Sad Stories Abound

I read today a story about a woman in Southern California who, in February, lost her $70,000 per year job, and less than two months later, is obtaining food for herself and her two children from a food bank because she did not qualify for Food Stamps. She was uncertain of her future, with a $2500/month interest only loan on her home. Comments to the news story were mostly sympathetic, but there were a number of people who could not see how someone making $70,000 a year could go broke so quickly. It seems that a huge number of Americans never make anywhere near that kind of money and have learned to live on less than half that amount.

So here's my sad story. Yesterday I went out on an appraisal assignment for a refinance. The house was an older dwelling, straddling two parcels. The front parcel was zoned commercial, and the rear parcel residential. The property does not conform to zoning. The home had a new roof, and the windows had been replaced a while ago with insulated glass units, and the basement had just been waterproofed. It still had a septic sewage system, even though the city sewer line was stubbed out to the property at the street.

The gentleman wanted to talk, and I let him. He showed me the front property pin, which was under his driveway; part of the drive was on the neighbor's property. He showed me the septic tank lids, which were right on the property line. Worse yet, the septic tank had a spruce tree growing on top of it, and there was no way of telling which way the effluent drained, if it drained at all. He showed me the basement, with its new, professionally done waterproofing, and also the missing basement steps (we had to climb down a step ladder) that the contractor had removed and not replaced, and the partially removed partition wall that he said the contractor had not completely removed because he was afraid the floor above would sag. He showed me the crumbling and collapsing plaster on an upstairs ceiling, where water had been leaking in for some time before he had the roof reshingled.

Not quite a slam-dunk as a valuation problem.

He told me his story. He once had a good paying job, years ago, but the company closed up shop in the northern part of the state. It seems that the union was based in Cleveland, and insisted on Cuyahoga County wages for workers in Summit County, where things just were not as expensive as they were further north. For years he had worked at odd jobs, and was now drawing his Social Security. His wife was bringing in most of the current income, working as a waitress, and she seemed very displeased with life. She shut herself in the bathroom, and it was with great difficulty that he was able to persuade her to come out and allow me to examine that room. With poverty there is often familial distress.

It seems that easy money was part of the problem. He had refinanced the house in 2004, and if it was an 80% refinance, then the appraisal at that time was probably close to the actual market value. But, in 2005, he needed to fix the roof, and he took out a home equity loan. That brought him close to 100% financing. He was also paying a very high interest rate for his car, and last August, refinanced his home equity loan to roll the balance that he owed on the car into the second mortgage. Bad move. The HELOC is adjustable, and he is upside-down on his mortgage. He was trying to refinance to roll it all into one lower interest fixed rate loan, but based on the fact that prices in his neighborhood have been falling at about 1%/month since 2006, and the needed repairs, I think he is stuck right where he is.

He told me where he needed to have the value come in (and I doubt that he realized he was engaging in a criminal act by doing so); it would have been far better from the standpoint of making the loan if the appraiser who had appraised it last August had been there yesterday instead of me. Had that appraiser accurately reported in August the problems with the site alone, I doubt the loan would have been made. Then again, it was a different bank, and we are in a different economic world than we were in just a few months ago. I have a feeling that my opinion of value is going to contribute to greater marital discord.

I wish I could help, but I think the solution is to be found only by squeezing through the tunnel. How did we, as a nation, get in such a fix? It may be simple human insecurity. We are herd animals, afraid of judgment and always seeking peer approval. People live beyond their means because they need to put up a public front. Just like the people who will speed up on the highway because somebody is tailgating them, rather than sticking to their convictions about obeying the law, we somehow rationalize that it is OK to engage in risky economic activity because "everyone else is doing it". We think that safety lies in numbers, and delude ourselves about the virtues of democracy. It is not a virtue to collectively go broke.