Last week, I wrote about some of the emotional and psychological issues that keep homeowners facing foreclosure from even contacting the bank to apply for help. Many of these things approximate a premature sense of defeat; I have seen many homeowners — who for various reasons might actually have a shot at obtaining a loan modification or who are afraid of joining the foreclosed masses they read about in headline after headline — simply pack up and move out when they think they’ll have to miss a payment.
What I didn’t cover last week were the myriad folks on the other end of the spectrum. The "overoptimists." These are the folks who are convinced that they’ll be able to deploy their superior negotiating powers and scintillating personalities to:
- get the bank to write off half of their mortgage balance;
- grant them a 40 percent lower mortgage payment than they have now (despite the fact that they cannot document a single dollar of monthly income); or to
- simply work hard and get their failing business or career to boom back so they can make their mortgage payments (without actually investing in marketing or changing anything about their business model).
Here’s the rub: When it comes to money and real estate matters, overconfidence can be just as harmful as paralyzing panic and pessimism. Overconfidence causes people to take unhealthy risks, and to fail to build in backup plans, and take the sometimes boring, conservative or painful actions that are sometimes necessary to avoid becoming homeless.
I’ve known homeowners, overconfident in their ability to rebuild their recession-decimated profits, who wound up losing their homes after falling behind on debt they took out to rescue their companies.
I’ve known unemployed homeowners who borrowed tens of thousands of dollars from parents or got into deep credit card debt in an effort to keep up with mortgage payments on upside-down homes, only to lose the home anyway and remain stuck with the debt.
I’ve known homeowners who had already lost their homes, seen them auctioned off, came home to the bank’s three-day eviction notice, and hadn’t packed a single thing, because they hoped the bank would finally listen to their logic and pleas.
If you or someone you love is in danger of falling victim to this sort of overconfidence, here’s a two-step intervention:
1. Ask yourself: How reality-based is your hope? If you are hopeful for a long-shot outcome, but have no actual basis in fact for the belief that the desired outcome will actually happen, it behooves you to get serious about calculating the risks that the outcome won’t happen and make a reasoned decision whether to increase your risk exposure.
For example, I’ve seen homeowners stop making all their mortgage payments to gain leverage in their loan modification negotiations with the bank, in hopes the bank will slash $100,000 off their principal. The chances this will happen in almost any event are literally between slim and none, so even if you think you’ve figured out a way to make this happen, you absolutely must get real about the much more likely outcomes that the bank will offer you a less advantageous loan modification or that eventually your nonpayment of the mortgage will result in foreclosure.
Yet, many of these people that I have known end up, months down the road, with a foreclosure notice and no ability to pay the arrearage (why the mortgage money didn’t just go to savings, I’ll never know).
Don’t take risks like this, or attempt borrowing from family or other creditors, without having some real, tangible basis in fact for believing that your bet will pay off.
2. Adopt the Stockdale Paradox. Vice Admiral James Stockdale was the highest-ranking POW in the Vietnam War. He later offered some insight on the types of soldiers who did and didn’t make it out of the Vietnamese prison camps.
When answering author Jim Collins’ question about who didn’t make it, Stockdale replied, "Oh, that’s easy, the optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."
Those who made it were the soldiers who possessed the mindset that has now become known as the Stockdale Paradox: They had faith that they would ultimately get out, and be the better for it, but also were able to confront what Stockdale described as "the brutal facts of [their] current reality, whatever they might be."
Overly optimistic, distressed homeowners tend to hope their job interview goes well or the loan modification comes through. But there’s nothing that says these things can’t be hoped for while simultaneously confronting the brutal facts of your current mortgage situation, which might cause you to list your home on the market as a short sale, to rent out a couple of rooms or, worst case, to find another home for your family if the eviction notice has been served — before the sheriff has to come put you out.
In fact, Stockdale would say that you must hold both these approaches, or you might not make it out of this housing market crisis as whole as you might otherwise.
As the Buddhists say, "Abandon hope." At least a little bit — when the facts don’t justify maintaining it. Opting into reality allows you to make clear and conscious decisions that minimize your exposure and prevent you from allowing your mortgage problem to snowball.