How a $170,000 House Turned Into Bankruptcy

If yesterday’s post was Part 1 of People Who Have No Self-Control When It Comes to Money (And the Lenders Who Love Them), this is Part 2.

The Wall Street Journal published a story on Monday about a Vallejo, California, couple’s descent into bankruptcy — a descent facilitated, ironically, by the rising equity in their home.

The Borrowers: Sherrie Floyd, 44, a clerical assistant at the Kaiser Foundation, and her husband, Kevin Floyd, 45, a truck driver in Vallejo, Calif.

The House: In June 1995, the Floyds bought a four bedroom, 2,100 square foot home in Vallejo at auction for $170,000. After cashing out of Mr. Floyd’s retirement fund, they put $11,000 down and financed the rest with a 30-year, fixed-rate mortgage from Countrywide. Their monthly payment was $1,500; the rate slightly under 9%.

Sounds reasonable, right?  Fast-forward 13 years:

Current Status: After refinancing several times, their monthly payments reached an unaffordable $5,600. They stopped paying in April 2007 and filed for bankruptcy in December 2007. A hearing in bankruptcy court is scheduled for Monday.

The Debt: The Floyds owe $670,000 in credit card, mortgage and auto-loan debts, according to the claim estimate from bankruptcy court. Since 1995, Mrs. Floyd estimates that they pulled roughly $100,000 out of their mortgage to pay off credit-card bills, broker fees and penalties.

Apparently many folks find it impossible to leave their home equity untouched.  To them, it looks like free money. But of course it’s not, because when you refinance and take out home equity lines of credit, you have to pay it back. 

The Floyds took only $100,000 out of their mortgage to pay off bills?  No way.  They pulled out a lot more than that, because in 2005, when they refinanced for more than $500,000, they already owed $452,000 on their mortgage.

Of course, it should be noted that the Floyds always managed to find an unscrupulous lender willing to finance and refinance their rising debt. But the responsibility ultimately lies with the Floyds.

The saddest part:  The family of seven can’t find a landlord willing to rent to them with their credit history, so they’re going to have to split up among friends’ homes until they figure something out.

If they had paid down their mortgage instead of adding to it, they’d be halfway to owning their home outright.  Instead, they’re 20 years away from retirement with less than nothing to their names.

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Throwing Cold Water on a Hot Listing in Coldwater Canyon
Tough Time for Sellers at 525 North Sycamore