Losing the home-equity gamble

Q: I'm 61 years old and in a bad situation. In 2006, I paid my house off and retired as chief financial officer for a public company. I wanted to invest in a new technology, so I called this mortgage broker who was always sending postcards to me in the mail. I had very little income, but had just entered into an agreement to work part time as the CFO for a startup earning a six-figure salary. The mortgage broker was able to get me a loan with nothing more than my Social Security earnings documentation and a letter from the startup's president.

I pulled about $600,000 out of my home, with a first and a second mortgage (of course, now my home is worth only about $400,000). But I didn't realize that the first mortgage was a pay-option loan, so every month, my loan balance is going up. My investment opportunity flopped, so the money is gone. My mortgage broker is out of business. I'm missing payments and getting calls from the bank, and I'm trying to get the loan modified -- what could I have done differently?

A: Before you read this, remember -- you did ask.

Interestingly enough, there are few things that you did wrong from a technical, transactional standpoint. If I had to pinpoint a transactional error, per se, I would say that you should have limited your investment in an unproven technology to an amount you could afford to lose without blinking an eye, and should never have pulled out more cash from your home than you could easily afford to pay from reliable income.

However, there were lots of things that went way awry in your scenario, from the perspectives of relationships, decision-making, and your relationship with money.

Your home was paid off. You were retired. Your were in your late 50s. Life was good, by most people's definition. What possessed you to even embark on this investment and equity cash-out adventure? Likely the same couple of decision traps that half of the country fell into, at various degrees. We Americans seem to feel that what financial wealth we have is never enough. Many of us also fell prey to the fallacy that our homes were ever-appreciating assets, the next logical step from which is that they could be used like ATM machines.

So, what could you have done differently here? You could have been grateful and satisfied with the financial comfort and ease of owning a home free and clear. You could have been protective of that wealth and comfort, rather than risking it all in an effort to parlay it into more. Or, at the very least, you could have been thoughtful about what you really wanted your life to look like, and been aware that big investment rewards, like those you must have been after to invest over half a million dollars, come attached with big risks. Then, perhaps you would have been clear with yourself up front that you were literally betting your personal farm on your investment gamble. That level of clarity might have improved your decision-making. ...CONTINUED

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