Nov092015

The emotional impact of ending loan modifications

As the loan modification entitlement is slowly rescinded by the major banks, the emotional fallout on subsidized families will be enormous.

The technical and political issues discussed daily on this blog only capture part of the loan modification issue. On a micro level, the lives of individual families are shaped in many ways, and the emotional impact of falling from entitlement is very real. Today, I want to revisit the story of a loanowner family and consider what lies in store for them. (This is an edited reprint from a 2014 post)pay_our_debts

Some time ago, I had an extended conversation with a loanowner. He bought eight investment houses during the housing bubble in addition to his primary residence in 2005. He didn’t put any money down, and he used option arms for most of the purchases, including his primary. Like many others who participated in the mania, he felt he was the next Donald Trump.

When the bust came, he let the eight properties fall into foreclosure, and he stopped paying on his primary mortgage in order to qualify for a loan modification, which he got. Everyone else living in a primary residence as opulent as his pays about $4,000 a month for the privilege; his loan modification payment is about $2,000 per month.

Like homeowers, this loanower family is emotionally attached to their house. Even though they haven’t had a true equity stake in the property in the nine years they’ve owned it so far, they feel like they “own” it because their name is on title. They want to keep the house because they customized it to their tastes, and they consider it their family home. They don’t want to move, and if given the chance, they will stay.

One of the reasons many loanowners don’t want to sell is because they will endure the unceremonious fall from entitlement. People who can’t afford their homes are living beyond their means, as evidenced by the loanowner qualifying for a $2,000 monthly payment on their $800,000 mortgage.

If they sell and find a rental, they will be forced to live within their means in a property they can afford. For most loanowners, that means taking a step down the property ladder — and nobody wants to do that. So unless they are forced to, these loanowners won’t voluntarily sell a nice house to move into one they consider substandard. When combined with the emotional attachments of home ownership, most people will chose to struggle and fight rather than capitulate and sell.

The family reacts to a denied loan modification

The following is a fictional account of a conversation yet to take place between Entitled, the loanowner’s spouse, and Prudence, the friend whose family avoided the housing bubble. The details will be different from case to case, but variations of this conversation will play out with millions of families over the next several years as prices near the peak.rejected

Entitled: The bank rejected our request for another loan modification. I think we are going to have to sell the house.

Prudence: That’s a shame. Those bankers are so evil.

Entitled: We’ve lived in that house for 12 years now. It’s our home, and the bankers are forcing us to leave.

Prudence has a fleeting thought about the bad choices Entitled’s husband made but chooses to remain silent.

Prudence: Well, you and your family got to live in that beautiful house for 12 years, raise your daughter, and it only cost you about $2,000 per month, right?

Entitled: It’s our house. After 12 years living there, it’s not fair that the bank can ask for more money for us to keep it.

I_rented_housing_bubblePrudence and her family didn’t buy a house during the bubble. Instead, they rented a small two-bedroom condo and bought an affordable condo near the bottom. She and her family have been living within their means, but in much less opulent circumstances, and they’ve been paying the same monthly housing expense as Entitled. This fact enters Prudence’s thoughts, but she is there to comfort her friend, so she says nothing about it.

Prudence: Are you going to be able to sell for enough money to buy another home?

Entitled: We barely have enough equity to pay the sales commissions, and although our credit is better than it was, I don’t think we will be able to afford a nice home. We may try to buy a condo, but it’s such a step down, we won’t be happy about it.

Prudence feels the slap in the face of her friend’s sense of entitlement. She suppresses her anger, but the look on her face betrays her. Entitled catches the expression in her friend’s face and realizes what she said, but she’s so caught up in feeling sorry for herself, she can’t bring herself to apologize.

Prudence: I’m sorry the loan modification didn’t work out for you permanently, but when you get a new place you can afford, you will be able to keep it as long as you like.

Entitled: We don’t want a new place; we like the one we have. It is perfect. It has four bedrooms and a loft. We can have visitors and a play area for our daughter. It is our dream home, and the banker is making us leave it.

Prudence thinks to herself, “We’ve been living in apartments and small condos for the last 12 years because it is what we could afford. A big, beautiful house like yours would have been great, but the stress of living beyond our means wouldn’t have been worth it. But then again, Entitled got to live in that house for 12 years. I wonder if she made the better choice? Twelve years is a long time.give_it_back

Prudence: Do you regret living in such a nice house for the last 12 years? It seems like the bank made you a pretty good deal, at least while it lasted.

Entitled: While it lasted? This was supposed to be our “forever house.” When we bought it, we thought we would make a fortune from appreciation to fund our retirement. We believed would be able to refinance into a low payment in a couple of years and keep that house forever. All the promises the lenders made us turned out to be lies, including the part about our loan modification being “permanent.”

I hate bankers.

Prudence thinks that she hates bankers too. They lobbied Congress for huge bailouts, taking Prudence’s money to pay themselves obscene bonuses and bail out loanowners like Entitled.

Prudence: Yea, those bankers are assholes.

Entitled: Those assholes should make our loan modification truly permanent so I can keep my house.

Prudence thinks the bankers were assholes to let Entitled keep her house as long as they did, but rather than be rude to her friend, she fakes a tight smile and nods her head in agreement with Entitled.

underwater_13

Is that story far fetched? I don’t think so.

Whom do you empathize more with, Prudence or Entitled?

Have any of you had similar conversations you wish to share?

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