How a financial pro lost his house

[Sarah in SC]

W2R, I'm with you on those quotes you pulled. Those were the ones that stopped me cold. And Ha, my 30+ year realtor friend didn't see the bubble, either (or more accurately, its end).

Here's the thing--I didn't get my CFP until 2007 (at 38). I knew enough about financial planning at 23 not to think this (and it was for lots less money at stake): “Wow. I guess if they’re willing to lend it to us it must be O.K.”

And the first time I saw that Pick-A-Payment crap, I thought--whoa, now there's something stupid. But in the interest of supporting my own designation, I'll say that people who are good at math may not always be good at their own finances. I'm remembering my dad's doctor who smoked like a chimney, and thinking of the cobbler's kids with no shoes.

Not that I'd take financial advice from the guy, but he's just one CFP in a pretty large pool. Loved the article. Thanks for sharing.

 

[haha]

He failed across the board yet he continues to practice?

That's why it's called practice.

Ha

 

[Leonidas]

From reading about all the past bubbles that have popped, I think that this,

My realtor has been selling houses as a broker for >25 years. She didn't see the crash coming, and very few others did either.

is more accurately expressed as this part that I highlighted,

And Ha, my 30+ year realtor friend didn't see the bubble, either (or more accurately, its end).

All the way back to the fricking Tulip Mania, the market participants in these bubbles eventually all knew it was going to end badly, just not when. They are all convinced that they're smarter than everyone else, they all believe that they will be able to get out before the bubble pops. It's greed, and ignorance, and nobody is willing to accept that they may be the greater fool.

If I were in a charitable mood I would say that perhaps the realtors are not true market participants, but just cogs and wheels of the machine itself. In which case they can be counted on to keep functioning properly, until they don't anymore. Or, since they're sales people, to party like it's 1999 on their commissions until the bust comes.

Whether they were greedy greater fools playing a Keynesian beauty contest, or clueless functionaries, I don't think we will find too many that will line up to admit to it.

 

[haha]

If I were in a charitable mood I would say that perhaps the realtors are not true market participants, but just cogs and wheels of the machine itself. In which case they can be counted on to keep functioning properly, until they don't anymore. Or, since they're sales people, to party like it's 1999 on their commissions until the bust comes.
Whether they were greedy greater fools playing a Keynesian beauty contest, or clueless functionaries, I don't think we will find too many that will line up to admit to it.

Agree, realtors are like stock brokers or FPs, their job is to facilitate transactions, and their continued presence in that field requires that they do this. When does it go most easily? In a boom. Same with developers. A very few exercise market discipline, the rest build when they can where they can whenever they can get their hands on money to build with. A realtor would be quickly transitioned to another field if she were not out there selling when a chicken coop is going for $350,000.
But many long time realtors also are investors in and managers of rental housing. The woman I am speaking of didn't put her rentals on the market either.

I began to look around at real estate for myself maybe 3 years ago. At that time the Seattle market had not yet suffered much, and I did not meet one realtor at an open house or on a trip out to see listings who expressed any concern. Seattle is different, blah blah. A few months ago I got an email from a guy who took me around to look at several downtown projects, when they were coming to auction after being unable to sell out on completion. He wanted me to sign an agreement with him, which had I been the agent I would have wanted also, but being a shopper with no deadline and considerable cash, I felt that I had a very strong position. I was willing to live out my life in my apartment, if the buy/sell equation did not improve markedly. So I declined his importuning.
Anyway, he emails and says, well I guess you were right to wait, want to look now?

A person has to be wary of salesmen. It is impossible to get them to discuss anything. It is useless to disagree. They just assume you are a whiner and they will never sell you anything, which has more than a grain of truth in it. I actually do not debate with them, but I also pay little attention to them. But they have that key box, which is the secret to the profession.

More broadly, real estate is sticky. Maybe an owner can sell a rental, if you think the market loss will be greater than the 10% or so transaction costs and certain amount of fix-up and lost rent. But try to sell you suburban house with kids in school and keep your wife through the process!
Selling a family home is a tough call, since prior to the last 5 years,>50 years of experience says prices go up steadily over time. How many people unplugged their index funds in 1999? Some did, but not many. It is very hard to walk away from something that is coining money. Especially a leveraged investment that is coining money

Ha

 

[tryan]

"Lost His House" is just a catch-phrase ... he did a SHORT SALE and in all likely hood will not have his credit scared. Once the mortgage is released for the sale, the banks lost is sometimes forgiven.

 

[growing_older]

I’ve also learned some things about risk. Risk is an arbitrary concept, until you experience it. And I’ve noticed myself focusing more on the consequences of something going wrong than just the probability of that happening. As a result, I tend to urge my clients to make decisions that err on the side of caution.

Many people have this problem with understanding risk. Those people occasionally win and we get all kinds of articles about their bold risk taking, but really it was this misunderstanding. Mostly they muddle through until they lose.

This guy seems significantly underqualified as a financial planner. Possibly he was a good salesman. It wasn't just one mistake or bad stroke of luck that caused his problems. It was an extended series of poorly understood decisions, many of which were very risky. Many of which he should have known better as a financial planner, but I can only hope he gave better advice than what he did for himself. I wonder how his clients fared?

 

[FinanceDude]

This guy seems significantly underqualified as a financial planner.

I guess I am overqualified then, since I have 90% equity in my home and no other debt............

 

[Ronnieboy]

It's quotes like that that really bother me when it comes to people rationalizing walking away from their obligations. Read the quote again. On the face of it, of course he should keep paying his mortgage. Simply being "under water" doesn't mean anything unless he's trying to sell. Every 100%-financed new car ever sold is "under water" the second they're driven off the lot, but that doesn't mean as soon as the owner gets home, he should be fretting about whether he should keep paying the payment, or hand over the keys. It's absurd on the face of it.

At the time he bought the home, he felt it was worth $x. He borrowed $x. He can easily afford the payments on the loan. Nothing in his financials has changed. The only thing that's different is some appraiser somewhere said, "I think today, it's probably only worth $x-y."

So what? That quote above says nothing about his friend's ability to pay. It only says that he's "under water," but is going to soldier on and keep paying his payment anyway.

Of course he should!

+1

 

[walkinwood]

Carl Richards appears to be more talented as an author than financial planner. Unfortunate for his clients.
Spending, saving, investing, managing risk and having realistic financial goals are the mainstay of financial planning. He failed across the board yet he continues to practice?

Why do you say "Unfortunate for his clients"? The article said nothing about how well or badly his clients fared. I don't think it is unusual for someone to be very objective wrt to others, but fail with themselves. Doctors who smoke, coaches who are overweight, and yes, FP's who go broke.

It's quotes like that that really bother me when it comes to people rationalizing walking away from their obligations....

Of course he should!

I respectfully disagree. A mortgage is a financial contract, not a moral one. If it stops making financial sense, you should terminate it. That termination is not without costs & consequences. The person loses a home, their down payment, any improvements & has to pay more for a loan in the future, in case they ever qualify for one.

 

[foxfirev5]

I am about 8 months away from paying off my condo that is worth $80K less than what I paid for it for 4 years ago. I have even been piling all available cash flow toward the mortgage for the last 4 years to pay it off early. It feels like the right thing to do. When I read stories like this it makes me 2nd guess my strategy but I then focus on the fact that I will never have another debt the rest of my life and let that "feel good" sink in.

Your doing the right thing. A deal is a deal. Never mind the legal minimum. Yeah what I did was legal but was it was not right. Sorry, but as one highly disillusioned and ticked off penn state alum I needed to vent

 

[MichaelB]

Why do you say "Unfortunate for his clients"? The article said nothing about how well or badly his clients fared. I don't think it is unusual for someone to be very objective wrt to others, but fail with themselves. Doctors who smoke, coaches who are overweight, and yes, FP's who go broke.

I said "unfortunate for his clients" because it appeared to me he had failed in "Spending, saving, investing, managing risk and having realistic financial goals", and I believe these are "the mainstay of financial planning".

 

[kombat]

I respectfully disagree. A mortgage is a financial contract, not a moral one. If it stops making financial sense, you should terminate it. That termination is not without costs & consequences. The person loses a home, their down payment, any improvements & has to pay more for a loan in the future, in case they ever qualify for one.

I disagree. Every contract is a moral contract. You've committed to pay the mortgage as long as you're able. If you're no longer able, the contract spells out the clauses which kick in to try and make the lender whole. However, the lender did not enter into the agreement expecting that the borrower would activate the "default" clause by choice, rather than necessity.

When you skip out on the bank, it's nice to think you're just screwing a gazillionaire CEO, and no one else. But in reality, you're screwing the shareholders. That's your grandparents, your pensioners, maybe even yourself.

People who are able to pay, but skip out, are thieves. Dirty, amoral, worthless scummy thieves.

 

[haha]

People who are able to pay, but skip out, are thieves. Dirty, amoral, worthless scummy thieves.

Come on, please tell us what you really think.

 

[Mulligan]

I disagree. Every contract is a moral contract. You've committed to pay the mortgage as long as you're able. If you're no longer able, the contract spells out the clauses which kick in to try and make the lender whole. However, the lender did not enter into the agreement expecting that the borrower would activate the "default" clause by choice, rather than necessity.

When you skip out on the bank, it's nice to think you're just screwing a gazillionaire CEO, and no one else. But in reality, you're screwing the shareholders. That's your grandparents, your pensioners, maybe even yourself.

People who are able to pay, but skip out, are thieves. Dirty, amoral, worthless scummy thieves.

I bounce back and forth on this issue, as walkinwood said there is a price to pay for defaulting. However, the people (many in Vegas area have done this) who buy a second house across the street for 1/2 the price of their identical home they live in, then strategically default on the original, seems very unfair. Not only do they get out of the burden of the depreciated assest, they stand to achieve an immediate capital gain on any uptick in the market. It appears to me these people get to have their cake and eat it too, compared to the ones who sit tight and pay.

 

[MichaelB]

A contract is a legal obligation, not a moral one. When one party is unable or unwilling to fulfill its obligation the contract specifies the remedy. In Nevada if the mortgage provider feels the borrower has the ability to pay it is free to go to court and demand payment. While a few may have found ways to take advantage of this, for most borrowers, homebuyers, lenders and all those that are (or were) employed providing related services it is a huge mess with everyone getting hurt in some way.

 

[george76]

I bounce back and forth on this issue, as walkinwood said there is a price to pay for defaulting. However, the people (many in Vegas area have done this) who buy a second house across the street for 1/2 the price of their identical home they live in, then strategically default on the original, seems very unfair. Not only do they get out of the burden of the depreciated assest, they stand to achieve an immediate capital gain on any uptick in the market. It appears to me these people get to have their cake and eat it too, compared to the ones who sit tight and pay.

I know of people who could afford to have bought a house before the bubble burst. But they didn't feel comfortable buying a house with the prices not being very stable. What if the house prices tanked after they bought their house? So, they kept renting an apartment instead. I think of them when I see examples such as the one above. How unfair to people who used caution!

 

[mountaintosea]

W2R,

My sentiments exactly!

 

[Leonidas]

A contract is a legal obligation, not a moral one. When one party is unable or unwilling to fulfill its obligation the contract specifies the remedy.

While I don't think there is a specific ring in Hades for those who did strategic defaults, I know I would never knowingly do business with them. Maybe that is a moral decision (don't do business with a thief/cheat/idiot), or maybe it is a sound business decision (don't do business with someone with a record of making bad business/financial decisions, or who might be a thief/cheat/idiot), but either way they're not getting their hands on any of my money.

I don't claim to be the world's best investor, but I saw the tech bubble coming a mile off, and I saw the housing bubble as well. As did many other people. My bad for totally misunderstanding/underestimating how both of those would affect the broader markets, the economy, and my personal wealth. It's the whole, "buy your ticket and take your chances" thing. But there have been moments in which I really would have enjoyed taking a baseball bat and teaching some direct lessons about the moral hazards of being a thief/cheat/idiot when it costs me money. My past visits to various correctional institutions inspires sanity and restores me to peacefulness, but a man can dream.

 

[clifp]

While I don't think there is a specific ring in Hades for those who did strategic defaults, I know I would never knowingly do business with them. Maybe that is a moral decision (don't do business with a thief/cheat/idiot), or maybe it is a sound business decision (don't do business with someone with a record of making bad business/financial decisions, or who might be a thief/cheat/idiot), but either way they're not getting their hands on any of my money.

.

I certainly understand this sentiment. But while I hesitate to lecture a former cop about the purposes of laws in society, I think you are being a bit naive to expect folks to value their moral obligation to pay a debt bank over their moral obligation to provide for their families or even indulge in a few luxuries.

There is a small group of people who obey law and honor contracts because it is the legal and moral thing to do. Another group who believe that laws don't apply to them and it is only fear of being caught and being punish them dictate their behavior. In the middle group is those of who are basically lawful, but adherence to laws is situational. I am much less likely to speed in town than on open highway in the middle of nowhere.

I think the fundamental problem is the both laws and the attitudes of the banks and government officials have changed to encourage strategic default. In general I believe that when people stop paying their mortgage, they should either be forced into bankruptcy, or have so little assets and so little future income that are basically bankrupt. Instead Congress passed and then extended the law that changes the long standing rule that treats forgiven debt as income. Simply getting rid of that rule would discourage people from strategic default since they'd probably owe Uncle Sam 1/3 of the money. The old rule was that if you declare bankruptcy at the same time as you get your debt forgiven, Uncle Sam will also forgive the taxes due. In the case of our "financial pro" this would mean that he would be bankrupt, most of his remaining assets would go to the bank, and if the book was a big hit some of the proceeds would also go to paying back the bank and other creditors.

The second thing that needs to happens is the public and especially politicians need to allow banks to get tougher in enforcing their legal contractual rights regarding collecting mortgage. The many folks in Vegas who bought houses while in the process of defaulting on their underwater house, should be receive notices from the banks telling them they will be seeking judicial judgement and if one house get foreclose means they lose both houses.

Right now the financially sound thing to do for most people is to default and I don't thing morale lectures are working well. I don't see away out of this mess until we make our laws and actions align with encouraging people to pay their mortgage.

 

[arebelspy]

A bunch of good thoughts.

I am intrigued by your ideas and would like to subscribe to your newsletter.

 

[Leonidas]

I certainly understand this sentiment. But while I hesitate to lecture a former cop about the purposes of laws in society, I think you are being a bit naive to expect folks to value their moral obligation to pay a debt bank over their moral obligation to provide for their families or even indulge in a few luxuries.

Either I did a miserable job in writing what I was trying to say, or you misread me.

The gist of what I was saying is - disregarding how one feels about laws or morals for just a moment - I care about people who cost me money.

People who have proven by their actions that they make irresponsible money decisions don't get a shot at redeeming themselves with my money.

The only judgement I'm making has to do with their ability to handle money.

Edit to include: Oh, and the part about the baseball bat was just me venting my frustration with a faceless crowd who got together and made stupid and/or greedy decisions that screwed the economy. It wouldn't solve anything (more stupidly greedy people are born every minute); prison ain't worth it, and there's millions of them and one of me and my arms would get tired before I made much of a dent.

 

[Sarah in SC]

One other thing about the financial pro's default is that he would also have to notify, in writing, every one of his clients about his financial situation because it is a material change. This alone would stop many financial folks from these strategic defaults.

 

[obgyn65]

I agree with MichaelB. A contract creates a legal obligation between parties, and it has nothing to do with morality.

A contract is a legal obligation, not a moral one.

 

[MichaelB]

I certainly understand this sentiment. But while I hesitate to lecture a former cop about the purposes of laws in society, I think you are being a bit naive to expect folks to value their moral obligation to pay a debt bank over their moral obligation to provide for their families or even indulge in a few luxuries.

There is a small group of people who obey law and honor contracts because it is the legal and moral thing to do. Another group who believe that laws don't apply to them and it is only fear of being caught and being punish them dictate their behavior. In the middle group is those of who are basically lawful, but adherence to laws is situational. I am much less likely to speed in town than on open highway in the middle of nowhere.

I think the fundamental problem is the both laws and the attitudes of the banks and government officials have changed to encourage strategic default. In general I believe that when people stop paying their mortgage, they should either be forced into bankruptcy, or have so little assets and so little future income that are basically bankrupt. Instead Congress passed and then extended the law that changes the long standing rule that treats forgiven debt as income. Simply getting rid of that rule would discourage people from strategic default since they'd probably owe Uncle Sam 1/3 of the money. The old rule was that if you declare bankruptcy at the same time as you get your debt forgiven, Uncle Sam will also forgive the taxes due. In the case of our "financial pro" this would mean that he would be bankrupt, most of his remaining assets would go to the bank, and if the book was a big hit some of the proceeds would also go to paying back the bank and other creditors.

The second thing that needs to happens is the public and especially politicians need to allow banks to get tougher in enforcing their legal contractual rights regarding collecting mortgage. The many folks in Vegas who bought houses while in the process of defaulting on their underwater house, should be receive notices from the banks telling them they will be seeking judicial judgement and if one house get foreclose means they lose both houses.

Right now the financially sound thing to do for most people is to default and I don't thing morale lectures are working well. I don't see away out of this mess until we make our laws and actions align with encouraging people to pay their mortgage.

What laws have changed to encourage default? If anything, the laws are tougher compared with two decades ago. Nevada is a recourse state, and lenders are free to pursue full damages if a borrower defaults. The laws are fine. Most people (that can) are paying their mortgages, and the financially sound thing to do is to continue paying and not default.

 

[Bestwifeever]

One other thing about the financial pro's default is that he would also have to notify, in writing, every one of his clients about his financial situation because it is a material change. This alone would stop many financial folks from these strategic defaults.

He can just send them each a copy of his book: Amazon.com: The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money (9781591844648): Carl Richards: Books

which apparently is about how he learned from his clients' bad decisions what not to do!

I'm thinking his blog report of his loss of his house was a preemptive strike for this book coming out--he laid his own troubles on the table before reviewers could do it for him.