Case Study: Forfeiting Your House

James is in his early 30’s and has been working for nearly 10 years at the company where he began his first job after college after achieving a degree in Business Management.  His wife Becky has chosen to stay home with their two children.  James was doing well in his career until the financial crisis of 2008 and resulting recession put a pinch on his company.  After two years of attempting to ride out the storm, they have finally decided to announce layoffs and go into a restructuring.

The department James works for is one of the hardest hit by this restructuring.  One morning, James receives a notice that he will be laid off in two weeks.  Since he is the only source of income for his family, James needs to work fast so that his wife and children will adequately cared for.  He does not want to push Becky back into the work force, and is quickly evaluating his options.

In 2006, James and Becky purchased a home near the company office so that James would be able to get home quickly after work and spend time with his family.  Unfortunately, this home has declined in value by 40%, and is now $70,000 below the amount James and Becky owe on the loan.  They had applied for a loan modification, but did not meet the bank’s hardship requirements.  James and Becky have been making their payments every month, in hopes that the market would improve.  However, they are now in a difficult situation where they cannot afford to stay in their home and cannot afford to sell it either.  They have $10,000 of savings in the bank, but this is not nearly enough to buy their way out of the loan.

After three weeks of diligent searching and interviewing, James was offered a job in another state.  They want him to start in two weeks, so he needs to figure out what to do about their current financial situation.  The home that he and Becky thought would be the foundation of their financial future has become a millstone around their necks, limiting their mobility and flexibility in adjusting to a changing employment landscape.

Problem: 

What should James and Becky do to get to the new job and still deal with their home that is under water?

Solution: 

In this situation, James and Becky must come to terms with their new reality that requires mobility and flexibility.  Their home is so far under water that their only viable option is to forfeit it to the bank, take the hit to their credit, and accept the reality of spending the next few years as renters while their credit is re-built. Many people feel a nostalgic romance about home ownership, but this emotional attachment cannot be allowed to render us blind to reality.

The employment landscape in the US requires more flexibility and mobility than ever before.  Home ownership is still a worthy goal, but it must be understood that owning a home ties you to an area and significantly limits your flexibility in seeking employment.  By shifting back into the renter pool, James and Becky will be able to focus their financial efforts on building a robust investment portfolio while staying flexible if another economic disruption occurs or another opportunity emerges that compels them to move again. (Top image: Flickr | Francesco Ceni)  

The JasonHartman.com Team

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