Friday, March 9, 2012

Think about the Endgame

There is a recent article in the Washington Post entitled A million-dollar mortgage goes unpaid for years while couple fights foreclosure. It is the story of a Maryland couple whom had not made a mortgage payment in over 5 years.
  • “The eviction from their million-dollar home could come at any moment. Keith and Janet Ritter have been bracing for it — and battling against it — almost from the moment they moved into the five-bedroom, 4,900-square-foot manse along the Potomac River in Fort Washington. In five years, they have never made a mortgage payment, a fact that amazes even the most seasoned veterans of the foreclosure crisis.  The Ritters have kept the sheriff at bay by repeatedly filing for bankruptcy and by exploiting changes in Maryland’s laws designed to help delinquent homeowners avoid foreclosure.”
From the news article we learn that the Ritters purchased their house for $1.29 million. The purchase involved a mortgage loan of $1 million. The monthly mortgage loan payment, at the time, was $7600 a month. So if the the Ritters did not make a $7600 monthly payment for 5 years, they essentially "earned" or saved or spent $456,000 ($7600 per month x 12 months x 5 years). The Ritter’s story raises several important issues for all people who are actively strategically defaulting. First. What do you do with the money saved from not paying a mortgage? Second. How do you keep the proper mindset/focus during a strategic default? Third. What your ultimate objective of a strategic default? Let’s look at the Ritter’s situation to see if we can “glean” their mindset and determine what they did with the $456,000 in additional savings and/or income.
  • “During the boom, they set out to become mini real estate moguls, buying properties and flipping them for a profit. In the process, Keith Ritter, 54, [became] a successful real estate investor and landlord with a six-figure income. Then, when the housing market tanked five years ago, the couple found themselves facing multiple foreclosures. The Ritters have tried to negotiate different payment arrangements with their lender to save their posh home near National Harbor, they said, but to no avail. 'It was never our intention to get here and never make a mortgage payment,' Keith Ritter said. 'We don’t believe in living for free.' But he and Janet, a 51-year-old real estate agent, make no apology for using every tactic available to them to stay in their house, including challenging the foreclosure sale in court, requesting mediation and claiming they had a tenant living with them…“When a bank does all it can to save itself, that’s good business,” Keith said. “When a homeowner does the same thing, he’s called a deadbeat.”
Now who can fault the Ritters for doing all they legally can to keep their primary residence.  
  • “For the Ritters, the housing crash was a catastrophe. The couple still owned five properties, four of which they had rented out. But falling home values meant they could not refinance the mortgages, some of which carried adjustable rates. Pretty soon the rents they were charging were not covering the mortgages. By the time the first mortgage payment of almost $7,600 on the Riverview Road house was due in January 2007, they faced a decision: which properties to save. “Do we put the money we had left in this one? Or is it better to spread it to the others?” Keith Ritter recalled wondering.  They chose the latter course, expecting to be able to catch up on the Riverview Road payments later. But that didn’t happen.”
As part of their strategic default strategy the Ritters chose to put spread the money between their 4 rental properties and their primary residence. This decision caused them to go into foreclosure on their primary residence. Additionally, the Ritters may be collecting income from their rental properties while not making any monthly mortgage payments for the rental properties.  

We need to ask ourselves: How did the Ritter’s plan to “catch up” on their primary residence mortgage if they did not have enough money to pay all of the other debts? What are the Ritter's doing with the money saved and earned from non payment of mortgage and from the collection of rental income? Did the Ritters think about the consequences of their strategy? Did they put pen to paper and create an action plan? Did they evaluate their short term and long term financial goals? Are they truly aware of strategic default consequences? The Ritters then faced their final chance to keep their home during a foreclosure hearing:
  • “Janet Ritter argued that [the lender] had no right to foreclose, because it could not prove it owned the note on the house. She said some of the paperwork documenting the mortgage’s many transfers from one pool of mortgages to another was fraudulent because it had been “robosigned,”… [b]ut in Maryland, the courts have ruled that if the lender can provide records of a note’s history, and how it came to possess it, it has the right to foreclose, even if the records weren’t properly endorsed. In response to Janet Ritter’s argument, Hillman held up an original copy of the note, with Keith Ritter’s signature in blue ink. Judge Smith awarded [the lender] possession of the property. Two days later, [the lender] filed for eviction. The Ritters knew it was only a matter of time before the sheriff showed up at their door to deliver it…On a rainy Wednesday in February, Keith Ritter stood in front of a foreclosed brick house a few miles from his home on Riverview Road. On the garage door, the county had posted a notice that said the property needed to be cleaned. Ritter, dressed in jeans, a knit cap and a jacket, had come to clear the house as part of his new business, Beat It Movers, which cleans and maintains foreclosed homes so they can be sold. Ritter gets the irony of working for some of the same banks that have foreclosed on him. But he has to make money somehow…[a]fterward, Ritter decided to stop at another house nearby that he and Janet bought in 2006. It was also in foreclosure, although it had not been auctioned yet. The tenant had moved out about two months earlier, and the house was empty except for a leather sectional just off the kitchen... “People think, because you haven’t paid, you must be a bad person. But not everything is black and white,” Ritter said. “A lot of things happen between the lines.”…Ritter still thinks he can work something out to save his house. He is trying to persuade an investor to buy the house from [the lender] and then sell it back to them.  It’s a long shot, and Ritter said he has been praying a lot… [h]e has found solace in his Bible, especially a passage from Matthew…“At this the servant fell on his knees before him,” the passage reads. “‘Be patient with me,’ he begged, ‘and I will pay back everything.’
The Ritters attempted the “lost note” and/or “robo-signed” strategy in court and lost. The bank foreclosed and took their home.  Was this their ultimate endgame?  What happened to the savings and/or income? Could the Ritters have used their savings and/or income to improve their financial situation? Is it possible for the Ritters to have planned for the eventual loss of their home? Why didn’t the Ritters use the income from the rental properties to keep their home? Did the Ritters get caught in the “I’m used to not paying my debt” mindset which led them to believe that they could keep their properties even though they did not make payments for 5 years?  

The consideration of a strategic default requires a thorough understanding of the risks and rewards. A strategic default is strictly business. It requires that you put your business cap on and plan for your financial future. It requires the preparation of written action plan or your strategic default business plan. It requires a realistic and honest evaluation of your current financial profile. It requires a team of knowledgeable professionals who can guide you to a better financial future. In the end, if you do not make mortgage payments the lender will eventually sell the property at a foreclosure sale and/or try to get their money. Are you prepared for the endgame? If not, then you should start to prepare now. 

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