Are You Upside Down?

Being upside down can be a lot of fun if you have a willing partner, a jug of wine, a degree of agility, and a little imagination. However, there’s another kind of upside down that’s no fun at all. Millions of American homeowners now find themselves financially “upside down” – owing substantially more on their home than what it’s worth.

So, what do you do? Do you keep making payments on a house that will likely never again approach the bubble price that you paid -- when you were young, foolish and greedy? Continuing to make payments on this house is often called throwing good money after bad or, simply, pissing in the wind. Do you bid adieu to the financial albatross, called your house, and move on to greener, though significantly smaller, pastures which are more affordable?

A Moral Dilemma
People often develop an emotional attachment to their home. They simply can’t bring themselves to leave. Meet an unfortunate couple. Their combined income is $40,000. They have educations that barely qualify them to run the tilt-a-whirl at the local carnival – and they love their house.

After all, it was this house where, just six short months before, that wonderful mortgage broker managed to give them a no doc $200,000 loan at 12% interest -- even though Emma just got laid off from the Dairy Queen.

It was this same house for which some equally as nice home improvement salesman helped them get a second mortgage for $25,000 to fix the crack in the foundation, a new roof, and the six-person hot tub. A touching story . . . brings a tear to the eye.

What Can They Do?
Walk away now and they’ll find themselves back in a 1973 double-wide, but financially whole – or, at least, financially half. There are a few things that can happen when you realize it’s no longer worth making payments when you are “upside down.” Ask your lender if they are willing to do a “short sale” of your property. That means they would try to sell your house. Whatever they get, will have to satisfy the loan. Why? Because you have nothing for them to get. You’ll be out from under. Your credit may suffer, but you will have a fresh start – and be rightside up.

I’ve heard stories of folks suggesting a “short sale” to their lender. They were rejected because they weren’t sufficiently delinquent on their payments. What did they do? They worked the system. They stopped making payments for the six months it took to become “sufficiently” delinquent. The money they saved by not making the payments was a nice security deposit on renting a smaller house.

If you choose this path, make sure to apply for the new rental before the negative info hits your credit report. Your lifestyle will change, but you’ll be better able to make ends meet with a substantially lower payment.

Foreclosure
The government now has programs that supposedly help people stay in their homes. They’re using our taxpayer dollars to entice lenders to restructure loans and to offer alternatives to upside down homeowners. These ideas are weaker than mixed drinks at a strip club. It’s like putting a band aid on a bullet hole -- and we’re paying a huge price for the band aids. Wake up, folks. The patients are terminal regardless.

Do I need to remind you that this is a product of the same government that, last year, sent out 10,000 stimulus checks to dead people? Is the kid from The Sixth Sense is running things?

Foreclosures are tough. They hurt your credit, but right now people should be more focused on survival. The banks have a ton of these “toxic” assets on their books. The government is coughing up whatever it takes to prop up the banks – on our dime, of course. Don’t shed any tears for the banks. The good ones want to return the TARP money to get the government out of their business. The weaker banks will have the government in their shorts for the foreseeable future – like it or not (just like we do).

Neighborhoods have become as empty as a Taco-Bell in downtown Detroit. There are some great deals out there. Investors are wisely scooping up foreclosed homes by the dozens. They’re being selective, though. Unfortunately, many foreclosed homeowners are taking the doors, windows, sinks, toilets, and whatever else they can carry when they leave – making them virtually impossible to sell. That’s just plain wrong. Working the system is one thing, but even the government and the banks don’t deserve that kind of treatment.

If you’re in a difficult situation, let your conscience and a healthy dose of common sense be your guides. But, be careful. Don’t let your conscience run up a bill that your wallet can’t cover.

(Mike Parnos has been writing about personal finance and teaching stocks and option trading for 15 years. Mike is the author of "Option Profits: The Naked Truth." Mke also writes a highly successful options newsletter at www.Mike-Parnos.com.)