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Wednesday, August 28, 2013

An American Family's Struggle With Foreclosure

"Kristy, Sweetheart, it's time to wake up or you'll be late for school." For Karen Munroe's children, the battle with the blankets at 6:30 in the morning was inevitable. Then it was followed with getting the whole family dressed, fed, and lunch packed.

Karen Munroe had the life that many families could only dream of, a wonderful husband, 3 beautiful children, and a wonderful home to live in. Her husband was Vice President of Sales for one of the most popular children's toys called Jiggles. With gross earnings of $275k per year, full benefits, and added incentives, Joshua Munroe and Karen Munroe had a very comfortable lifestyle.

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Joshua and Karen Munroe had been married for about 12 years. They met about 14 years ago in Irvine, California at a local restaurant. 2 years after that, they were married and moved to Laguna Beach, where they had always dreamed of living. Nice neighborhoods, less than half a mile walk to the beach, and a beautiful 4 bedroom, 2.5 baths home.

With a down payment of 20%, the Munroes were able to purchase their home in 1996 for $550k. During that period, the average interest rate for a 30 year fixed was about 7.5% for a Jumbo Loan. The Munroes had an interest rate of 8.0, which they were satisfied with due to their 30 year fixed program.

Then a positive economic turn of events that took place in the late 90s caused a decrease in mortgage rates, which caused a surge in mortgage programs, and then a rise in housing markets. The competition increased between banks and other lender institutions. As incentives grew for the lenders and their employees, more and more borrowers were able to qualify with very little ability to repay their debts.

When interest rates dropped to an average of 5.5%, the Munroes no longer thought their interest rate was a good deal. They saw this opportunity as a possibility to have lesser mortgage payments and also a chance to have a piece of the equity they were counting on. After all, 2002 had become a good year for Joshua as his income increased from $150k to $200k per year. Their children were 5 and 3 years, and the other was 10 months old. They knew they needed to make a few adjustments in their home so they could live a little bit more comfortably with now 3 children to look after.

The Munroes needed some money to renovate their home from a couple's home to a family's home. In addition, they thought of going on a vacation that they had been talking about before their 5 year old was born. They also thought of saving some additional cash in case an emergency occurs.

The value of the Munroes' home increased to $750k in 2002. They decided to take out about $200k from their equity plus $12k in fees. Therefore raising their loan amount from approximately $408k to $620k. However, the difference of rates from a 30 year fixed to a 3 year fixed was at least 1.25%. The difference of their payments would be at least $500, which could go towards one of their 3 vehicles, the children's private schools, or other monthly expenses. After a long discussion and a review of the reports of the current economic data, the couple decided to go with the 3 year adjustable rate, which would be fixed for at least 3 years. At this time, they thought that they could always refinance due to the possibility of a tremendous increase of value for their home.

In mid 2005, the Munroes knew they had to refinance their home as their 3 year fixed was about to be over. At this time, Joshua had been thinking of investing in a couple of properties in Orange County. Many of Joshua's friends who bought properties in 2002 had immediately become wealthy with the homes they purchase and sold. The value of homes continued to rise along with their Laguna Beach home, which had immediately risen to $1.10 million. Joshua thought that if he could get a hold of a couple of good deals on newly built properties in Irvine, he may well be on the same level as some of his friends in a couple of years.

The Munroe's refinance in 2005 resulted in a loan amount increase of $858k. However, they had 2 additional investment properties, which had about 10% equity. They were able to find renters with good credit histories and the ability to make their monthly rental payments with their high incomes.

At the beginning of 2008, Default Research, which provides one of the most updated foreclosure statuses in the United States, stated that foreclosures in California increased to about 433%. The housing market's bubble as it appears, had burst. Fixed rates were becoming adjustable, refinances slowed down, and the ability to repay debts was slowly taking a dive.

The effects of the mortgage industry has promoted to the large number in unemployment, including that of Joshua Munroe's. As the unemployment rate increases, the consumer's spending decreases. Therefore, the company that Joshua's family were once very comfortable with, forced them to make a complete change in their lifestyle. The Munroe's high mortgage payment of approximately $7200 per month, were no longer possible. In addition, Joshua's Irvine properties rapidly decreased in value. Joshua's tenants had to vacate due to problems with their rental payments. The Munroes tried to sell the property, but was unable due to its negative value. As a result, the Munroes had to foreclose on 2 of their properties and were forced to make a short sale on the Laguna Beach home they had lived in for 12 years.

Joshua and Karen Munroe currently live in a small condominium with their friend in Corona, California. Their children live about 30 miles from them in Karen's parents home, who own a small, 2 bedroom house. Joshua and Karen are hoping to make a quick change in the situation, but unfortunately are tied to it until their unemployment and poor credit status changes.

Joshua and Karen Munroe are among the many American families who suffer from the fall of the housing market. However, despite the increasing number of foreclosures and unemployment rate, the price of goods continue to rise, burning deeper holes into pockets of income earners.

The Munroes are just one of the many families in America that are suffering from the unfortunate mishaps of the foreclosure market. Perhaps Henry Louis Mencken had a point when he said, "economic independence is the foundation of the only sort of freedom worth a damn".

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