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Tackling a mortgage meltdown of their own

A couple hope a bad real estate investment won't hinder college plans for their triplets.

October 26, 2008|ann marsh | Marsh is a freelance writer.

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.

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