2008-08-13

The Lady Who Wouldn’t Pay Her Mortgage

There are at least a few schools of thought on the order in which you should pay down different debts. Mathematically, paying down debts with the highest interest rates first should result in paying off total debt the fastest—and paying the least in interest charges, presuming one can still make all the minimum payments on each debt account. Psychologically, paying down the smallest debts first could lead to feelings of accomplishment when those smallest debts are fully paid, helping keep one on track—and arguably reducing the chances of a late or missed payment as the number of debt accounts shrinks. Logically, paying down secured debt first is more important based on the importance of the security pledged for the debt—for most of us, that's our home for our mortgage and perhaps our car for a car loan. So for many of us, the mortgage would trump everything else, because it's not tenable to consider losing our homes.


This past weekend, a caller into the Suze Orman Show took the opposite path. In juggling her debts, she decided to stop paying her mortgage and put her home at risk. She continued making payments on her car loan and credit cards, as well as relating to her living and other expenses. She planned to start renting after what she expected to be a foreclosure.

What the…?

The caller's profile looked like this:

  • Age 46
  • Owes $516K on mortgage on condo (value of condo estimated at $475-499K)
  • Owes $25K on car loan (value of car estimated at $16K)
  • Owes $38K on credit cards

Okay, so this was not a person naturally good with money. If I recall correctly, she had purchased her home with a variable-rate loan that adjusted upward—such that she could no longer afford to make the payments along with all of her other debt payments and living expenses. So she probably couldn't afford the condo in the first place. And her other debts indicate a similar record of spending more than she could afford. She was in trouble—but her solution seemed a rather odd choice. Suze Orman had a fairly strong "are you crazy" sort of reaction to the caller's decision to stop paying the mortgage, with which I more or less agreed.

And really, my initial reaction was about the same as when I'm watching a game show where I know the right answer—and the contestant is stumbling. At that point, I yell out something helpful like, "C'mon, this one's easy! Everyone knows this one!" In this case, there were numerous paths worth considering before intentionally seeking out foreclosure—to throw out just a few: trying to negotiate a short sale of the condo; just selling the condo at a loss; cutting other expenses; consolidating credit card debt; negotiating payment plans on the credit card debt; and even just deciding to default on credit cards first.

But then I wondered if I should be giving that caller more of a break. After all, how easy is it to make good decisions when you're in big trouble? It's a little easier for me to shout answers at a TV from the comfort of my living room, lounging around in old and comfy clothes in which I wouldn't particularly care to be seen by other members of the human race, with no bright lights shining down, and bolstered by my honed mental ability to pretend I always buzz in faster than anyone on the show. And at least the caller knew enough to question her own solution and call in to a show to try and get some help (though perhaps she could have called in before making the decision to stop making mortgage payments, rather than two months later…).

My living-room-chair psychoanalysis (which may only be as good as my armchair quarterbacking and backseat driving) is that the caller had a "fight or flight" response to the stress of her situation. Lacking the personal-finance knowledge and tools to fight, she was trying to flee. Some of the things she said indicated this posture. Roughly quoted, she said things like, "The mortgage is upside down. I don't see any way to get over that," and talked about how she wanted to instead pay down her credit cards to try and get a "fresh start." She may have been so anxious to get to that fresh start that she was willing to hasten a foreclosure, thinking there were no other options.

Maybe this is a natural response, and you have to get to stop and think about fleeing before deciding to stay and "fight." Have any of you had these types of experiences with your own personal-finance situations? How did you get from "flight" to "fight," if you were able?


Related Posts:

The Lady Who Wouldn't Pay Off Her Credit Cards Even Though She Had The Money

14 comments:

  • Moneymonk

    Most people that call the Suze Orman Show are behind on something or need advice on money management. So I am not shocked that someone called saying that.

    You have to realize they simply don't know, that's why they are calling the show.

    Most people pay other bills before the mortage because the house note is usually the largest bill. So they opt to pay smaller bills

    Is it smart? no, but it's what they know!

  • jeflin

    A lot of people are finding their mounting ARMs unaffordable, some blame it on the mortgage brokers while others said it is the greed of the buyers.

    In either case, there will be more of such cases in future. I write a post a few days ago.
    http://jeflin.net/2008/08/13/more-pain-from-avalanche-of-mortgage-defaults/

  • Chris Forsyth

    You don't seem to be seriously considering the possibility that this woman's decision was correct. Your reference frame is of a person like yourself -- focused on long term financial security, averse to negative credit, etc. However, with significant negative equity, walking away from this mortgage might indeed be the correct decision. The possibility of redirecting her mortgage-payment cash into other debts and living essentially rent-free while the bank undertakes the foreclosure process also offers an attractive financial benefit. Your suggestion of the option to sell the house at a loss is particularly inexplicable. How is throwing tens of thousands of dollars down a well a sound financial move for anyone, particularly someone already deep in debt of all kinds?

  • G Blogmaster

    Thanks for the comments, everyone!

    Chris,
    There's no doubt that I started with my own frame of reference, though I tried to move on from there; and I expect there may well be situations as you describe, where "choosing" foreclosure could be the best option. But I don't believe that that was likely to be true for the caller here. From the nature of the conversation, it didn't appear to me that she had considered many options or simpler moves that could have been less extreme. And for me at least, it's absolutely the wrong call to jump ahead or quickly to the foreclosure path Maybe after careful deliberation, number crunching, and consultation...

    As for selling a house at a loss, I absolutely think that's a viable option for someone who is comparing that to foreclosure and could in some cases be not just a sound financial move but the best one available in a dire situation. Unilaterally stopping payments and allowing foreclosure is, I am quite sure, going to ruin one's credit for many years. If the caller here sold at a loss, by the numbers given, she would get rid of $475-499K of her $516K mortgage (not trying to figure in closing expenses). She didn't have any equity in the house, so it's not as if she lost anything she actually had, so I don't agree that it'd be throwing money down a well. Her total debt would go down from $579K to around $80-104K. If she could manage rent payments with that debt load, she could save her credit score; and perhaps with a low-enough rent or with other financial makeovers, she might be able to start paying that down and get onto solid footing.

    Also, if her credit were ruined, the caller might even have trouble getting a rental, which is a point that Suze Orman raised.

    Great dialogue! I hope you'll all come back and comment some more. Thanks again.

  • Chris Forsyth

    Blogmaster,
    You makes excellent points. There may be something I'm missing, but it seems to me this lady will need to come up with a minimum of $17k at closing, but more realistically (supposing she will owe agent commissions, seller closing costs, etc.) quite possibly $30k to $50k. Where is she going to get this money? I agree that her credit will be hurt for a long time if she allows herself to be foreclosed; once upon a time the "deed in lieu of foreclosure" would have been a better choice but is often unavailable since mortgages became securities, and is probably harder still now that the banks themselves are hurting. As a practical matter I'm not sure selling at a loss is even an option for her.
    Chris

  • MasterPo

    Good article. In a perversely logical way I think she's making the best choice given her situation. She still needs transportation, clothing, food, medicine etc. Sure a foreclosure will hurt her record but she will still be able to buy (albeit adding to already massive debt) a place to sleep, food etc.

    ps- You know that inspite of her best intensions this person will NEVER pay off that credit card debt. :-(

  • G Blogmaster

    Thanks for the comments! It's interesting to see that at least a couple of you sound like you would vote for the foreclosure path for this caller. I agree that the reality is, for some people, foreclosure or the similarly or more credit-damaging path of bankruptcy are viable or the best options. But I still think this caller should have pressed harder on several other paths and weighed options more carefully than it sounded like she did before stopping payments on her mortgage (more fight, less flight). But past what I've mentioned, it's hard for me to weigh in much further without more information about her situation.

    I'm curious as to what people are finding out there in the market. Have any of you tried to sell (or know people who tried to sell) their homes at a loss (whether an actual loss or loss on paper) and found they just aren't able to sell at all? Have any of you experienced a foreclosure or bankruptcy (or know someone who did) and have information as to how hard it is to get a rental?

  • Anonymous

    How come in this type of situation I never hear anyone suggest that the person just get a roommate? The rent and help with utilities would surely provide enough extra income to save her financial situation. With a condo costing this woman a half a million dollars, I imagine it is somewhere like San Francisco or New York. I know people in both these cities who have lived with 3 or 4 roommates in apartments that are only 1 or 2 bedrooms. Extreme... yes. But more extreme than voluntary foreclosure?

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  • Sahra Smith

    In such situation I think the lady is taking the right decision and want to give her life a new start . I hope it will give people a lesson to react in such way in such situation.
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    It is necessary to pay different debts but it is amazing to see that a lady does not pay her mortgage.You have got such a great article.Keep sharing such nice post.
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  • Anthony Davis

    informative blog to share.Person who plan their budget are 40% more wealthier as compared to one's who do not plan at all.
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