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
Now, on to your mortgage situation. You’ve heard, by now, that 60 is the new 40, or something like that, so although I believe you might have dropped your age to suggest perhaps you were being taken advantage of, I’m going to give you much more credit than that. You just retired a couple of years ago as the chief financial officer for a public company, so you can’t be totally unaware of how loans, mortgages and amortization all work.
When a consumer takes a pay-option or negatively amortizing home loan, they are made to sign 35,000 disclosures explaining what the adjustments will be like, when adjustments will occur, that making the minimum payment will result in an increasing balance, and that eventually there will be a big adjustment in the payment. (OK, 35,000 is a slight exaggeration, but only slight.)
Long story short: The only way a smart guy like you ends up in such a loan without "being aware" of how the loan will operate is that (a) you neglected to read the paperwork, or (b) you consciously or subconsciously ignored the information, because you really didn’t want to know. Staying awake and aware, reading your documents and asking questions, and deciding what type of mortgage to take based on your actual financial resources and predictable future income — these are all things you might have done differently to avoid your current predicament.
Finally, you should have worked with a mortgage broker you found by referral, rather than some random bloke who sent you a postcard. Let me be clear: Nothing you’ve said here indicates to me that he specifically did anything wrong in your situation. You called him up, asked him to get you some cash out of your home, and he did it the same way most brokers would have gotten you some cash in those days (i.e., using a stated-income loan).
But if he was the type of mortgage pro who generated most of his business by postcard, it’s no wonder his business couldn’t survive the recent market drama. If you had worked with someone who was referred by someone you know and trust, that mortgage broker might have asked/cared/advised you with more care about the loan obligations you were committing to and perhaps even the investment you were planning. That might not have stopped you, but it might have slowed you down or encouraged you to rethink the whole deal. At the very least, a referral-based mortgage broker would be more likely to still be in business, so they would be around now to help direct you to the resources you need.
Guilt and regret are probably the least productive of the entire repertoire of human emotions, so don’t beat yourself up. Do be aggressive about seeking out a solution to your situation; you might need to make hard decisions about even — gasp! — going back to work, as most lenders are unlikely to look favorably at your loan modification application if you can’t document the income needed to make a payment. If you need help, find a HUD-approved housing counselor online who can run interference with your lender. And I wish you the very best of luck.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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