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."
They also put the money they made on each house into the next one they bought. They didn’t burn the money on BS as they traded up.
The fatal mistake was getting an ARM. They would still be in their house with a conventional loan. Not sure why someone would us a ARM if they planned on keeping the house?
Gary is one of an increasingly rare species. I bet he and his wife recover and do nicely down the road. I hope so.
I don’t think they pulled much out of the real estate other than the 2nd loan. Figure they spent 6% on each sale for commission (~40K). They also had closing costs associated with each purchase (2-3% on a total of $1.03M in 3 purchases). It certainly wasn’t $119K they pulled out.
“I’m in somewhat of a mess myself, and it is clearly my own fault.”
I am in the same boat. I moved to Phoenix and bought a lovely house (my wife, three teenagers, three dogs and myself). We decided to move back east, but housing prices have dropped 20%. Well, I am working uber-overtime to pay off the unpaid balance.
I could do a “short sale” and stiff the lender for the difference between my sales price (less Realtors fees) and the unpaid balance. But I signed a Promissory Note saying that I owe the lender the money. Seems pretty straightforward to me. Honor thy debts and promises.
Have you seen her home designs? (Link, below) They’re very nice & practical. I have way more house than I need, but I wanted the LAND, and not the house. We, too, are only 2 people (and two dogs and two cats) in a 3-story house, that used to house five and sometimes six of us. We’re mid-40’s now, and our “farmette” it’s a little Midwest Goldmine, so we’ll hold on for another decade, then greatly downsize. ;) (I can’t wait, actually!)
I've heard stories of woe from people who had a custom house built. I've never met someone that went that route twice. Even people in the house building industry have little desire to build their own custom house. Apparently it's a big headache.
Why? I like my stuff. I don't want to sell my stuff. I want a basement not only to store the Christmas decorations, home repair equipment, and some books, but also to have a workshop, a little art studio in an area where the smell won't bother everybody else, and a laundry room big enough to sort laundry and open up an ironing board while I watch TV. I want a place to hang my saddles and bridles without risk that they'll get cooked by the heat of a garage in summer. I want a place where the kids can have their friends over to watch dvds and shoot each other with pellet guns, and I won't get hysterical because they're leaving potato chip crumbs on the Persian rug in the living room or wrestling around near antiques.
In the case of these people, they were trying to run a business out of their home and they may have wanted kids at some point, so having a lot of bedrooms makes sense.
And if you have the money to afford all your "stuff" AND buy the house and keep up payments on it, more power to you.
In the case of these people, they were trying to run a business out of their home and they may have wanted kids at some point, so having a lot of bedrooms makes sense.
Ahhh, you're a little mixed up.
They already have grown children that were out of the house.
They didn't start trying to run their business out of the house till they couldn't make payments anymore.
Sorry, but this twaddle doesn't fly in this particular case.
Two people, I don't care HOW much "stuff" they have, don't need a 5 bedroom house unless they are taking in boarders.
Despite the WI and CA residency, there is no way that these people are “liberal”...
I have NEVER seen a lib accept responsibility for their choices.
They turned a quarter of million dollars from real estate since 99, so what’s the problem?
As a single woman who is constantly being told “You don’t NEED” this or that or something else that I have, I would like to say what I always tell them: “Sez who?”
Although Mama conceded that my answer to her “Why does a single woman need a maid?” i.e. “I have two jobs, one of them involving a lot of travel” was a good one.
If I ever bought a house, which I never will, I would have at least four bedrooms in it. I have a lot of family and friends and I’d like to put them somewhere besides on blow-up mattresses in the living room.
Where does the dog work out?
Outside.
Please. It's a freakin' dog.
< |:)~
"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."
Whole ball of wax...but surprising to see it recognized and in print...
People need to decide for themselves how much house they can afford. Just use the old tried and true formula: Mortgage not to exceed 1/4 of monthly income. Indeed, smart ones would go even lower, leaving a buffer.
And tell the lenders, who now 'qualify' people on the most convoluted criteria ever designed, to stuff it.
Watch words: Thou shalt not covet more than thy can afford.
I couldn't agree more. Buy what you want. Just remember the rule of making money. You have control how much you pay for something, not for how much you sell it for.
Business gross is not net, and they were probably using profits to grow their business as well. With employees, they were probably making a nice profit, but who knows - maybe they put their own money in the business too long before letting go of their employees.
But I’m buying and keeping. Not buying and selling.
Kudos to the couple for not blaming anybody for the catastrophe that caused.
That said, I am simply amazed by man’s capacity for stupidity when they are in denial and don’t want to believe anything that contradicts their preconceived notions. “See honey, the home has shot up like a meteor therefore past performance DOES necessarily predict future returns, right???”
I am even more dumbfounded by the sheer exhausting numbers of otherwise intelligent people who behaved with such massive stupidity only by burying their head in the sand and pretending that the party would go on forever and ever.
Unfortunately, stupidity hurts.
I used to have the desire to build a home, but no more. There are plenty of already-built places where I could live quite happily. :)
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