Posted on 06/02/2008 6:57:16 AM PDT by Diana in Wisconsin
LA QUINTA, CA -- Like a lot of houses here, the Spanish-style five-bedroom Gary and Debra Magsam bought three years ago has a sparkling pool, a designer kitchen and a nearby golf course.
Now it has one other feature common to the area: a foreclosure notice. Barring a last-minute reprieve, the Magsams' house will be auctioned June 27. They've begun to pack.
"We've accepted the fact that it's going to have to take place," Gary, 48, said of their impending departure. "For a long time we felt, 'Why did this have to happen to us?'" he said. "Now we know a lot of other people are going through the same thing. It seems to make it a little easier to accept."
The Magsams are among an estimated 243,000 American households, including more than 47,000 in California, that face the prospect of foreclosure this year. Congress is expected to pass legislation by the fall that would help an estimated 500,000 households avoid foreclosure. But for the Magsams and thousands of others, the relief would probably be too little to help them, even if it weren't already too late.
The Magsams aren't looking for a handout, however, and they don't blame predatory mortgage brokers or Wall Street financial wizards for their plight. Instead, they say they simply got caught up in the excitement of the real estate boom and the bad judgment that went with it -- on the part of lenders and borrowers alike.
"The banks loaned money to all kinds of people they shouldn't have, including us," Gary said. "This situation we're in is one of our own making. We were not taken advantage of."
As analysts explain the rising tide of foreclosures sweeping the country, many point to first-time home buyers who used sub-prime loans to finance properties they couldn't quite afford. But many of those facing foreclosure are people like the Magsams -- experienced homeowners who simply didn't expect that values would fall so hard, so fast.
Rising home prices created "a false sense of security," said UCLA economist Edward E. Leamer. "Borrowers are realizing some of the decisions they made over the last few years were not that wise."
Gary acknowledges that before the boom went bust, he and his wife were among its many beneficiaries.
In 1999, the Magsams and their two sons came from Wisconsin to visit relatives in the Palm Springs area. They liked it so much they decided to stay, happy to be done with the Wisconsin winters. That year, the couple bought a house in the Coachella Valley town of Bermuda Dunes.
They paid $140,000 for that house and sold it the next year for $170,000. Southern California real estate looked like a solid investment. In Wisconsin, that kind of price appreciation would have taken five years or more.
The Magsams scored again with their next home, which they bought in La Quinta for $215,000 in 2000. Four years later they sold it for $452,000, more than twice what they paid.
Proceeds from that sale enabled them to buy their current house in late 2004 for $685,000. They took out a mortgage for $537,000. A year later, with the house worth an estimated $865,000, they took out a second mortgage for $100,000.
With new construction booming and real estate values soaring, people spent freely on home improvements, and the Magsams' business selling blinds, awnings and outdoor misting systems took off. La Quinta was one of the Inland Empire's boom towns, its population swelling about 75 percent from the beginning of the decade to a current 43,600.
The couple's business had five full-time employees, and its gross sales grew to more than $40,000 a month, Debra said. They had obtained an adjustable-rate loan to buy the house, but they thought they would have plenty of income to cover the bigger payments once the interest rate reset upward. And if not, they figured they could always sell the house for a neat profit.
Then in 2006, the real estate market began to cool off. Construction slowed in the new developments around them, and then halted. So did orders for their blinds and awnings.
By 2007, they had let their employees go and moved out of their office, running their business from their house. Over the last year, revenue has shrunk to about $5,000 a month, Debra said.
Barely breaking even, the Magsams said they tried to re-negotiate their loan. But their lender told them they couldn't do much because Gary was self-employed.
They stopped paying the mortgage in December, just before their interest rate was reset, raising their monthly payment to $4,000, up from $2,400.
To try to reduce the damage to their credit, they put the house on the market for $549,000. There were no takers. They cut the price five times, most recently to $490,000, each time with the same result.
The Magsams can avoid foreclosure only by finding a buyer willing to pay something close to that price, but the lender will have to agree to a sale for less than the amount owed on the property. Such transactions, called "short sales," still result in the borrowers giving up their house, but with less damage to their credit score.
Short sales are becoming the norm in La Quinta, said Craig Conley, the agent selling the Magsams' house. Conley said 40 of his 70 current listings were short sales, and the distress is widespread.
"I've got doctors, farmworkers, police officers, business owners, everybody," he said.
The foreclosure prevention bills making their way through Congress are designed to keep people in their homes by providing up to $300 billion in federally insured mortgages. But to qualify for these loans, the lenders would have to agree to voluntarily write down the principal on the loan to 85 percent of the appraised value, and the borrowers would have to be able to document their income, along with other requirements.
For the Magsams, those terms would probably be too difficult to meet, according to Jack Guttentag, a retired University of Pennsylvania professor who is an expert on mortgages.
For one thing, with the decline of their business, they may not have enough documented income to qualify for a new loan. On top of that, the couple, like many homeowners, reduced their equity by taking out a second mortgage -- $100,000 in this case -- on which they have already defaulted.
The second is also with another lender, and the added complication of the default makes it more likely that the primary lender would pursue foreclosure rather than face the complications of two loans, Guttentag said.
The Magsams say friends offered to lend them money to cover their mortgage. But with house prices dropping all around them, and their business unlikely to pick up soon, prospects for staying in the house or selling it are dim.
Borrowing from friends "might stretch it out three or four months, but we didn't feel it would help in the long run," Gary said. "I do not want to have any bad feelings if we are unable to pay them back."
To cover their living expenses, Gary recently took a job at a new Home Depot store, one of two the chain recently opened in the area. His co-workers include former construction superintendents for the now-shuttered housing developments nearby, Gary said.
The Magsams, meanwhile, still have their business. These days, Debra, 46, runs what's left of it from home, while Gary takes care of any clients in the mornings or afternoons, depending on which shift he has at Home Depot.
For now, they will rent a place to live. Friends have offered to lease them their vacation houses in the area during the summer off-season.
They'll have to leave when the tourists return in the winter. Then, they plan to rent an apartment or house nearby, which they guess will cost them a bit under $2,000 a month, less than what their mortgage payments had been.
Gary and Debra remain cheerful despite it all. They built a business and owned three houses, trading up twice as the market rose.
Now, they're back where they began. Their two sons are grown. They point out they've got time and health going for them. "We're still young," Debra said. "It's not like we can't start over."
HEY! Where can I go to get the government to pick up 15% of my mortgage principal? I am going to stop paying my mortgage TODAY so I can qualify! People who are responsible and only buy a house they can afford are FOOLS!!!!
What a refreshing view of the problem...and absolutely true. This is why it absolutely pi$$es me off when Congress suggests jumping in and using my money to bail out these parties. It was a private transaction where both were greedy and at fault and I fail to see why this is my problem and why my money should be used to fix it.
Exactly. Congress has no business even trying to fix this.
This is refreshing. Because of their attitude, I expect they will land on their feet and build wealth again.
Some people...........
“They had obtained an adjustable-rate loan to buy the house,...”
Root cause ping. I do have to agree with you that it is refreshing that these individuals are not trying to shift the blame.
Yes, this was a good read. I’m glad there is someone out there taking responsibility and not looking to blame others.
I’m in somewhat of a mess myself, and it is clearly my own fault.
Great that they take responsibility BUT they were grossing $40k a month at one time and put nothing away? Unbelievable!
Hey, c'mon.
While things were going well, they drew $119,000 out of their real estate transactions and another $100,000 in a home equity loan, presumably for lifestyle spending. This left them with no cushion when business turned against them.
If they had simply reinvested their profits in their real estate transactions and not taken out that home equity loan, they would have a quarter million dollar cushion to break their fall.
Moral of the story is that for 99% of the people real estate is someplace to live, not an investment. This expense must be handled very conservatively and minimized at every turn, because the amount of money can swamp the careless quite easily.
This used to be common wisdom, and every first-time home buyer was warned about this by pretty much everyone they talked to. Somehow this common wisdom was lost. It looks like people are figuring it out again.
Don't forget the two bedrooms for the escort service.
I thought the same thing until, many years ago, the ex was considering taking a job in California. I learned that houses in California do not usually have basements. So you get an extra bedroom or two and store your stuff above grade.
I'm glad we didn't move out there. Beautiful and warm, but the lifestyle is not quite for me.
This reminds me of the "dot com boom" meeting online trading.
At time when investment cash was thrown at anyone making a website about their intuitive cat, a good number of people that I knew began to fancy themselves Wall Street wizards.
And a short time later they stopped boasting about all that easy money
It's greed, trying to make a quick buck
Shoot, I don't have a basement now. I haven't HAD a basement since I was about 13 years old.
If you got more stuff than your house/garage can hold - sell some stuff.
I noticed that too. A couple w/ no kids shouldn’t need a five BR...
driven by envy, keeping up with the Joneses. Most herd behavior is inspired by chatter at the watering holes, talking to neighbors, family, friends, coworkers. Keep your ear to the ground to sense when the next stampede starts and the direction it's headed in. Those running near the front of the herd get the most benefits, assuming they don't fall down and get trampled on. Those in the very back get eaten by lions.
Speak for yourself : ) The point is whether people can afford the house they are living in. If people are using houses as an investment vehicle that is fine too. It is the only investment that I know of where the profits are tax free. Now, it looks like the Government wants to guarantee the investment too. I have a big problem with that. The government should not be in the business of bailing banks out of bad investments.
A refreshing look. We all make mistakes and we learn from the suffering.
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