Three Steps to Wealth & Financial Security

by Gary Laturno

  Thirty percent with coverage reported less than $1,000 in investments.

  Many workers move in and out of coverage and take their money with them.

  Writers at the New York Times and the Wall Street Journal commented: “Most retirees are heavily dependent on Social Security, which currently pays a modest benefit, on average, of $1,265 a month. . . . Only the top fifth of seniors with incomes above $57,960 do not rely on Social Security as their largest source of income; most of them are still working”. The New York Times, March 30, 2013.

  “Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts,” Teresa Ghilarducci, The New York Times, July 21, 2012.

  “Sixty percent of all workers surveyed had less than $25,000 in savings and investments,” Brett Arends, Wall Street Journal, October 2012.

  Recommended reading: “Our Financial Failings”, Neil Irwin, Washington Post, May 5, 2006; “10 Facts about the Financial Condition of Americans”, Business Insider.com; “Finances of the Average American” freemoneyfinance.com; “Retirement Security across Generations - Are Americans Prepared for Their Golden Years?” The PEW Charitable Trusts, pewstates.org.

  But there is good news! If you bought too much house or too much car, if you have overlooked or been unable to put money aside for retirement, if you wonder if you will ever get out of debt or be able to retire, do not despair. You are like many people in America - your neighbor, cousin, co-workers, doctor, attorney, pastor, rabbi, among others. Financial problems are not hopeless. See Chapter 4 below, “The Good News! Money Problems Are Fixable!” You can achieve wealth and financial security. Read on! You will enjoy the journey!

  2. HOW DID WE GO ASTRAY? WHAT ARE THE LESSONS LEARNED?

  “We are the only generation in history to borrow large sums to buy consumer goods”. ArrangeFinance.Blogspost.com

  “I think we are seeing the culmination of a gradual change in philosophy”. Richard Steiner, senior staff attorney, Legal Aid Society of San Diego, Inc.

  When Vikki and I were kids there were no car leases. People used cash. Most lived within their means. Bankruptcies were rare. Mortgages were often paid off.

  Our parents and grandparents who experienced the Great Depression of the 1930s would never buy goods and services unless they had the money to pay for them. They also saved and invested. (See “What Gary’s Parents Taught Him about Money” in the Appendices.)

  From the 1980s to the early 2000s, Americans started to live beyond their means. We bought expensive houses and cars and started to spend more than we earned. Few thought about financial planning or living within their means. Few distinguished between necessities and discretionary spending. Few thought about putting part of their earnings each month into an automatic investment plan.

  To say “No” and to resist the temptation for newer, faster, or fancier products being advertised became challenging for us. When is enough, enough?

  The crash of the stock market in 2008 combined with the housing crisis caused many to rethink what is important: Many are starting to wonder when and if they can retire.

  “Maybe we don’t need our 3000 square-foot home, a new car, an expensive vacation, or all the adult toys”.

  Trends may be moving in the opposite direction. Some now buy smaller, less expensive homes; more people are renting. Some are buying fuel-efficient cars, cutting up credit cards, spending less, and starting to save.

  3. WHO IS TO BLAME?

  “The problem with personal finance is in our mirror”. Dave Ramsey, host of the nationally syndicated Dave Ramsey Show

  “The average person today spends anywhere from 10 to 30% more than they earn”. Peter Serrano, financial blogger at personalfinancemastery.com

  Many people want to blame the financial institutions—“It’s their fault. We want to sue the bank!” (From a couple who took over one million dollars out of their house over twenty-five years and an attorney who had not paid his mortgage for over three years)

  “I do not have a financial gene.” (From a judge, a Harvard Law School graduate, who could not pay his mortgage and was drowning in debt)

  “Why won’t the bank work with us? Why won’t the bank give us a loan modification?” (From many who had no ability to pay their mortgage) Examples of the people making this type of statement include the following: Attorney who earned $5,000 in 2011 with $1 million in debt against his home.

  Handyman who made $1,500 per month with $900,000 in debt against his home, who at one time owned the home free and clear.

  What is the lesson learned? Who is to blame? Correct answer: Forget about who is to blame. Chasing after and blaming the bank for giving you a bad loan will not solve your financial challenges. Take responsibility for your situation. Look in the mirror! You are in charge of your destiny and can recover. You can put your financial house in order, build wealth, and achieve financial security.

  4. THE GOOD NEWS! MONEY PROBLEMS ARE FIXABLE!

  “God helps them that help themselves”. Benjamin Franklin, Poor Richard’s Almanac

  Bad things happen in life. We lose our jobs, find ourselves separated or divorced, become disabled, or find that a wage earner in our home has passed away. We may realize that we are overextended and cannot pay our mortgage.

  The good news is money problems are fixable. You can put your financial house in order!

  At the first sign of financial distress, take action. Consult with competent counsel—a real estate, bankruptcy, or tax attorney; a CPA; a HUD certified housing counselor; or a financial adviser. You may also need to see a healthcare professional. Financial distress and depression often go hand in hand. To find an attorney, call the Lawyer Referral Service of your local bar association. To find a HUD-certified housing counselor, see www.hud.gov. But do not wait too long. See “The Bad News” below.

  Some of the options open to you may include one or more of the following: Best option: live within your means and pay your creditors.

  Negotiate and settle with creditors.

  Loan modifications on both owner-occupied and investor homes.

  Short sales (discussed in Part IV) and deeds-in-lieu (you deed or give the house back to the bank) on both owner-occupied and investment property.

  Refinancing under government programs such as HARP 2 and conventional REFIs.

  Bankruptcy: you may be able to discharge many or all debts in bankruptcy and avoid paying income tax on the discharged debt.

  Foreclosure: I have talked to many people who were angry because they lost their home to foreclosure, wanting to sue the bank. All had been in serious default on their mortgages. “I want a mortgage litigation attorney”, many have said to me. None, however, appeared to have any viable legal claims against their bank. After listening to them vent and asking follow up questions, my comment on occasion was: “It appears the bank may have done you a favor. You no longer own a home you could not afford.” Typical reply: “I never thought about it that way. You may be right.” Recommended reading: “How Lenders Can Help Forestall Foreclosures”, Anya Martin, Wall Street Journal, June 13, 2013.

  Default on your legal obligations: In 2012, according to The Wall Street Journal, Americans walked away from $585 billion in mortgages & credit cards and much of which was simply written off by the banks. Note, however, there is a dark side to walking away from debt. See “The Taxable Downside of Debt Forgiveness”, Jennifer Waters, The Wall Street Journal, March 10, 2013. In addition, the lender may pursue legal claims against you. At the very least, the lender may pursue you, attempt to settle and at the same time threaten to sue. Finally, your credit scores will take a hit. Recommendation: Before you default on any debt, consult competent legal counsel to fully understand your options.

  5. THE BAD NEWS

  “A fool and his money are soon parted”. George Buchanan, Scottish historian and scholar, 1506-1582

  Many people in financial distress understand that they have options but are unable to make a de
cision. Fear, ignorance, even depression may be at the root of their inability to take action. Some lack financial acumen and do not understand how much house they can afford. The typical result in both cases: the home is lost to foreclosure.

  Many in financial distress fall victim to frauds and scams: California leads the nation in foreclosure rescue scams including loan modifications and mass joinder law suits.

  Red flags: Is the promise is too good to be true? Does the scammer want up-front money? The result: the victims lose their homes, as well as the money given to the scammer.

  Many credit repair companies prey on individuals in distress. Beware if they make claims such as: “Credit problems? No problem!” “We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!” “We can erase your bad credit—100% guaranteed.” “Create a new credit identity— legally.” The Federal Trade Commission (FTC) says: “Don’t believe them. They’re very likely signs of a scam”. Indeed, attorneys at the nation’s consumer protection agency say they’ve never seen a legitimate credit-repair operation making these claims.

  The fact is there is no quick way to fix your credit. You can improve your credit report legitimately, but it takes time, a conscious effort, and sticking to a personal debt repayment plan. See www.ftc.gov.

  Some pursue legal action against their lender with unfortunate results. I have listened to hundreds of borrowers who hired counsel to sue their lender. All paid their attorneys significant amounts of money. None were happy with the outcome. I have talked to countless attorneys in California who filed claims on behalf of borrowers against lenders. I found one who obtained a truly favorable outcome—the Kamala Harris, California Attorney General (forty-nine attorneys general versus major banks—a $25 billion dollar settlement in 2012). Many borrowers do not understand the following: A lender has the right to foreclose on your home if you do not pay your mortgage as agreed. Courts have little or no sympathy with borrowers who do not pay their mortgages.

  A lender is not required to give a borrower a loan modification. The government guidelines on loan modifications on the Treasury Department’s website specify the lender is to make a business decision relative to loan modification requests. What is in the lender’s best interest? Will the lender do better if they modify the loan? Or, will they do better if they take the house back either through a short sale or foreclosure? These are decisions the lender makes—not the borrower.

  If you do not obtain a loan modification, you are probably living in a house you cannot afford. The good news is that you are no longer burdened by the property. Many borrowers feel substantial relief when the battle is over. They are now in a position to get a fresh start, put their financial house in order and move to a home they can afford.

  To avoid making unwise financial decisions, we recommend contacting a credible financial adviser at the first sign of financial stress. Confer with your CPA and a HUD-certified housing counselor. See www.hud.gov to find housing counselors in your city. A real estate and bankruptcy attorney may be appropriate as well. Some have experience assisting borrowers in financial distress and charge a reasonable consulting fee. Some are available pro bono at consumer clinics sponsored by charities or local bar associations.

  Also, do not overlook the servicer of your mortgage, but beware, the servicer is a debt collector who works for the investor who owns your loan, not you. The servicer may give you false information. They may say anything to get you to make a mortgage payment. Confer with a HUD certified housing counselor or attorney both before and after speaking with your loan servicer.

  6. LESSONS LEARNED: HOUSES

  a. Biggest Mistakes

  “Housing prices do not always go up”. Joe Nocera, New York Times

  “Many people buy houses they cannot afford”.

  Gary M. Laturno, Esq.

  Few people consider or think about other financial needs when they buy a house. What we want is often bigger than our wallet, and after buying a house many find they are in financial distress. Here is a list of the biggest mistakes we have seen:

  Many bought houses they could not afford and/or used their homes as a piggy bank or ATM, taking equity from the property. During the run-up on housing prices in the early 2000s, some spent 10 times their income or more on a house, eventually going into bankruptcy and/or losing their home to foreclosure.

  “Equity extraction was responsible for around 80% of defaults among homeowners who purchased their homes before 2004, representing around 30% of all defaults between 2006 and 2009”. “Study: How Using Homes as ATMs Fueled Foreclosures”, Nick Timiraos, Wall Street Journal, May 28, 2013.

  We keep houses we cannot afford and fight living within our means. Many run down savings and retirement accounts – if they have them – and/or run up credit cards to maintain their life style and pay for their mortgages. The end result is often bankruptcy and foreclosure.

  We buy and keep rental properties with significant negative cash flow. I have talked to many borrowers who spent thousands of dollars a year keeping a negative cash flow property. They took money out of savings or retirement accounts, borrowed money, or spent money they could have saved and invested. For example, a woman with whom I spoke contributed almost $40,000 over two years to pay HOA assessments and negative cash flow on her rental. With no savings left, she had to borrow $20,000 to pay medical bills. An active duty Army officer stationed abroad spent $60,000 over five years to pay the negative cash flow on his San Diego rental, losing the opportunity to save and invest a significant sum of money.

  High-income earners with zero or minimal net worth buy luxury homes. One of the biggest mistakes by attorneys, medical doctors, and other high-income earners—those in the top 10 percent—is to buy luxury homes. I know! I have been there. I made that mistake. Money goes into the luxury home, and the owner typically has no money to save and invest.

  Worst case and a not an uncommon situation: The owner’s income falls; they have nothing to fall back on and lose their home.

  So, avoid luxury homes unless you have substantial net worth. If you are a millionaire many times over with significant net worth, buy a luxury home. If not, forget it! A luxury home is a huge liability and may be a poor investment. See our discussion about houses in Parts 3 and 4.

  In 2012, I spoke with an attorney who owed well over a million dollars on his house. In 2011, his income had fallen to five thousand dollars, and he had no savings and no ability to pay his mortgage. The man could not understand why his bank “would not work with him.” Several months later he committed suicide.

  A big lesson: Depression may result from financial problems. If you are in financial distress and “down in the dumps,” contact your physician immediately. Talk to friends, family, and members of your support group. Call 911! Go to the nearest hospital! Do not wait! Depression is treatable!

  Few understand mortgages or basic mortgage information. Few shop for loans with different lenders. It is not unusual for an individual or couple to look at dozens of houses, negotiate the price, and do significant due diligence before buying a property. These same people accept the first loan offered, giving up the opportunity to shop and compare fees and interest rates.

  According to Zillow.com, one- quarter of all home buyers incorrectly believe they are obligated to close their loan with the lender who pre-approved them and that the best interest rates and fees can be found with the bank where they do business. “In fact, homebuyers should always shop multiple lenders to compare rates and fees to find the best loan”. See “One – third of Homebuyers Surveyed Are Ill Prepared to Get a Mortgage”, Zillow Press Release, May 10, 2013. Zillow.com

  Many were sold negative amortization loans and subprime loans with teaser rates that increase significantly in a few years. With a negative amortization loan, the borrower has the option of paying less than the interest that accrues on the loan each month. The result: the debt or amount owed increases over time – not a good thing.

  Some
continue to pick adjustable rate mortgages (ARMs). With an ARM, payments change over time - going up or down to reflect interest rate movements. While this is beneficial if rates fall, it is unfortunate if rates rise. With a fixed rate loan, the payment remains the same over the term of the loan, and you can plan accordingly.

  We co-sign mortgages for our kids, other relatives and sometimes our friends. Bad idea! You are now responsible for the debt! If you are tempted to co-sign a mortgage, read “Co-Signing on the Dotted Line” by Vickie Elmer, The New York Times, August 4, 2011. If you are still tempted to co-sign a mortgage, talk to a real estate attorney to fully understand what you are getting yourself into. Read “What You Should Teach Your Kids about Money” in the appendices. If your adult children cannot afford a house, do not cosign for their mortgage. Gifting people money makes them financially inept.

  People with little or no savings or investments put significant money into their homes. According to the National Association of Realtors, remodeling projects yield a negative return on investment. A two- story addition, for example, on average costs $152,470 and yields a return of 65.4%. Home office remodels and sunroom additions recoup the smallest returns (43.6%). See Realtormag.realtor.org. Recommendation: Except for paint and possibly carpet, think long and hard before taking on expensive remodeling projects, especially when you have no savings or investments.

  Recommendation: Make decisions about spending on your home based on an overall financial plan. Before putting significant money into your house, consider other financial goals and objectives.