“A lot of people wonder how you know you’re in love. Just ask yourself this one question: ‘Would I mind being financially destroyed by this person?’”
I first came across that quote hanging on my friend John’s fridge, soon after he started dating fellow friend Fahmi. Since Fahmi was on the verge of trading in her lucrative IT consulting job to head back to grad school, it wasn’t an idle question.
Happily, Fahmi got her degree, John and Fahmi got married, and they’re now cheerfully bonded and financially stable.
But for an illustrative example of just how literally that quote should be taken, there’s the tale of Dawn vs. The Leech.
Dawn (not her real name) has been one of my best friends for a decade. About five years ago, comfortably before the housing boom’s peak, she and her live-in boyfriend decided to buy a house together. It was a pretty good deal: a recently foreclosed, two-bedroom place in a Western city for a tad over $100,000. Dawn had a stable job and could comfortably manage the monthly mortgage payment; her boyfriend, aka The Leech, was a contractor who could handle the house’s badly needed renovations. They bought the house on an ARM, planning to finish the upgrades and refinance the house before it reset.
You see where this is going.
Over the next few years, Dawn and The Leech got married and worked on the house, but the renovations never quite got done. Time management is not one of Leech’s strong suits. To finance the renovations, they tapped a home-equity credit line, which added a second mortgage to the house’s debt load.
Then the economy tanked. The Leech wasn’t getting contract work the way he used to. At the same time, the ARM on the house reset, and the interest rate zoomed past 11%. Once-affordable payments were suddenly a big struggle. Like millions of other Americans, my friends were being bankrupted by their house. Somewhere in here a third home-equity credit line snuck into the mix.
It’s easy to point fingers (“An ARM — what were they thinking!?”; “Never buy a house unless you have enough money saved to make the payments for uppitygazillion years without an income”; etc etc.), but as they say, hindsight is 20/20.
Here’s where the situation gets really sticky. Dawn came up with a clever solution to the ugly financial math: move. She’d worked in NYC before moving out West, and had a job offer that would pay about twice what her local job did. With that extra cash, she could afford to keep up the house payments and also get a rental in NYC. So, after extensive discussions with Leech, she moved back East. The plan was that he would stick around for a few months, finish the house and rent it out, then join her in New York.
It was a pretty cool plan. One that got blown to smithereens a month later when Leech moved his new girlfriend into the house. (Here’s the part I like best: He didn’t want to get divorced. He was pretty happy to stay married to Dawn, keep her on the mortgage … and live with the new chick. Logical thinking is *also* not one of Leech’s strong suits.)
Now, all of this still could have worked out if Leech had the income to support the house he wanted to stay put in. But he doesn’t.
Dawn — who was far nicer to him than I would have been — took a fair stab at weaning him off her financial support. They drew up an agreement under which she would keep paying into the mortgages for most of a year, while he got his act together. Which she did.
A year later, shock of shocks, Leech was still broke. He promptly fell behind on the mortgages, obliterating his already-shaky credit rating and Dawn’s excellent one.
So Dawn is now caught in an epically nasty situation: She’s getting divorced but is still on the mortgages for an underwater house she isn’t living in and can’t sell without the consent of the house’s co-owner, Leech. The full face value of the loans on the house sits at around $200,000. The house’s market value is maybe 75% of that.
This has to be a pretty common situation these days, but all the researching Dawn and various lawyers have done turns up basically no good way of dealing with it.
No lender will refinance the house notes into Leech’s name alone; it’s underwater and his credit is shot to %@$!. The best option is to sell the house, but a) that requires Leech’s consent, and b) it’s probably going to be a short sale, which won’t fetch enough to clear all the notes. The second and third lienholders have little incentive to agree to that — and even if they do, they could then still pursue a deficency judgment for the shortfall.
So for now, Dawn is stuck taking a credit hit every month that Leech fails to make payments, and remains on the hook for a life-destroyinging giant sum of money. She’s been waiting for more than a year for one of the three lenders to finally get fed up and foreclose, but every time that seems imminent, Leech chucks the lender a small payment and manages to stave it off a bit longer.
I know the advice, before you co-sign a whopping loan with anyone, is always to be really, really sure you know what you’re getting into. But how can you? Very few people get married expecting to get divorced, and yet, almost half of us do. Neuroscientists keep pointing out that we’re hardwired to be overly optimistic, make irrational choices, and stay in bad relationships.
So on top of all the many, many ways we now know that buying a house can turn into a debacle, add this one: That mortgage can be more like a marriage. You might end up bound to the ball and chain till death — or something else equally unpleasant — do you part.