How she owed more than her home was worth?

No Good Deed Goes Unpunished
by Laura Rowley

Posted on Wednesday, January 28, 2009, 12:00AM

Eve Pidgeon, communications director for a nonprofit credit counseling service in Michigan, says she'll never forget the day she realized she owed more than her home was worth.
"I was at work, saying, 'Can you believe I can't refinance my house?'" recalls Pidgeon, who had made timely payments on her 30-year mortgage for nine years and has a credit score over 800. "Then a [colleague] said, ‘You're upside down -- like our clients.' I thought, ‘My God -- I am?' I thought that happened to people who had $50,000 on credit cards and refinanced into adjustable-rate mortgages."
A Canadian immigrant who became a U.S. citizen, Pidgeon bought her home in 1999. Her mortgage broker said she qualified for a $240,000 loan -- on her then-salary of $33,000 per year and her husband's volatile income as a freelance photographer.
Passing Up the Big, Fabulous House
"Calculations for insurance, escrow for property taxes -- none of that was considered," recalls Pidgeon, who has two children. "Of course we wanted a big, fabulous house, but when I crunched the numbers, I thought, 'If the cost of any one thing in our [budget] goes up, we're going to be in a deficit every month.' It put a lot of pressure on my marriage because my husband said, ‘You're terrible at math; this is a professional who knows what he's doing, and we should get this house.'"Instead they bought a quaint 1918 Victorian for $135,000. Pidgeon, who eventually divorced and navigated a job layoff without ever missing a mortgage payment or accumulating high-interest credit card debt, has refinanced twice -- from 8 percent to 6.8 percent, and then again to 6.3 percent, always locking in for 30 years. She wanted to refinance again when rates slipped under 5 percent, but widespread foreclosures have depressed her home's value; comparable dwellings are selling at or below the $117,000 she still owes.
Pidgeon is emblematic of the financial insecurity afflicting millions of Americans who are being punished despite doing all the right things with their money. Hard work, steady savings, and thoughtful sacrifices haven't protected their jobs, nest eggs, or home values from an economy twisted by fraud and stupidity, coldly indifferent to responsibility and productivity.
Homeowners Underwater
By one estimate, 12 million homeowners -- one in six -- are underwater on their mortgages. In 20 major metropolitan areas, home prices dropped an average 18 percent in November compared to the year-earlier period, according to the S&P/Case-Shiller Index, released earlier this week.
Unemployment rose in all 50 states in December and surpassed 10 percent in two -- Rhode Island and Pidgeon's home state of Michigan. Moreover, in the year following October 2007 -- the stock market's peak -- more than $1 trillion of stock held in 401(k)s and other defined-contribution plans evaporated, according to the Center for Retirement Research at Boston College.
"The new insecurity doesn't look like the old insecurity -- grainy Dorthea Lange photos of Depression-era men and women, their weathered faces projecting despair and helplessness," writes Yale political scientist Jacob Hacker in his book ‘The Great Risk Shift'. "Those who experience it have homes, cars, families, degrees. They've usually tasted the fruits of success, if sometimes only fleetingly. They very rarely end up on the streets or in shelters. For most, insecurity is a private experience, hidden away behind closed doors, felt in quiet despair."
A Fair Question in Unfair Times
Consider a reader's comment last week following my column on the difference between optimism and magical thinking. The poster wrote that he was a computer programmer who had been employed for 25 years, worked hard, lived frugally, and was now laid off. His 401(k) had lost half its value and his home equity had declined sharply.
"Please tell me again why you believe I should be optimistic?" he wrote. "Is it that you expect folks (suckers) in my situation to get up, brush off, and once again toil to accumulate wealth that will be seized from me in one way or another?"
That's a fair question in unfair times. At the very least, we can mitigate the risks of having our hard-earned cash seized in the future by asking ourselves a series of questions:
1. Do you live within your means? How long could you live without your current income if you lost your job? Do you know exactly how much money comes in and where it goes each month? What areas of your budget could you slash immediately? What expenses can you cut back for the next year and reallocate toward a cash cushion?
2. If you consistently ratchet up your lifestyle to match rising income, can you divert half of any raise, bonus, or other increase you receive into savings instead?
3. Have you considered a strategy to obtain severance or other benefits in the event you're laid off? How up-to-date is your resume and network of contacts, and what would be the first five steps you would take to find a new position? Have you investigated your options for continuing or obtaining health insurance?
4. If you are living on two incomes, how can you shift your lifestyle and spending to rely on one for needs and the other for wants?
5. How well do your insurance policies protect you and the people you love? Have you shopped around for the lowest premiums?
6. If you carry high-interest, revolving debt, what is your plan for eliminating it, and how long will it take?
7. Do you have written goals -- short-, medium- and long-term -- for your money that reflect what you value most, with specific dollar amounts and time frames? Do you know how fast the cost of your goal is rising?
8. Do you understand how your money is invested, how much risk you're taking, and what expenses and fees you are paying? Do you understand the tax implications of your financial decisions (and your geographic choices)? If not, are you making an effort to learn about these critical areas of your portfolio?
9. Are you taking good care of your health to reduce the risk of financially devastating medical costs?10. Do you give as much energy to your family and friends as you do to your finances? (Losing your shirt is a lot more painful when you go through it alone.)
The Risks We Face
"Studies consistently suggest that we are good at some kinds of risk assessments and very bad at others," Hacker writes. "And unfortunately, the kinds of risks that we face today -- diffuse, interwoven, mounting, uncertain -- are precisely those we are most likely to overlook. Economic losses for families are often like system failures in engineering -- they cascade from seemingly small events into major crises. Yet few of us worry much about the small events that can set off the chain."
Pidgeon says she never imagined she'd be in her first home nearly a decade after she bought it, but she is focused on the positive. "If I could [refinance], I could gain a few hundred dollars in my monthly surplus and use it to stimulate the sagging local economy," she says. "But my priority was to move to the States and make the most of my education and my career, and raise a wonderful family in a safe, comfortable, and loving environment. Whether I'm paying 6.3 percent or 4.5 percent, I feel very proud that I accomplished that."

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