only option. We have two loans on our home, and our first lender would accept a short sale but the second would not.

We thought about renting out our home, but our mortgage is $3,000 a month, and we can only expect to receive monthly rent of about $1,800. We can't afford three payments per month (our two loans on our house and the rent for the home in Florida).

We have been advised to stop making the mortgage payment. We do not want to do that, but we really want to move to Florida. On the other hand, we want to make the best financial decisions and rebuild our credit as soon as we can.

You have an interesting situation. Unlike many people with mortgage troubles due to job losses, health problems or other financial difficulties, your situation appears to be self-created.

You know your home value has gone down, and you know you will make less money if you move to Florida now, and you know you can't afford to keep your current home and rent a home in Florida. And yet you've gone ahead. He has accepted the job in Florida, and you have signed a lease for a home there.

What are you thinking? Your life in New Jersey must be pretty horrific if you're willing to file for bankruptcy just to get back to Florida.

You have excellent credit -- now. Unfortunately, going through a short sale or filing for bankruptcy protection would severely hurt your credit, and you could expect your credit score to drop several hundred points.

A short sale is where you sell your home for less than the amount you owe on it to your lenders. Both of your mortgage lenders would have agree to take less than the full amount that is owed in exchange to allow the sale to go forward.

When a home has two lenders, the second lender is in a position to lose all of the value of its loan. In some cases, the second lender may not even respond to the request for a short sale, with the hope that it may get something later rather than agree to get nothing now.

If either lender fails to agree to the short sale, your sale with a prospective buyer will fall through. Make sure you are in good contact with each lender if you choose this route. If you have a good line of communication with each lender and each lender works with you in the short sale, you have a better chance of selling the property.

You mentioned filing for bankruptcy protection as another option. Bankruptcy will certainly hurt your credit history -- if you even qualify. Your excellent credit would be shot for years, and you would have to take steps over the next several years to restore it.

With a lower score, you may find that you will have to pay more for car and renters insurance, and it may be much more difficult to obtain credit cards with low interest rates.

Just because you file for bankruptcy may not mean you're out of the woods with your lenders. If you have other assets, you may find that your lenders want a piece of them. If you have savings that are not in retirement accounts, you may lose them. If you sat down with a bankruptcy lawyer, you should have gone through what you own, what you have in savings and what you owe to come up with a picture of where you would end up after the bankruptcy.

You do have another option: Sell your home and fund the shortage from savings. For example, if you sell the home for $60,000 less than you owe to the bank but can scrape together $60,000 from your savings, retirement accounts (you may have to pay taxes and a penalty on that cash), and family or friends, you can close on the property and move on.

For many people, coming up with that kind of money is prohibitive, but for others, it gives an option to move on without affecting their credit.

It may be too late, given the other commitments you've made, but if you could hold off moving back to Florida for a few years, you might find that the real estate market is much better. You might find that you're able to sell your home for what you owe and then move south without taking a hit on your credit score.

If you feel as though you can't live without whatever is waiting for you in Florida, then move and suffer the financial consequences. But from what you've described, it sounds like you're sticking a dagger through your wallet.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is "100 Questions Every First-Time Home Buyer Should Ask." Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, http://www.thinkglink.com and http://www.expertrealestatetips.net.

© 2008 Ilyce R. Glink and Samuel J. Tamkin

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