Tackling a mortgage meltdown of their own

Michael and Esther Maston had hoped the fertility drugs would work, but they weren’t ready for the news that they were going to have triplets: a boy and two girls.

“We can’t afford to send three kids to college” at the same time, Michael, a civil engineer for Rancho Cucamonga, recalled saying in the doctor’s office that day in 2001.

Since then, the Mastons have been focused on saving for their children’s college educations and building a retirement fund for themselves. The Walnut couple live modestly and don’t spend recklessly.

But they thought they could cash in on the housing boom in Las Vegas, so they, a relative and another partner bought a three-bedroom house for $328,000 -- no money down -- in 2006 at what would later prove to be the top of the market. Their timing couldn’t have been worse.

The crash in the real estate market over the last 18 months has left the group underwater, owing more than the property’s current value of about $220,000.

“Michael and Esther are examples of the financial crisis that is currently facing our country,” said financial planner Brad Stark, a principal with Mission Wealth Management in Santa Barbara. “Real estate agents, lenders -- and their own actions -- have put them in a situation they should never have been exposed to in the first place.”

The Mastons, both 37, aren’t blaming a real estate agent who may have misled them and they aren’t looking for a bailout, though Stark suggests they take advantage of any help that recently adopted laws and regulations allow. With a tenant paying just over half the mortgage, the Mastons and their partners have cut their annual losses to about $6,000 each.

Even tax benefits from losses are hardly helping. Before they got into the Vegas deal, the Mastons typically received a refund of $2,000 to $3,000 on their income taxes -- money they could use any way they wanted. Now the refund has swollen to $6,000 a year, but it all goes to pay the mortgage, property taxes, homeowner association dues, repairs and other property costs.

“Right now, we’re taking the money and throwing it in the trash,” Michael said. “You can always look back and say you should have done something else. It’s a lesson learned.”

A gamble in Las Vegas

Initially, the Mastons figured they could hold onto the Las Vegas property for five or six years and make a profit. And if it didn’t work out, well, they were young and could recover.

What the Mastons need now is a way to trim their overall debt and help in deciding whether to keep the Vegas property.

“It was a bad decision, but we’re ready to see what we can do about it,” said Esther, a compliance officer with the state Department of Insurance.

The couple pay $51,600 a year, nearly half of their combined income of $110,000, for mortgages on the Las Vegas property and their home in Walnut. There’s nothing left over to add to the $900 they’ve saved thus far for each of their 6-year-old children.

Aside from $578,000 they owe on their home, the couple also have $8,000 in credit card debt, and Esther is still paying off a $15,000 student loan. They do not owe anything on their cars.

But to Stark, their worst problems are two loans totaling $328,000 on the Las Vegas house. The first, at $253,000, is more than the current estimated value of the home, and in a bankruptcy or foreclosure, it would leave nothing to the second mortgage lender -- except $75,000 in worthless paper.

Whether the couple continue to support that debt is the sort of unknown banks are struggling to define.

Stark and Robert Gallaway, a tax attorney in Ventura, advised the couple to get out of the Las Vegas property if they can. It is held in Michael’s name, and his good credit is especially at risk.

Stark and Gallaway said the Mastons and their partners could:

* Try to persuade their lenders to approve a short sale of the property. In a short sale, the lenders would have to agree that the group could sell the Vegas home for less than the amount owed. The incentive is that the lenders’ loss would be smaller than if they foreclosed on the property and resold it. In a short sale, Michael’s credit score would drop substantially.

* Stop paying both mortgages and allow the home to go into foreclosure. The holder of the first mortgage would probably assume ownership of the house to sell it. Michael’s credit would take a more severe hit in a foreclosure than in a short sale.

As with a short sale, the holder of the second could pursue him and his partners for what is now an estimated $75,000 loss.

* Try to work with both lenders to renegotiate the terms of both loans to lower their monthly payments. In particular, they need to change the terms of the first, which now is scheduled to increase from 7% to as much as 13% by 2011.

The Mastons may need to seek bankruptcy protection to keep creditors at bay no matter what they do, Stark said, and they will need ongoing legal and tax advice to guide them through the process.

The couple don’t fare much better with their own home, which they bought in 2005 and has fallen in value by $60,000 in the last year or so to about $520,000.

Though that doesn’t seem like much of a drop compared to ravaged values elsewhere, the Mastons have two loans totaling $578,000 on the home. The first carries a relatively low 5.75% interest rate, but the second mortgage of $163,000 has a sticker-shocking 9% rate.

The second loan was taken out mainly as the down payment so the Mastons could avoid the added cost of private mortgage insurance, which lenders tack on to a home loan when the down payment is less than 20% of the purchase price.

Loan modifications and government aid

Stark urged the couple to go to the lender of the second and try to renegotiate terms, taking advantage of any available government relief.

They should try to obtain a fixed-rate loan at 6%, he said. That could reduce their monthly payment from $1,300 to $975 a month, he said.

“The good thing is that you are not alone,” Stark told them. “The government recognizes the problem. And the banks and lending institutions understand the problem. And you’re not 60 years old with all your eggs in one basket. You have your whole lives to move on.”

One advantage: The Mastons’ government jobs come with benefits that include adequate life insurance, some disability insurance and pensions that should be stable, he said.

Stark estimates that, in 12 years, the full amount of three college tuitions at the UC and Cal State systems would cost the Maston family nearly $600,000 and $300,000 respectively -- impossible amounts on their current budget.

He suggested they send the two girls, Ixchel and Nayeli, and the boy, Usuhe, to junior colleges for two years before transferring them to four-year institutions to cut those costs in half. He also said they should start talking about college with their children soon.

“The biggest mistake I see parents make is when they start talking to their kids about college the year before they are supposed to go,” Stark said. “Bottom line here is to get your children thinking in a certain way now.”

Stark said the couple should pay off their $8,000 in credit card debt before focusing on Esther’s student loan because the credit card debt carries an 11% interest rate while the student loan has an 8% rate.

Esther said she may find a second job during the holidays to help pay down the debts, even though she and her husband see their children only about two hours a day during the week. “That’s a real concern for me,” she said, but a second job is “an option we should look at.”

Michael said Stark and Gallaway’s input has given him a road map.

“This provides me with some answers,” he said. “Now I need to do some more investigation.”

He’s confident that he and his wife will be able to help pay for their children’s college educations. Still, he hopes that at least one gets a scholarship.

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This month’s makeover

Who: Michael and Esther Maston, both 37

Income: $110,000

Goals: Decide whether to keep or sell investment home in Las Vegas. Save for 6-year-old triplets’ college educations and their own retirements. Pay off debts. Stay in their home.

Assets: $2,700 for their children’s education. Pension and other job benefits.

Debts: $578,000 in two loans on Walnut home and $328,000 in two loans shared with two partners on investment property. $8,000 in credit card debt. Esther’s $15,000 student loan.

Recommendations: Reduce debt load by renegotiating terms on the Las Vegas home, selling it or allowing it to go into foreclosure. Renegotiate terms on the Walnut home’s second mortgage to reduce the 9% interest rate. Pay down higher-interest credit cards first and then the student loan. Keep track of every purchase for the next three months to see what other expenses to cut from budget. Consider taking second jobs to pay down debts. Send children to junior colleges for two years before moving them to four-year institutions to cut college expenses in half.

About the planner: Brad Stark is a fee-only financial planner and principal with Mission Wealth Management in Santa Barbara.