Search results for: mortgages

As Spring came this year, the news was filled with reports that we would see an especially large crop of ciccadas this year as the 13 year brood is coming at the same time as their 17 year cousins. But it isn’t just insects emerging this year as we learn of the mortgage industry’s version of the 17 year insect. The danger of these critters is the bite they can take out of your home equity.

If we role the clock back to 2007 Americans were furiously buying homes and fulfilling other needs using second mortgages to invest or get what they thought they needed. Second mortgages were being deployed to finance home improvements and second home purchases as well as debt financing and other stuff. Stocks were in a three year bull market. People loved the concept because back then mortgages were in the 5-6% range, at that time a 30 year low. And, recall this, second mortgage interest was largely deductible.

Result: Americans took on a huge amount of mortgage debt; both primary and secondary. Then in December 2007 the sub-prime mortgage market began to wobble. Three months later Bear Stearns collapsed. By September the Treasury had to take over lenders Freddie Mac and his sister Fannie Mae with Lehman Brothers folding the following week. The housing market collapsed, especially in resort markets like Florida. People across the country were living in $300,000 homes that now had $450,000 of mortgage debt.

When you take a mortgage you sign a promissory note to pay the amount loaned over time and you pledge your house as security for that loan. The lender stuck the note in its file cabinet and recorded the mortgage at your nearby courthouse so that anyone could see what debt you owed. There were lots of defaults in 2009 as people lost jobs or the income needed to pay both mortgages. The second mortgage lenders did not aggressively chase the debt because if they foreclosed on the house, the resulting sale would barely pay the primary mortgage lender. As the economy slowly dug out of the 2009 recession, many borrowers claim the “forgot” they had these loans. Usually, lenders who are defaulted upon make a lot of noise but 2009-2010 was a tsunami of default such that big lenders couldn’t keep pace with demands for payment. Things got very quiet and borrowers certainly weren’t hustling to resume payments for debt on a home that exceeded its value.

Meanwhile, smart money private equity investors were buying up these second mortgages for cents on the dollar. The debt they bought was in default, but default debt comes pregnant with all kinds of interest and penalty clauses…much like what credit card lenders do when you miss a payment. For a long time, these “investors” stayed underground while the economy and home prices stabilized. Then came Covid and suddenly home prices shot through the roof. The $300,000 home of 2011 was now a $525,000 home and the first mortgage had been paid down from $250,000 to $200,000. Thus, 2011’s negative home equity became today’s $300,000 in positive home equity. So, in a divorce setting, wife is getting the house and with it that $300,000 equity in equitable distribution. One day wife goes to the mailbox and there is a letter from Speedwagon Private Equity. They acquired the second mortgage husband and wife gave Countrywide mortgage company back in 2011 and since no payments have been made on the 2007 Countrywide second mortgage, the balance due on that loan is now double what it was when the loan was taken, call it $100,000. Please remit your check to Speedwagon for $100,000 in the next thirty days or they will begin foreclosure proceedings on the second mortgage.

Hold it. Wait. Wasn’t that debt forgiven? What’s a Speedwagon and how did a $50,000 loan become $100,000 without me or the ex spouse knowing about it? These are perfectly normal client questions. Unfortunately, the answers are not going to make them happy. You signed a note. It had all kinds of nasty interest and penalties if you did not pay. You didn’t pay. You didn’t get anything that said your obligation was discharged or the mortgage was cancelled. If you had seen the obligation discharged, you would have been taxed on that income. So, these Speedwagon people have been lying in wait for you; waiting to see if your home value would rise high enough that they could come after you for what you borrowed plus all their crazy interest and penalties. And you may have settled your divorce with your spouse assuming the debt had disappeared. Now the letter says the note is due and if not paid, foreclosure will begin to sell your house and pay the forgotten debt.

Implausible? No. National Public Radio is reporting that these letters are being sent and that foreclosure proceedings are coming soon after because not many folks have a spare $100,000 to satisfy the debt.  They indicate that some of the interest and penalties may violate consumer protection laws and that can slow down the litigation or induce some compromise on the amount claimed. But if you borrowed the money, you have the burden of showing why you didn’t have to repay it.

This presents a divorce issue as well. Most lawyers figure that people know what mortgages they have signed. But this is a new phenomenon. Ignore just about any other debt and your mailbox and answering machine fills with demands for payment. But these second mortgages are like cicadas. They are emerging from the ground after a long hibernation and their bite is substantial. It may be provident for lawyers and clients to check title records to search for recorded mortgages, long since forgotten.

The NPR article is here: https://www.npr.org/2024/05/10/1197959049/zombie-second-mortgages-homeowners-foreclosure  

Early in this writer’s career lawyers used to have to be careful about possible capital gains tax on the sale of a personal residence. Before 1997 the exclusion was $125,000 per spouse and $250,000 if the taxpayers filed jointly. In 1997 Congress doubled the exclusion to $250,000 and $500,000 for joint filers.

That was a big exclusion; then. It doesn’t look so big now and in our modern world, you and your soon to be ex may want to think about that before closing out your separation with a decree of divorce. Because, to claim the $500,000 exclusion you need to be married in the year when the house is sold and that means married on December 31 of that year. Should your decree become final a day, week or month earlier than December 31, the exclusion is capped at $250,000.

So, what does this mean in practical terms? I buy my house in 1992 and I pay $200,000. In 2024 spouse and I are wrapping up our divorce. The house is worth $600,000 which means after commissions and taxes the net sale on which tax may fall due is roughly $300,000. If we file jointly for tax year 2024 (which is to say in April 2025) no worries because we jointly have a $500,000 exclusion and even lawyers understand that $300,000 is less than the $500,000 exclusion.

But we are both impatient and our families are anxious to see the conflict concluded. So, we divorce now and then sell the house. That’s not a problem because if we sell the house jointly even though we don’t file jointly each of us will claim half the sales price net of sale costs ($550,000/2= $275,000) and then claim half of our $200,000 basis. That makes for a gain of $175,000 each, still within the $250,000 we are each allowed to exclude on a primary residence. $275,000 minus $100,000 yields a $175,000 gain on each of our returns and that is blessedly less than the $250,000 exclusion we have when filing as individuals. Note that in the capital gains world the amount you paid off on sale to retire your mortgages is not relevant to the calculation.

The problem emerges when the divorce is processed and the parties have agreed that one of them will take the house. Under Section 1041 of the Internal Revenue Code, the person getting the property in a divorce gets what is called a “carryover basis”; the basis from when the house was first acquired. Now that person is single and his/her $350,000 gain is protected by a single person’s $250,000 exclusion. That yields a $100,000 gain on the sale that is taxable at federal rates that can be 15-20% depending on your other income. In real terms it means that up to $15,000 to $20,000 of the proceeds will have to be paid to Uncle Sam in addition to the 2.8% Pennsylvania will snag without any exclusion. That’s another $9,800 in state tax because there is no exclusion on the $350,000 in gain.

As we said at the outset, real estate prices did climb through the 1990s and 2000s but homes in the $300-700,000 range have taken off in value since 2019. This also seems to be true with seashore properties of all kinds in recent years.

If you are the spouse who will be “getting” the appreciated home in a divorce, just make certain that someone does a calculation of what capital gains tax may be baked into your home’s increased value while you held it. That gain can be offset by capital improvements to the property (e.g., pool, new garage, re-construction) but repairs (paint, replaced roof etc) are not counted. IRS Publication 530 is the source for those distinctions. Realize as well that if you operated a business out of the house and decided you wanted to deduct a portion of the household expenses for the portion occupied by your business as depreciation, those deductions may get added back when you sell the house. Lots of people took the “home office” route during the pandemic but most did not realize that yesterday’s deduction could be tomorrow’s income when you are selling. And in cases where there has been a home office for years, the potential recapture of those deductions can be big.

When I circled back to review some of the regulations governing the tax aspects of these transactions, it became clear that this 700 word analysis is “superficial” at best. Suffice to say, if you perceive that you are getting a property or selling a property with more than a $250,000 gain, you need to convey that to both your lawyer and your tax adviser and see how they analyze the tax consequences of sale or transfer. When you do that make certain you collect data on the purchase price and capital improvements or deductions taken during your ownership. Otherwise your advisers will be left to guess; never a good method

Whether you are getting married or divorced, it is helpful to understand what will happen to the assets and liabilities that you have or had at the time of marriage.  This is because assets and liabilities that you have before you get married are treated differently than those you get during the marriage if you are divorced under Pennsylvania law.  Here are five facts about your premarital assets and liabilities under Pennsylvania law:

  1. Premarital assets are any assets that you own on the day that you get married, such as checking accounts, savings accounts, investment accounts, retirement accounts, real estate, vehicles and jewelry.
  2. Premarital liabilities are any liabilities or debts that you owe on the day that you get married, such as credit card balances, student loans, tax liabilities and mortgages.
  3. The value of your premarital assets on the day of your marriage will be your separate property if you get divorced so long as you kept those assets in your name alone, which means that you will get to keep the value of your premarital assets that remained in your name alone as of the date of your marriage after you are divorced.
  4. The increase in value of your premarital assets during the marriage will be marital property and will be divided in the divorce.  For example, if you owned any financial accounts, retirement accounts, or real estate when you got married and those assets increase in value during your marriage, only the increase in value of those assets will be considered marital property and will be divided in your divorce.
  5. Any of your premarital liabilities that still exist when you get divorced will be your responsibility to pay and will not be divided in your divorce.

Every day there is another article published beginning with the ubiquitous question: “Can I retire if I have……………?” The blank piece is filled with all kinds of trivia. Can I retire if …

  1. I am 55 and will have social security of $1250 a month at 62 and $700,000….
  2. I am 50 and will have social security of $1800 a month at 67 and $500,000….

The scenarios change every day and the “experts” typically weigh in with anodyne advice that is anything but definitive.

In their defense there is nothing about this topic that is definitive. Just ask someone who had their retirement in an S&P index fund in late 2007 and saw it fall by almost half by early 2009. The concerns become even more acute when one of the contingencies to be considered is divorce. We are all conditioned to address contingencies such as the cost of life care/memory care at the end of life. But nothing puts a crimp in a couple’s retirement plan like dividing the retirement pie in half. It is one of the most troubling questions divorce lawyers face. The client is looking at us as we show them what an equitable distribution looks like and their response is: “Will this be enough for me to live on?”

To answer that question requires serious research. You won’t get it from Suze Orman or Ed Slott. Their advice can be useful in terms of strategies. But, effective retirement planning begins with a pencil, paper, checkbook register and calculator. “What am I spending today and how can I change that once I am off the payroll?” Part of that is looking at the outside resources. What are your social security options? They change depending on when you file for benefits. Once you reach 65 you become Medicare eligible. That’s a cost savings in relation to private health insurance but you may still be paying for Part B if your historic income is high. Then there are the” gap plans” and the often elusive lure of Medicare Advantage.

But the true starting point is your largest budget item and that is housing. You may be nearing the end of a 30 year mortgage. That’s a huge savings if your housing cost will soon be reduced to real estate taxes and homeowner’s coverage. Unfortunately, many prospective retirees have clouded the picture by refinancing their primary mortgage or taking second and third mortgages which will remain due well into retirement.  The residential real estate market has been quite generous in recent years, but many retirees see that while they can now sell their single family home for $700,000, a downsized condo or townhouse has now bloated into the $400-500,000 range. And those come with the inevitable “community fees and assessments” for the fellows who will now shovel your snow or clean the fountain in front of the building.

Health costs are the most challenging to budget for. But, we also see people who have sticky habits when it comes to the cars they drive and the vacations they take. In other words, it’s tough to trade down to a less expensive vehicle and a week in March to watch the Phillies or Pirates prepare for the upcoming season has become a fixture in your calendar. Not to mention the week in Sea Isle where your kids and grandkids all frolic in the surf at the house you rent in Wildwood. These are the expenses that require a hard look in a world where your income will be fixed to social security and a draw on your retirement accounts. Those sources are all you will have to get to the finish line; wherever that line may be. Curiously, if you remain healthy, there do seem to be an abundance of jobs at your local stores at $15-20/hour if you are willing to balance work with retirement.

Circling back to the beginning, let’s assume you have retirement and other income producing assets of $500-700,000. How much of that can you reasonably draw on? This has become a new battleground lately in the world of financial advice. Earlier this month Baron’s published a retirement supplement, affirming what is termed the 4% rule with qualifications. This morning Moneywise reports that Suze Orman thinks 4% is way too risky and insists that you need to spend as little as possible but not more than 3%.

Using $600,000 as a median, 4% allows a draw of $2,000 a month while 3% cuts that to $1,500. That will be supplemented by social security. The average benefit this year is reported as $1,767 per month but you can log on to see where the government wants to peg your benefit. https://www.ssa.gov/myaccount/?gad_source=1&gclid=CjwKCAiA_tuuBhAUEiwAvxkgTrYeniEoVvGMZ_60QDEva_lylBoeU3K6GIWAjBmzqKov5gg492vG

Now we have some real numbers ranging from $3,267 to $3,767 per month. There are going to be some taxes due on that amount although chances are you will be in a much lower tax bracket and most of your social security will not be taxed federally.

Again, playing the average, if your draws on retirement and social security payments come in at $3,500 what expenses can you afford at $115 a day. This is where the rubber meets the road. Needless to say, if the retirement account and after-tax savings (brokerage, bonds, bank assets) total $1,000,000, your retirement draw is $2,500 to $3,300 supplemented with social security. That’s why ALL the experts are encouraging people to save early and often.

The savvy reader also recognizes that most folks also have home equity and in many cases it is quite substantial. But accessing it is where the questions abound. Of course, you can sell but a substitute home is going to consume a lot of that cash and the rental market is a thin one where rents have been rising. The reverse mortgage is the new tool on the block but from the reading we have done, this is not a do-it-yourself transaction. A late tax payment or your election to rent the house could trigger a technical default that could require a sale. Here’s a useful on-line guide. https://reversemortgageguides.org/reverse-mortgage/pros-and-cons/

The Barron’s article by Elizabeth O’Brien observes that the 4% rule is a guide and not a fixture. In flush markets such as 2024 (S&P up 24%)  the retiree has room for some indulgence. But then in a down market, you are liquidating assets in a depressed market which suggests that some expense cuts may be in order. Two challenges lawyers commonly see are subsidies for adult children who are themselves struggling. Realize that your Job 1 is getting to life’s finish line without being dependent on your kids. The second place where clients really can’t help themselves is pet expense. We have all read the stories about people eating one meal a day because the family pet needs to eat as well. But when Fido or Topcat reach their end, realize that before you shop for a replacement, the average dog or cat is costing $100 a month.

So put down your articles about whether $500,000 is enough and substitute that pencil and paper to figure out what your retirement will look like based upon your assets and your needs. And take some solace in the fact that the 10 year Treasury yield is 8x greater than it was four years ago.

Silt, Colorado is a pretty tiny town: 3,500 people. Not otherwise on America’s radar until two former spouses ran into one another at the Miner’s Claim Restaurant on Saturday night. We don’t know if that was by accident or design, but we do know that Jayson Boebert telephoned police for assistance with what cops call a “domestic.” The first round of facts suggest that his former spouse Congressman Lauren Boebert punched him. After the fact, Mr. Boebert offered to the Denver Post “I don’t want nothing to happen. Her and I were working through a difficult conversation.”

In the domestic violence world and in many other aspects of the divorce world, you can’t unring the bell. There was a time when police would be summoned and after a visit, matters would go away; as Mr. Boebert suggested it was all just a misunderstanding.  Then police began to be sued for dereliction of duties in settings where “misunderstandings” were ignored and people later ended up dead or seriously injured. So today, when you dial 9-1-1 you need to realize that the police arrive to protect you but also to protect themselves and their municipal employers from lawsuits alleging they did not do enough to protect the public.

Until twenty years ago, cops would try to calm the situation and go home. Today, they are pushing people to file for relief under the Protection from Abuse laws and, often arresting one party for the crimes of assault or terroristic threats. Candidly, they are not very happy to encounter situations such as occurred in Silt where they come with lights and sirens to protect lives and find a 6 foot 3 inch 43 year old man say “Never mind” when asked how the cops can assist in protecting him from his 5 foot tall former wife.

Lawyers tell clients: “If you are in danger, call the cops.” That’s just common sense. But that advice is pregnant with other risks which are really unsettling and underdiscussed. If you are the spouse of a physician, an educator, a child care worker or anyone who interacts with the public, your “domestic” call could trigger a crisis. Many counties don’t make protection from abuse claims public. Perhaps that is because almost half of them are not prosecuted or withdrawn. But should the cops decide the incident merits an arrest, the world will be notified in one way or another. We have had “domestics” where the arrest has ended on the front page of the daily local paper; not because the alleged violence was noteworthy but because of the people or circumstances involved. At a minimum, any arrest is published on the state’s judicial portal.

https://ujsportal.pacourts.us/CaseSearch

An arrest is notice to the world that the person arrested may be a danger. Suppose you opened your newspaper or your “Patch” feed to find out that your physician has been arrested and charged with assaulting his/her spouse. You have an appointment for the next day with that physician. Are you going? Suppose you are the person managing that person’s medical practice. Do you want to continue to employ the doc who made headlines for allegedly smacking a spouse or a kid. Of course, that person is innocent until proven guilty but when 30% of the doc’s patients  are calling to cancel or “re-schedule” procedures, who bears the pain of the hit on the practice’s revenue? Again, the Boebert case demonstrates that often the parties want their public conflict to just go away. But the local paper isn’t going to put the news that charges have been dropped above the front page fold when that occurs.

As lawyers we often have to present these realities to clients. They are justifiably angry because they are victims of their spouses’ behaviors. But if the news becomes public, employers feel obliged to terminate the alleged perpetrators to show the public that they are sensitive to customers/taxpayers/patients and their safety concerns. The physician earning a huge income and supporting a handsome lifestyle for his/her family is suddenly terminated because of a dust-up in the bar at the Miner’s Claim on Saturday night. Children who weren’t there and had nothing to do with their parents’ dispute are now taken from private school because the money isn’t there to pay after the doc is terminated.

It isn’t just physical violence. We commonly see clients who show us joint tax returns that are patently incorrect. Some are just stupid. Most are borderline fraudulent. When we tell the client that you can’t finance two houses, three cars and two private school tuitions on $10,000 a month in net earnings, their response is that they knew nothing about these misrepresentations. Then we have to explain to the client that the return is joint and that the liability for underreporting income is joint as well. Often the client will proffer that he or she is an innocent spouse; had no idea that income was underreported. At this point we have to gently “do the math.” “So, the return shows income of $10,000 a month net of taxes. From that you paid two mortgages totaling $7,500 a month, two tuitions summing to $5,000 a month and three care payments of $800 each. That’s basically $15,000 a month before food, clothing, gas or utilities. How do we tell the IRS that you didn’t know what these things cost when you live in the houses and drive your cars to take the kids to school?

Rule 1 is self preservation. If you are in real danger, you need to call for help. But assuming that Jayson Boebert was clocked by the honorable representative of Colorado’s 3rd Congressional District, perhaps he might have chosen to dine at one of Silt’s other culinary establishments and ordered a side of ice to reduce the swelling.

I last did a movie review in May 2020 and at that time confessed that I rarely watched movies and usually missed all the deeper meanings trapped in the plots. So, caveat emptor here, especially on the movie part.

Perhaps I am the last person in America to see it, but I watched Barbie. And as it unfolded, I felt as if I was watching 40 years of my life as a divorce lawyer. The movie is, of course, a parody. But it isn’t. As a child growing up in the 1960s and 1970s, Barbie and Ken really were paradigms of what we were encouraged to be. Ironically, Barbie was introduced in America in 1959 three years after William Whyte published his groundbreaking book The Organization Man. That book suggested that the zeitgeist of “conformity” prevalent in the 1950s was strangling American ingenuity and progress.

The movie mocks that age of conformity in which no one could be too thin, too stylishly dressed or too cheerful. But it also unveils much of what I heard in initial interviews with both men and women who came to me to discuss their failing marriages. Even today, a half century after the Equal Rights Amendment passed in Congress we live in a world where highly talented women will sit across the table and ask me whether it’s ok to separate. And equally talented men will tell me that they are spying on their spouses or engaged in other behavior that radiates a perverse need to “control” their families. The movie unwraps these still surviving cultural norms in a way that is both amusing and enlightening. Its central theme is that it’s ok not to be Barbie and Ken. In fact, it is often destructive and demeaning to the person and their relationships. The presence of children in the film is also telling. Often marriages that start off well and with mutual respect will start to disintegrate when the kids come along because there is now a perceived need to become perfect parents, just as Barbie and Ken would be.

How did we get here? For this I offer David Stebenne’s 2020 book about American life and culture 1929-1968 titled Promised Land: How the Rise of the Middle Class Transformed America. Stebenne’s history reminds us that in 1929 the middle class was just beginning to form as businesses grew large enough to require not just owners and workers but people who managed the workers, ordered the material they manufactured and kept the books. This was a day when the average American died before age 60, often of infection or tuberculosis and lived in a world where there was no social safety net. For all but the rich, life’s focus was on survival and not what Ford’s latest Mustang would look like or whether Botox was a force for good or evil. The national programs created by the Roosevelt administration coupled with the demands of World War II created a culture of conformity and uniformity. Those who did not conform to the new national programs created for banking, mortgages, student college subsidies and product rationing did not “get” mortgages, student loans and subsidies or tires and meat. Even after the depression and the war ended, the demand for products made in the U.S. caused by the war’s destruction of European and Asian economies enforced conformity at all levels to achieve high levels of productivity. As the middle class grew this demand also brought about money that could be allocated for the extras in life like designer shoes, golf clubs and trips to Disney. If your neighbors in this new middle class driven America vacationed at Disney, were you a “lesser” parent if you didn’t do the same?

Stebenne’s book ends in 1968 probably because by that point the die of middle class life was now cast. You bought a car every 4 years, you sprayed yourself with “Chanel” or “Obsession.” Your kids went to college because that was how they got ahead. This was all captured by Billy Joel’s 1982 song “Allentown” with its iconic line: “Every child had a pretty good shot to get at least as far as his old man got.” Joel notes then that industrial America was in decline. The computer and electronics age has substituted for that decline but also signaled that perhaps humans aren’t as useful or productive as we like to think ourselves.

This has contributed to much of today’s anger and malaise. Job security, home ownership and the certain success of a college degree are now all in question and it’s disquieting. But if you look at the world from the perspective of 90% of Americans as they lived in 1928, our life is one imbued with unprecedented health, wealth and the time to enjoy both.

Meanwhile, we still pine for the good old days and old values. What Barbie does is to tear down the mirage that Barbie and Ken ever really existed and that theirs were lives of unbridled security and joy. The child character Sasha is well worth watching. At first she completely rejects Barbie but over time she begins to see that Barbie is an enticing concept but not “reality.”

People in their 20s and 30s today who are forming domestic relationships of any kind are often trapped in a world where their parents sought to emulate Barbie and Ken. The results are mixed because the ideal was illusory. These young folks come at life with the approach of 15 year old Ariana Greenblatt who plays Sasha. There is much to learn here about how relationships come heavily imbued with expectations. This movie challenges us to ask whether those great expectations have anything to do with real happiness.

It’s a phrase this writer didn’t know about. But there it was in a Forbes Magazine article on October 14. In short, a “doom loop” is when a house of financial cards starts to tumble. A couple creates a tangle of assets and debt; typically funded by two incomes. Suddenly, one of the incomes disappears. The typical causes are job loss, divorce or drug addiction. It can also happen when there is unexpected medical debt or variable rate debt, whether mortgage or personal. The Suze Ormans and Ed Slotts of the world tell us we should all have 3 months worth of expense money sitting in the bank. But Forbes says we don’t and, by the way, divorce and drug addiction just don’t disappear after 90 days.

We tend to think of homelessness as something that occurs to people who are utterly without resources. But, if you have been paying attention, you may have read or heard about people who had substantial jobs/careers at one point, yet who fall through the cracks because they have no savings.

Today, we often see parents come to the rescue. Either good savings habits or dumb luck have left them with resources that are not needed for immediate consumption. So, they intervene with funding to make certain the grandkids don’t lose their home or get kicked out of private school. As divorce lawyers this pops on our radar with some frequency. We are in the middle of a divorce and that is already a taxing unbudgeted expense. Then one spouse loses a job or falls prey to oxycontin. This can create financial free-fall unless a parent intervenes.

What we don’t see and ethically cannot discuss (except in blogs) is the fact that the rescuing parents can also become victims of their child’s doom loop crisis. In the typical case, as lawyers, we represent your kids in the divorce. The crisis hits and the parents come to the rescue, covering late mortgage and car payments. Time moves on and the payments start to mount. There’s the orthodontist and the piano lessons and something for Christmas while mom is in rehab or dad searches for a job. The 90 day lifeline that was supposed to be in savings is now a 180 day or 365 day lifeline and the parents are pulling money out of retirement accounts for needs they never budgeted to have; their child’s needs. The parents doing this funding will sometimes be on phone calls lawyers have with their clients and they will say things like: “This is costing a lot; when will it end?” As lawyers (a) we don’t know and (b) we are representing your kids and you are talking about your financial future and not our client’s.

The lesson here is that when the pin of financial stability gets pulled and the doom loop begins, parents do come to the rescue. It’s what families do for each other. But parents need to set limits to their contributions and insist on a plan that allows their escape from their children’s financial responsibilities. We have seen parents jeopardize their own financial security in the name of rescuing a child with overwhelming debt. They have funded business interests for their kids or paid off mortgages with retirement money they need for themselves. The trouble is that if those parents are fully retired, they have a disadvantage their children do not. They have little to no ability to replace the money they have plowed into supporting their son/daughter/grandchild.

If you are a parent summoned to your child’s financially burning household, approach carefully. Of course, you can cover next month’s mortgage and car payment. But can you do that for a year while hoping that the downward spiral abates with a new job? Unfortunately, your kids (the ones in trouble) see you in a mortgage free house and with money in the 401K. That’s true but do you really want to sacrifice your own financial security so the piano lessons or private school can continue? There needs to be an exit strategy where the kids sell their home or trade in their cars and resume a humble lifestyle. There may even need to be a bankruptcy. As the Forbes article aptly notes, there are many formerly well-off couples who may face these hard choices.

Parents don’t like these choices. But they are very real. And you are doing your kids no service and putting your own well-being in jeopardy if you start supporting a second household without an exit plan.

We should also note that some parents are already in this mess before they realize it. Your son and daughter in law wants to trade up to the big house or get a place at the shore “for the grandkids.” They have solid income but don’t quite qualify for the financing. The parents wade in to guarantee the mortgage or become unspecified “partners” in the new residence. Then there is a job loss or a divorce or another catastrophic event. Now the parents are in the middle of it because the lender for “bighouse” is banging on their door for the mortgage payment. Or, your son in law in rehab refuses to agree to sell “bighouse” because he knows he will go back to making $200,000 a year as soon as he gets out of rehab and off probation. What you needed when you signed these financial documents was an agreement that effectively gave you control of the “bighouse” as soon as there was any default in the mortgage so it could be sold and the debt retired.

The borrowers or co-owners are your children and their spouses. You wanted the best for them when you came to help. But, again, in your days of retirement, you can’t afford to see your ship go down while trying to rescue theirs. It’s just not smart.

Yes, it’s a family law blog but what makes this field so interesting is how many ways people can find to get themselves in trouble. Usually, folks know the risks they get into when they borrow out their 401(k) or trade their S&P balanced fund for bitcoin. Alas, even when they proceed innocently and seemingly in good faith, things can become crazy complicated because, after all, “Who needs a lawyer to buy a house, right?”

            Once upon a time, which is to say before the mid-1980s, almost no mortals bought or sold houses without lawyers at the closing. They arrived at the closing having received the deed and mortgage documents several days in advance. They had read the documents and informed the title clerk (conveyancer) if anything seemed problematic.

            In the late 1980s, there was a real estate boom remarkably similar to 2007 and 2020-22. Buyers and sellers were lined up like cordwood in the halls of real estate brokers waiting for their transaction to be summoned for closing. By this time the fax machine was ubiquitous and mortgage lenders decided they didn’t have time to deal with lawyers. They would simply fax the documents to the closing. People who once hired lawyers to make the biggest purchase of their lives said to themselves: “I’m not paying for the lawyer to sit in the hallway waiting for my settlement to be called.” The lawyers said: “I don’t want to have to review documents involving hundred of thousands of dollars of debt in 20 minutes after they come through the fax machine.” Moreover, if something was wrong, there was no one to call to correct the documents. So, lawyers got out of the residential real estate business. Clients assumed they were already working with licensed “brokers” so they thought the broker would protect them.

            We recently were consulted by a client whose divorce we had handled. The client was in a new relationship and he wanted to purchase a home with his fiancé. They were not married. They would own 50/50 but one “partner” would put up down money (about 25%) while the other was going to pay the mortgage. They wanted an agreement to say that so we wrote such an agreement.

            Today, real estate transactions are happening fast. We were still circulating documents for what amounted to a “partnership” when the closing came. Consistent with the trends of the day, no lawyers reviewed the real estate sales or deed/mortgage documents or attended the closing. What’s a bit shocking as we look at those documents today is that it doesn’t appear that the title insurer or the mortgagee (the lender) read the documents either. What makes this all the more concerning is that this home purchase was big; lots of 00000s on the purchase price and the mortgage debt.

            The real estate transaction closed a couple months ago and our couple is happily ensconced in their new crib. We have been asking about the partnership agreement and became concerned when we saw that the mortgage as recorded said the property was acquired with “rights of survivorship.” That was not the deal we were asked to write as a deed granting a couple property with “rights of survivorship” (WROS) means that if one partner dies, the survivor takes all of the dead owner’s interest. In contrast, if the deed said they held as “tenants in common” or said nothing except the names of the parties taking title, that’s a tenancy in common. That means that if someone dies the dead person’s half interest goes not to his co-owner but to his heirs or as defined by a will. That’s a BIG difference, especially when the transaction involves BIG money.

            Note also that as we reviewed the recorded mortgage, the partnership agreement we prepared had not yet been signed. In fact, it referred to the transaction “to be.” We saw that the transaction had already “been” as it was recorded in the courts. We recently looked at the recorded deed. It’s a tenants in common deed. 50/50. Meanwhile, the mortgage says the property is owned with “rights of survivorship.” So, we have two documents that are inconsistent on their face relating to the terms by which the parties own the property. If there is happy news in all of this, it is that the parties did sign our draft partnership agreement specifying the conditions and terms by which they would hold and manage the property. But they dated that document 10 weeks after they settled on the property.

            Thus, we have a document saying the couple own the property by the terms of a signed agreement. They have a deed recorded many weeks earlier that suggests they may own it straight out 50/50 and a mortgage that says they own it such that if one party dies the survivor takes all. The agreement we prepared says our client puts up the down money to buy the house, but the other partner is the only person who will be obligated on the mortgage. The documents are executed in the wrong order. You want to have an agreement in place before you take title or pledge property under a note and mortgage.

            Is there something nefarious here? Not really from what we can see. But if one of the partners dies in the next 30 years before the mortgage is paid, there could be a legal mess to untangle and the property may be unsalable until the courts untangle the mess.

            The realtor who represented the couple as buyers has 75 hours of training in real estate. That’s less than 2 weeks. Perhaps, you shouldn’t need to be a lawyer to handle legal conveyances. Lenders and title insurance companies should be paying more attention. But again, when people get busy lots of things slip through cracks. This error was patent, but we are certain there are many legal deeds and mortgages out there where the legal description of the property is in error; not just omission of a word or line, but someone pasted a completely different property description on your deed in the haste to get things done. This is a silent nightmare that does not emerge until the buyer tries to sell.

            There really isn’t a clear solution to this. The days when lawyers had a few days to review deeds and mortgages in residential transactions seem to be ancient history now. And lawyers can’t edit real estate documents “on the fly” unless someone at the lender and/or title agent’s office is willing to babysit that event. But it may make sense after your documents are recorded and you have moved into your beautiful new home to take the documents from your settlement to a lawyer and ask “Are these kosher?” This is much more readily done soon after the transaction than many years later when you are told that the property you are selling doesn’t belong to you the way you think it does.

People often ask divorce lawyers how they do it. My stock answer is that it’s like any other financial transaction, except that the transaction is wrapped in layers and layers of emotion.

Usually, that emotion has to do with the relationship and the breach of “trust.” But in markets like the current one, emotions related to financial insecurity and financial ignorance make matters even worse.

            Year to date the market is down 13% as of the close today. Interest rates on mortgages have jumped from 3 to 5%. Inflation is expected to be 6.3% this year. So, if you are divorcing and over age 40, there is reason to be concerned. Meanwhile, I spoke with colleague last week about the second home market and he reported that he can’t settle a divorce because each spouse thinks the other one will make a killing on a shore property because the market is so hot. I offered that interest rates will probably dampen the market to which the response was that the buyers in resort markets are paying cash of $2 – $5 million to secure their piece of paradise.

            The inspiration for this opus is Lindsay Bryan-Podvin’s post today on Vox about money and emotions. In a nutshell, Lindsay reminds us that “Emotions drive most decision making” and tells us that research shows our emotions toward money are pretty well formed by second grade. And perhaps the deepest fear people develop in their first seven years is fear of understanding how money works and our financial lives are organized. If doctors dealt with trauma patients the way most of us deal with money, every patient would be dead from indecision.

            It’s a bad market. But guess what? If you had $100,000 invested in a SP500 index fund 30 years ago, you have a million today. If you didn’t get that $100,000 together until 20 years ago, you still have $400,000. If you waited another decade you have $322,000. In the Philadelphia region if you bought a house 30 years ago for $225,000, you can probably put a $650,000 “for sale” sign out and reap your $380,000 reward. We are coming off a remarkable run of wealth creation.

            Yes, the future is uncertain, but on two subjects we should all agree. Obsessing about markets and trying to time market events achieves nothing. Did you or your financial advisor predict that we would have our first worldwide pandemic in a century? Did the Kremlin let you know in December that Putin was going into Ukraine? If yes on the latter question, step forward and claim a Russian oligarch’s yacht because you bought oil in December and you have just about doubled your investment in six months.

            A year ago, when we were all being vaccinated, one of our client’s had lots of stock in a start-up that had just gone public. It opened at $60, shot up to $80 and now rests just under $20. By the way, the company is exceeding revenue targets but even that good news is getting a chilly reception on Wall Street. Meanwhile we have a client with a property at the shore that appraised for $1.8 million a year ago and now seems to be worth at least a million more. These outcomes are the product of fate more than anything else.

            Aerosmith got it right. “Life’s a journey not a destination.” The average life expectancy in the U.S. today is 80 years. If you get to 65 you have a 40% chance of reaching age 90. So where are you today and where will your divorce leave you in that financial plan once the pie gets cut? That’s the only question that does matter. Yes, smart people can sometimes predict markets. Early in my career I represented a fellow who called the October 1987 flash crash and got a lot of press because he had moved to all cash. But it really took no genius to figure out that tech stocks were overvalued in 2000 and that real estate was crazy in 2007-08. Alas, no one predicted the flu or Ukraine. And even the people who saw the 2007-08 problems didn’t really predict the kind of meltdown that nearly occurred. So, every investor needs to realize that the goal is to avoid running out of money before reaching 90 while chasing the gold in the meantime.

            Unfortunately, despite nearly 6 million people in the financial services business, not many will be of much help. They are trained to talk to you about returns and dollar cost averaging, expense ratios and the like. Real financial planning for humans involves thinking and budgeting. And it involves setting emotion aside. That can be difficult.

            So, here is the path you need to follow. And before it even stops, you probably need to look at two paths. In the last 20 years the number of senior citizens being divorced has exploded. You will need one path labeled “Together” and another called “Apart.” Two people together do live more cheaply than two in separate households.

  1. How long is the expected work life? Many clients like to say they plan to work indefinitely. I respond that the fates often interfere with that plan and that work after 70 is by no means assured. Henry Kissinger is still at it at 99. Michael J. Fox was diagnosed with Parkinson’s at 29.
  2. Where am I going to live and is that a sound physical and financial decision? Mobility is a question that changes over time. But for many clients who want to keep the “big house” I ask whether that’s a smart financial decision. The $225,000 house of 1992 is today worth $650,000. The same money (if cash) invested in SP500 for 30 years is today $3,000,000. Note also that real estate runs in streaks. My neighbor sold his house in 2018 for $355,000. Zillow looks right in estimating $514,000 today. Realize as well that there are usually two steps; downsize first and chances are by 80 years + you may need to live in what we politely dub a “community.”
  3. What’s my bare bones minimum expense level? Sure you would like to stay somewhere warm after Christmas. Most people do. But how much does that cost and can you afford to do that in years like 2022 or 2042 if the economy is down. Understand, you only get to run out of money once after you retire. The financial services all like to tell you that you will need 80-90% of your pre-retirement income. That’s the lazy person’s way out and, by the way, the more money they hold on your behalf the more money they make. You need a real budget based on your utility bills, your car insurance, your mortgage.
  4. What’s a reasonable return on the money I do have? Until recently all the “smart” people in the investment community have said you can reliably take 4% of your savings each year, leaving the rest invested. So, if you will retire with $1 million 4% is $40,000 a year plus your social security and any defined benefit pension money you might have. $40,000 is $3,333 per month. That withdrawal from a 401K or IRA will be taxable. On that withdrawal bank on roughly $3,000 ($250 a month) in federal taxes before you start spending. A portion of your social security is going to be taxable and a piece will be deducted for Medicare Part B. You should also look at AARP or others for additional premiums for expenses under what is Part D (Medications).

Some tough news. Morningstar research indicates that 4% withdrawals may be too high and that 3.3% is the more conservative route. This is getting lots of press lately especially given the market decline. You will also see lots of articles about using annuities as a means to mitigate or avoid the problem. We wrote an article about this published on May 12.

Some good news. Interest rates are on the rise. Historically, investors were told to shift away from stocks and toward bonds as they age as a means of avoiding risk of down markets. Not bad advice generally but two years ago a 10 year Treasury bill paid less than 1%. Today we are at 3% and 4% is what most would call “normal.” Interest rate increases are healthy for the fixed income side of your portfolio and provide some comfort in choppy stock markets such as we are seeing today.

5. Having done the scary work of Steps 3 and 4 what “indulgences” can I buy. New car/used car? Club membership? Dining out? Hello Fresh meals dropped off at the door? Purina?

6. Is there untapped equity? The reverse mortgage market pays you the equity you have trapped in your house before you sell it. The fees are high but this device is gaining popularity and acceptance according to today’s Wall Street Journal (6/6/22 pg. R6). Why be sharing a bowl of Meow mix with the kitty when you have $400,000 of untapped home equity? Just be certain to make your real estate taxes and insurances are paid because there are nightmare stories about lenders foreclosing on retirees because they were not.

7. Don’t freak out unless absolutely necessary. Years ago the investment house Glenmede used to pitch putting your investments with them using the voice of an affluent customer who opined that “My lifestyle is very important to me.” The implication was that Glenmede had that lifestyle “covered” and perhaps they did. In the end, this is your life. This is your money. The data show that as we get older we do spend less. Not lots less. Unfortunately, health care needs climb just as you realize that you really won’t need a new tuxedo for New Years’ eve. But for most of us, the days of buying the “must have” Rolex or Hermes clutch give way to replacing the clutch on the Ford.

8. Beware, beware, beware. We have written this before. Very few retirees have the resources to fund the needs of the next generations. If you do, good. But job 1 is getting yourself to the finish line without becoming a burden to your kids. Almost every 40 year old adult looks at an 80 year old parent and can find expenses gramps can cut. Maybe you choose to drop the club or your weekly lottery ticket from Gus to help the next greatest generation with their needs. But don’t break your bank trying to fulfill their needs even if your granddaughter is acclaimed as the best ballerina south of the Juniata River.

In the end, with rare exceptions, our stock portfolios did not double in the last decade because of our genius, nor did our houses go up by a third because of our occupancy. If you had a house or savings, the economy has been kind to you. But, history has taught us that the Wall Street bear does periodically bite even when we are not confronted with a worldwide pandemic or a senseless effort to recreate the Soviet Socialist Republic. Neither Wall Street nor its nabobs know or care how you live. That’s something that you need to take care of after setting aside your emotions related to money and actually planning for retirement.

It’s not actually Aunt Fannie but her Chief Economist Doug Duncan who has concluded today that the party ended in March as interest rates spiked 200 basis points since January 1. Fannie Mae revised new homes sales for March down to 709,000 from an earlier estimate of 763,000. The numbers for April also reflect a continuing slowdown with sales estimated at 591,000. Duncan described this as a normal market response when the Federal Reserve increases borrowing costs to consumers while trying to stem inflation. A report issued by Realtor.com suggests that the market has not lost all its wind, but that buyers are now much more price sensitive.

 

The advice to clients in the throes of separation and divorce needs to be that if you are the spouse keeping the homestead and buying out your husband or wife, be aware that the appraisal or market analysis you rely upon may show “market peak” prices. If the economy slows or the Federal Reserve keeps raising borrowing rates, the herd of buyers is going to thin and prices may actually fall. It is this writer’s guess that the Philadelphia and suburban markets may have some insulation from those prevailing winds for two reasons. First, compared to New York, suburban New Jersey and metro Washington, Philly housing remains comparatively cheap. AND, if remote work stays in vogue many people living along the Northeast corridor may select Eastern Pennsylvania for a homestead because they can get to New York or Washington a few days a week while living in a land where state income tax is a flat 3.07%.

 

Remember, a house is not just “home”. It’s an investment and a big one. Friends who bought  during the 2007 market rush will remind you that many spent a few years “underwater” with mortgages that exceeded fair market value and no one to sell to.