The Anatomy of One Bad Month

Many people thinkthat a catastrophic issue has to occur in order for a homeowner to lose theirproperty. This is not necessarily the case. While the vast majority of dis­tressed properties fit into one of the categoriesdiscussed in Tab 3, many times a minor issue can cause an otherwise financially stable Family tospiral quickly into distress. -

Here is an example that is based on a real client of how a simplehospital visit can send afamily into foreclosure:

The Smith family brings home $4,000 a month and has the following monthlyexpenses:

The family currently has a cushion of about 9% of their monthly income($350) for unex­pectedissues or discretional spending. These ratios are common among many USfamilies.

January: One of the Smith's children is involved in a minor accident at school thatcosts the family $1,200 in medical bills. Mrs. Smith also missed two weeks of work to be with the child and that caused the family to lose $1000 in income.

February: After paying the medical billsand after the lost wages, the Smith's onlyhad $1,800 to pay $3650 in bills. Knowing that they had to feed their family and get to work they paidtheir car payments, auto insurance, utilities and grocery bills. This cost them$1,350 and they sent the remaining $450 totheir mortgage company in hopes of making a partial payment and catchingup later. They were unable to make their credit card payments.

March: When the Smiths receivedtheir credit card statements in March they realized that be­tween the increasesin interest for a missed payment (from 11% average to 25% average) their minimum monthlypayment had been adjusted to $700 a month. They also realized that with this increaseand late fees they owed the credit card companies $1200 ($700 + $400 for Feb +$100 Late Fees) in March. They make a full payment on their mortgage plus late fees of $100which showed they were one month behind even though they had sent a partial payment.They were unable to make their credit card payments in full so they sent what they could$250.

April: Early in the month thecheck the Smiths sent to the mortgage company for $450 had been returned sincethe company would not accept a partial payment. This was good news since their childrequired a 90 day follow up visit with the doctor and this cost them another $400. Their creditcard bills arrived and with late fees and missed payments they now owed $1,400 ($650March + $700 April + $50 Late Fee). Thankfully the credit card companies .accepted a partial payment but stillcharged late fees. The Smiths thought theymay be able to catch up someday. Then the mortgage bill arrived and it showedthe Smiths owing $4,100 for theirmissed payment and late fees and current month. They also had to purchase tiresfor one of their cars that normally would not have been an issue, but their $350 a month discretionalspending had disappeared. Having to get to work they paid as follows:

May: Mr. Smith, facing a financial crisis for the first time in hislife, and not dealing with the stress well, falls ill and missestwo weeks of work. This causes the families income for the month to drop to $2,000against bills of almost $8,000 and the situation begins to look hopeless. Knowing that themortgage company will not accept a partial payment they hold on to the money theyhave left at the end of the month since they have no idea what will happen next.

June: The deficit from Mayalong with monthly bills and the missed mortgage payment and continued late fees fromcredit-card companies and the mortgage company amount to over $9,000 owed. Eventhough both Mr. and Mrs. Smith are able to work a full month they see no end in sightand no hope in their situation. They make the difficult decision that they are going to haveto move. Concerned •about their credit ratings getting any worse and having beenthreatened by the collections agents now constantly calling their house the family makes thedifficult decision to move into a three bedroom rental that will only cost them $800 per month but willallow them to pay off some of their east due debt.

July: After having been informed (incorrectly) by a lender collections agent that their house is going to finalbank sale, the Smiths accept the fact that the house will be lost and they willhave a foreclosure on their records.Rather than mail the bank the July payment that they now can't afford anyway,they send the mortgage company the keys to their former home.

This may seem like an exaggerated accountof what can happen to homeowners who are paying their bills, however, storieslike this one are realities that happen every day. Collections agents stretchthe truth and sometimes fabricate information to try to get a payment out ofthe borrower. Misinformation and lack of knowledge cause many homeowners tomake the wrong decisions and make their situation worse.

Given the example above, and how little itreally takes for a homeowner to become distressed, there is no mystery as towhy as many as 20% of homeowners with subprime mortgages are I default. In thisexample a very small percentage increase in the house payment would have beencatastrophic. If the Smiths had a n ARM that adjusted and their payment hadgone to $2600 a month they would have been out of options in the second month.If they had an option arm (like many people do) that recast and their paymentwent to $3500 a month it would have been immediately catastrophic.