Don’t Foreclose on the Notion That Obligations Are a Matter of Honor

Q In your column last Sunday, you responded to a question about how or whether the writer might remove a negative credit reference relating to a foreclosure. Your response was needlessly self-righteous, particularly your conclusion that “lenders need to know you’re the kind of person who would bail on a debt.”

If you took the time to think rather than judge, you would have recognized your writer’s situation as reflecting an unfortunately common problem among residential owners and developers who bought property in California in the late 1980s only to see their values eroded and opportunities diminished by the real estate crash. There are many successful real estate developers in this community who have made similar decisions about foreclosure with regard to specific developments or property and who are considered shrewd businessmen and icons of the real estate community.

In the future, please respond to questions and save your preaching for those interested in your moral teachings.

*

A Thanks for the editorial direction, but my response stands. The reader was suffering no acute financial distress when he allowed his rental property to go into foreclosure; it had merely lost value and he didn’t like the hassle of being a landlord. That might make him a shrewd businessman; it does not make him an honorable person.

By the way, your opinion was in the minority. Here’s a sampling of what other readers had to say:

On Values--Property and Other

Q Your unflinching assessment of individuals who shirk their financial obligations (or counsel others to do so) is most refreshing.

I moved to Los Angeles from Boston five years ago, arriving at the tail end of a traumatic period for many homeowners and real estate investors. While sympathetic to their difficulties, I have been astonished at the number of letters and advice columns claiming a decline in real estate values is something beyond one’s control and suggesting that foreclosure is simply one of several planning options to be considered by the well-informed, irrespective of income--not unlike selecting the right mutual fund.

I can only imagine the howls of protest we would hear from these same individuals if obligations due them, such as pension or health benefits, could be so lightly dismissed.

*

A Interesting point. It is, of course, possible for a business to end a pension plan, just as it is possible for an individual to walk away from a mortgage debt. But there are inevitable repercussions in either circumstance. The original writer wanted to somehow eliminate the effect of a relatively recent foreclosure from his credit report, which isn’t possible.

Real estate values are indeed beyond our control--as you know from living in Boston, which suffered a similar nose dive just before California’s market went into decline. That is why it’s so important to plan for the bad times as well as the good. A healthy emergency fund and not buying more house than we can afford are just two of the ways we can help stave off trouble.

There are circumstances, of course, when foreclosure is the best of bad options. Most of the time, we have better choices. Here’s a letter from a reader who was in much the same situation as the original writer, but who took a different road:

Weathering Real Estate Hardships

Q I enjoy your column and the no-holds-barred advice and admonishments you give. Your column last Sunday regarding the owner who chose foreclosure and had credit aftershock was particularly interesting since my story is the opposite, thus providing anecdotal credence to your response.

I purchased a three-bedroom townhouse at the height of the real estate boom in 1989 for $275,000. Needless to say, its value plummeted about $60,000 and I still had a $27,000 second mortgage in addition to the $220,000 first mortgage, which meant I had several thousand dollars of negative equity. I didn’t walk away from these obligations but hung on. I moved out when I got married, lived in a cheaper apartment and converted the townhouse to a rental. I weathered some unpleasant tenants until the rental market turned into a landlord’s market. We saved up money living in the one-bedroom apartment and eventually bought the house of our dreams. We only had the money for 5% down, but our exemplary credit rating got us the loan. The house has since increased more than $100,000 in value and we feel lucky to be living in such a nice home and neighborhood. Meanwhile I have excellent tenants in the townhouse, which is appreciating rapidly and will someday be salable for a good profit.

*

A Thanks for writing and for offering your experience. You made several astute financial decisions, not the least of which was honoring your obligations. Today you’re reaping what you’ve sown, and it’s well deserved.

*

Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at http://161.35.110.226/moneytalk.