Jim, a homeowner recently approached me with the following dilemma:

At the top of the market, in late 2005, he closed and moved into a new home that had taken about 9 months to build.  He was ecstatic when he closed, because the home he was paying $300,000 for was being sold now for $385,000.  Life couldn't be better.  But, then the market reality struck.  This homeowner had a very lucritive job in the housing industry.  He was making more than enough to easily pay his bills.  He and his wife decided that, as the market declined and their jobs became non-existant, that once they had lived in the home for two years (their lender's requirement to avoid a hefty pre-payment penalty), they would sell, break even and move to something less expensive.  Think again.

Jim helplessly watched as his "outer edge of the Metro area' home lost more and more value.  Where were all of the buyers on his street that were supposed to move in?  Suddenly, acres of For Sale signs appeared on his street, many with Foreclosure riders.  Homes that had not ever been lived in began to have broken windows, and weeds a foot high.  Since Jim's job was lost with the gloomy economy, he got a job delivering pizzas for a local restaurant.  It did not pay much, but he assumed that this 'little downturn' would only last a couple of months, so he and his wife took out a Home Equity loan (the 85K down payment they invested in his home) so that they could continue to pay their bills.

Fast forward two years.  The 85K Home Equity loan had sustained them for two years of income.  But, now it is gone.  They no longer had to worry about that pre-payment penalty, so they decided to sell their home and 'break even'.  Well, surprise, surprise, surprise!  Their $385,000 home was now selling for $170,000!!!   They had a combined first and second mortgage of $300,000 and absolutely no income to pay for it.  Their home was worth $130,000 LESS than they owed on it!  How could this happen?  Since 1963, the beginning of records on housing, values ALWAYS averaged an increase of about 6% per year.  HOW could the value of their home decrease by over 60% in two years???  Who could have predicted such a thing?

If you were Jim, what would you do?

Jim is over his depression and is now furious.  He and his wife had had 3 years of earning a combined income of $100,000 annually in the housing industry.  It was their chosen career, and they spent years getting the proper education for their field.  But, it seems that their chosen field is no longer a viable option.  They are just not trained for another field that would provide them with the income they had made in the housing industry.  For the past two years, Jim has been back in school trying to become an electrical engineer, as well as working a full time job.  He has two years to go, two small children and he and his wife work opposite shifts so they don't have to pay for child care.  They barely see each other anymore.

According to Jim, he has no other choice but to 'walk away' from his home.  For Jim and his wife, with almost 800 FICO scores, the thought of not paying a debt sickens them.  But, what other choice do they have?  So, this is what Jim is going to do:

The lenders won't reduce his mortgages to their actual value, which Jim could afford to pay.  So the lender will be forced to accept a 'short sale' on Jim's home, which will definately cost them more than if they had reduced Jim's debt and let him stay in his home.  Jim's relatives are going to purchase an investment 'short sale' in a closer-in location and allow Jim and his wife to rent the property at an amount they can afford.  Jim's relatives are also 'willing' the property to Jim and his wife so that it will become their own upon the relative's deaths.  Jim will be able to continue to finish his education in a new field and by living closer in, they will see much more of each other.  During the two years that Jim is finishing school, he and his wife's credit will be much worse.  But, they can't afford to borrow money anyway, so it will probably not affect them much.  Their home will show 'paid' on their credit report, so in about 18 months, if Jim and his wife regularly pay their other obligations, their credit will be right back up to where it was when they decided to let their home go.

Multiply Jim's story by MILLIONS!  We all know someone who is facing the reality of this situation.  They are terrified and confused.  It is not their fault.  They are victims of an economy that was allowed to charge up and down like a roller coaster, with no way out until it was too late.  The big losers here are really not the 'Jim's' of the world.  They will make it through this experience and never allow themselves to be placed there again.  But, the lenders and investors who CAUSED the situation will continue to take America down the Recession-Depression road, due to their continued greed.

And, me?   Jim is my client and friend, so I will list Jim's home for sale and negotiate a short sale with his lenders.  Jim's relatives are going to purchase a 'short sale' for Jim, his wife and children to live in, so I will get to sell them their next home.  Jim will be able to pay half as much for the same type of home, much closer into town than the one he left behind.  Jim's relatives will get a fantastic investment property with a 'true blue' built in tenant.  They will probably split any future equity with Jim, take a nice profit, and this will allow Jim to be a homeowner again.  Only in America.