Negative Equity - the underwater mortgage

If you purchased a house between 2004 and 2008, chances are that you have negative equity. If you remember the simple formula for equity

equity = what a house is worth - what you owe on it,

Between these years, the cost of houses was rising rapidly in a market that was composed of unrealistic purchasers. Big lending organizations found ways to make money by lending money to home purchasers with few or poor qualifications. This put more buyers into the market and drove the prices of homes to higher levels than a normal market would have allowed them to reach. In short, if you bought a home during this time, you paid too much for it because of irresponsible banks. As this became known, people became less willing or able to purchase homes. "What a house is worth" began to drop about halfway through 2008. The result for homeowners was negative equity.

If you made a purchase at this time and now have negative equity, you are stuck with a huge payment that you can no longer pay. If you no longer have an income stream, a large regular monthly payment will suck up your saved money reserve pretty quickly.

Question: Have you told your loan servicer that you are having financial problems and cannot make the payments anymore? The reason I ask you this is that your inability to pay mortgage payments while living in the house isn't as big a problem for a lender as an empty property. The bank has an interest in keeping you there, even for free. Here's why:

Empty houses spread poverty in neighborhoods that banks own. 

Imagine that a bank is managing twenty properties on your block when you tell them that you can't pay. Their interests are served best by maintaining the value of the other nineteen. An empty house with boarded windows that you moved out of depresses the surrounding property values and lowers the bank's wealth. So they will deal with you. For instance, Bank of America has a homeowner relief program that can reduce (even to zero - but temporarily) your mortgage payment. (http://homeloans.bankofamerica.com/en/service-and-support/homeowner-relief/find-a-solution.html) You may not trust banks, but would it hurt to ask?

If you want to get out of your loan and are prepared to move away from the house, remember that your lender gambled on your ability to pay them back. You could hand them the deed and say "that's the collateral on the loan that I promised." This is called a "deed-in-lieu" of continuing payments. It isn't done very often because it's very inconvenient, and where are you going to put the stuff that had been occupying your 25000 cubic foot vessel.You won't get credit again for a while, but if you don't want credit anymore, but if you have a place to put your stuff, a deed-in-lieu may be your best bet.

There is always allowing your house to go to foreclosure. Banks don't like for you to do this because it costs them too much to take control of your former residence. And the legal proceedings can take up to 2 years to be completed. They would rather have you promise future payments and carry you over for a short term unemployed spell than have to foreclose on you. It's better for both you and them. Negotiate if you can.

Mortgages and Rents

If you are like most people, you have an address that identifies your space on earth, and you pay somebody for the privilege of associating that address with yourself. In each case, you claim the right to uniquely use a vessel of some number of cubic feet for your own private purposes. In my case, I claim to possess a vessel that contains around 25000 cubic feet of space within its walls for me to fill as I deem most appropriate for my needs. Others would say that I own a small 1 1/2 story bungalow with a basement. You either own or rent something that you call home.
Ownership arrangements and rental arrangements are very different from each other. In an ownership arrangement, you will have agreed with someone who has lent you a large block of money to acquire complete ownership over a period of around 30 years by making a series of payments over that long stretch of time. In a rental arrangement, there is no thought of owning the space, you just pay someone else to stay in it. Renters do not acquire equity while owners do. Equity, for those who don't know, is determined by a simple mathematical formula of

Equity = amount it's worth - amount you owe

For a renter, equity = 0. For a homeowner, equity is a positive or negative number of dollars. If it is a positive number of dollars, it can be used as a temporary source of income. If it is zero or negative, it can't. Equity defines your relationship with your housing into three major categories: 

1. much positive equity
2. little or no equity
3. much negative equity

Which of these categories you fall into sets up the choice you make about what your best approach is to your rent or mortgage payment. In category 1, you have options for refinance in a way that can greatly reduce monthly outflow. In category 2, your monthly cash outflow is determined by a previous agreement. In category 3, you feel trapped by your housing. The next couple of posts will focus on strategies and options in each of these categories. I expect to address them in backwards order because 3, 2, 1 is the order of how big your emergency is.

Cutting Expenses

The money you have has to last until several weeks after you start your next job before a money stream is restored. Frugal living is your friend, but that may mean reviewing and denying some of the things you have done habitually. Almost any aspect of life is available in many categories of expense. Here are some things I used to do before the sucker punch and how they were handled during unemployment.

• Go to movies - if continuing, go only to matinee performances. If the habit is dropped, parts can be replaced with a DVD. Redbox Rentals are OK here. When you were employed you bought a large screen TV and promised yourself that this was cheaper than movies. It is. Use it! Popcorn is far less expensive when prepared at home. If you need pop, off-brand pop costs around $.25 per can. This compares very favorably with the concession stand price of $3 for a small. 
• Sports - A professional sporting event costs a lot. College sporting events are far less expensive. If there are athletic facilities at the local community college, that's a better price again. Women's professional sports are far less expensive then men's. Public park pickup games cost nothing to watch. Participants play with a lot of heart.
• Coffee - Give up fancy drinks prepared by fancy people who give themselves titles. The $5 spent at the BigBucks or the bookstore will buy a 12 ounce bag of coffee. Find your old Mister Coffee machine and brew your own. By the way, before there was such a thing as Mr. Coffee, the size of a cup was standardized at 8 oz. The Mr. Coffee carafe is labeled 12 cups and holds 60 oz. That means that Mr. Coffee changed the size of the cup from 8 to 5 ounces. But they didn't tell you to use less coffee. 1 tablespoon per cup means 5 tablespoons per 8 of the little cups that they mark on the side of the carafe. Use less coffee!
• Food - You cannot stop eating. But since your time isn't money anymore, don't trade back money to get more time. Convenience is expensive. Use it wisely. For instance, a large box of oatmeal (the off-brand is OK) costs about the same as 12 pre-measured foil packages, but holds about the same amount as 30 of the packs. Take the time to do your own measuring. You have enough time.

I may get back to this frugality later and will probably look at rents and mortgage payments in another post. Please feel free to comment with frugality ideas of your own.

Network Network Network

There are plenty of employers who say they have jobs but don't. There are some jobs that exist that employers don't tell the world that they have available. And many of the publicly available listed jobs have already selected their candidates but are just filling a company policy requirement that all jobs be posted. Of people placed into jobs, some ---- but only a few ---, are placed through a want ad and search process. Don't cut yourself off from the listings by any means. But the less you have to rely on listings, the better you are likely to do.
Networks are the way to go.
And the biggest and best network is Linked In.  http://www.linkedin.com/
If you are searching for a job, you owe it to yourself to create a profile. There are groups you can join that are about your specific area of expertise. A greater percentage than usual of the jobs that are listed are real searches.
Are you part of a professional organization - even one that you joined as a grad student? Reconnect as soon as possible, particularly if there is no cost to doing so. National organizations in your area of expertise often maintain online job boards. As a general rule, there is no cost for group members to search these. As a general rule, searchers pay for their listings or alternatively, use up a limited number of free listings. This keeps the number of listings down to those that are genuine.
If you have other suggestions, please post them in comments.

Certify your job search

A condition of your receiving unemployment is certification. Every two weeks, you are assigned a Monday, Tuesday, or Wednesday date on which you re-certify. This means that you tell the employment security office that you have been looking for work. Because most of your job searching will be by email, it is a good idea to save all emails related to your job searches. You may, at some point, need to furnish evidence of applications having been sent, but in the first five re-certifications, I did not encounter this demand.
Again, you MUST use Internet Explorer and then browse to http://ides.illinois.gov/individual/online-services.asp to fill in the form. This process is relatively painless and doesn't take too much time. Do it first thing on your bi-weekly certification day.

Get your unemployment!

From the day you are handed the bad news about your termination, you are eligible to apply for an unemployment insurance benefit. DO NOT BE STUPIDLY PROUD! You have been buying this insurance policy with every deduction taken from every paycheck you have ever earned. Yes it is important to get a job. But think of this as a car accident and report it to the insurance company immediately. Even if you are VERY good about getting a new position, you will probably be unemployed a minimum of a quarter of a year while applications are being processed, interviews being conducted, schedules of orientation sessions run their course, etc. Your unemployment benefit isn't much, but it is the only steady income you may be getting until you are in place somewhere else. So take as much of it as you can. You do not begin to receive it until you apply, so apply quickly. It will probably amount to only $200 per week. And most of your funding will have to come from savings, severance, carried-over vacation (if allowed), possibly IRA withdrawals if you qualify, etc. But presume a half year, and you can see that an early start on receiving your unemployment payout is worth $5000 that you wouldn't have had otherwise.
In Illinois, the easiest way to claim your unemployment is to:
1) Make sure that you are using Internet Explorer as your browser. Nothing else will work.
2) Navigate to http://ides.illinois.gov/
3) Your status is that of a "claimant". Within a couple of clicks, you will find yourself at http://ides.illinois.gov/individual/online_claim.asp
4) Fill in the forms using "Continue" buttons until finished. If you have left out any required information, you can insert it onto the form after failed attempts to submit the form. The rest of your filled-in lines will be saved, so the errors are all you have to correct. You do not have to do the whole report from start to finish.