Elbert: In midst of mortgage mess, what's a parent to say?

Most parents at some point have a talk with teenage children that begins: "Dad (or Mom), I crashed the car." Today, many are also having a conversation with adult children that begins: "Mom (or Dad), my house is underwater," and they're not talking about a flood.In financial jargon, the phrase "underwater" or "upside down on a mortgage" means that the mortgage on a house is more than the value of the house.
Recent data show that 28 percent of homeowners nationally and 9 percent in Iowa are upside down on their mortgages.
For a 30-something homeowner, it's a sinking feeling to realize that the $150,000 house that was purchased four years ago with a $140,000 mortgage is now worth only $120,000, while the amount still owed on the mortgage is $135,000.
It's causing young homeowners to seek advice from people they trust, including their parents.
But how does a parent respond?
Is it better to tell them to tough it out and keep paying? Or should you tell them to give up, turn the keys over to the bank and move on with their lives, albeit with a big black mark on their credit report?
Giving advice is made even more difficult by the lousy job market and the fact that people who want to sell their homes to move to new jobs often can't find buyers willing to pay enough to cover the original loan.
It's gotten to the point, said Tom Coates of Consumer Credit of Des Moines, where recent statistics show "people are keeping current on their credit cards and letting their home mortgages go. They figure, 'I'm underwater. It will take them a year to get me out of here.' "
That's not something that Coates recommends.
But he also said it's not good advice to tell someone to keep paying a mortgage that is underwater if the payment is 35 percent to 37 percent of the person's take-home pay. "If they are upwards of 40 percent or even 50 percent, it's unlikely that they can continue for long, unless they can find some way to expand income."

Parents have new role in mortgage crisis

Once children are grown, the parents' role changes, said Mary Riche, a social worker who specializes in family situations.
"When you have young adult children, the transition from being the protective parent who can explain rules and consequences shifts into an adult-to-adult role," she said.
In the new role, parents are more of an adviser, because the lenders are the ones with the rules and consequences, Riche said.
"If you want to have a respectful conversation with your young adult children, then offer them understanding empathy instead of comments like, 'Well, what did you think would happen?' " she said.
A good way to start the conversation is to provide background that explains how the nation's home mortgage mess was created, said Tahira Hira, a personal finance expert at Iowa State University.
"What happened to housing is a very sad thing," she said. "A lot of people did things personally and financially that were wrong."On the business side, she said, brokers provided mortgages to homeowners who they knew could not afford them, and those loans were fraudulently packaged and sold to investors who did not take the time to understand what they were buying.But consumers have responsibility, too, Hira said.
Many were greedy and thought that they, too, were going to make money in what seemed like an ever-expanding real estate market. Or, they took money out of their homes in the form of home equity loans to spend elsewhere.
"They didn't say, 'We know we can't afford this house,' or 'We know we can't afford the down payment,' or 'We know there are dangers to this whole thing,' because ultimately there is nothing free in this world," Hira said.
"Responsible behavior was missing on both sides," she said. "If we walk away now, we are continuing to play that game," she added. "Buying a house is not like buying a pair of shoes or even a car."

Taking long view helps; so does talking

It helps when homeowners look at a mortgage as another long-term investment, said Doug Borkowski, who counsels students and faculty at ISU about financial issues.
"We know that we take some risk when we invest in a 401(k) or IRA," he said, and that over time those investments will go up and down, even though the presumption is that they will gain value over time.
The problem with homeownership, Borkowski said, was that the housing bubble that burst in 2007-08 led homeowners to have unrealistic expectations, just like the dot-com bubble in the stock market did more than a decade ago.
Homeowners need to realize that the downturn in housing "is going to work its way through and then we will have the market rising again," he said.
"Over the long haul the housing market is probably going to average gains of 3 to 4 percent a year," Borkowski said. The current downturn is just offsetting the double-digit gains in the years leading up to 2008.
For young people who can afford their mortgage payments and don't need to move, the answer to the question of what to do is simple, Borkowski and Hira agreed: Keep paying the mortgage.
Things will improve. Stay put and give it time, they said.
But not everyone is in that situation. Two increasingly common scenarios are people who can no longer afford a mortgage because they lost a job and people who need to move to a new job but can't sell their old house.
Even people in a worst-case scenario should never walk away without talking first with their mortgage lender, Hira said. "You have to go and say, 'This is where I am and I need a solution,' " she said.
Having that conversation is important because by now most mortgage lenders are attuned to the problems and offer a variety of options that include lowering the monthly payment by extending payments into the future and, in some cases, lowering the amount due.
Keep in mind, Hira said, that it is to the bank's advantage to keep you paying something.
If the bank won't help, said Borkowski, contact the Iowa attorney general's mortgage hot line at (877) 622-4866, or by going online to www.IowaMortgageHelp.com.
As it turns out, the same skills that got parents through the teenage years can serve them well now: Stay focused and don't panic.
Source http://www.desmoinesregister.com/