A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.
Shawn Forgaard, a 37-year-old software company project manager, bought one home for his family to live in and nine more as investments. He stands to lose all the investment houses in the mortgage meltdown but says he has come away wiser from the experience.
"Everyone stumbles. I'm not going to hide or run or live in denial, or with regrets," Forgaard told Reuters in an interview. "On the surface it looks like total devastation but it's just the opposite. I'm confident our lives will be much, much richer as a result."
Forgaard bought a house in Santa Cruz, about 60 miles south of San Francisco, in 2000. Four years later, using $800,000 in stock options, he began snapping up investment properties, putting 10 percent to 40 percent down on negative amortization loans — in which payments do not cover the interest so that a borrower's balance grows over time.
It was those "neg-am" loans, which include triggers causing payments to balloon if the debt reaches a certain percentage of the original balance, that would come back to haunt him.
"I knew I was sitting on time bombs," Forgaard said. "I knew the market was going to go soft and I knew that property values would decline. But I figured that I had enough equity to survive the storm and sell or take the loss and refinance.
"I didn't anticipate a downturn of epic proportions such that home values are 40 percent less than they were," he said.
The mortgage market has melted down in the past two years in a crisis that began in the subprime sector and has left millions of Americans facing the possibility of foreclosure on their homes.
Forgaard bought his first investment home in the booming housing market of North Las Vegas in 2004, followed in the next two years by eight others in such hot markets as Phoenix and Palm Springs, Calif., before he realized in 2006 that the situation was worse than he had feared.
"I knew that the market was soft but at that point I'm realizing that this could really get ugly," he said. "At that point I had a bad feeling in my stomach."
Forgaard thought he still had enough equity in the homes to "take a huge hit," possibly losing most of his investment, but thought for a while that he could still ride out the storm.
"It really wasn't until five months ago that I realized, 'Hey, you know what? Not only am I going to lose everything I have invested but this is going to force me into bankruptcy," he said.
"I'm going to lose my car and my primary (home) and we're not going to be able to live in Santa Cruz, where I was born and raised, and live by the beach. And that was pretty tough to take."
Experts say speculators like Forgaard, who count on real estate values to keep rising to pay off their debt, play a risky game and doubly so when they use neg-am loans.
"You are essentially betting the house on the strength of the housing market and if you're that leveraged in debt and the market goes down, you're going to lose your shirt," said Austin King, director of the community organizer ACORN's Financial Justice Center.
"To do it eight or nine times over is eight or nine times as foolish as just doing it once," he said.
The Forgaards likely will sell their Santa Cruz home and declare bankruptcy before banks start foreclosing on his properties. With a newborn son, they intend to start over in his wife's Northern California hometown.
Forgaard said that some good has come out of the experience and that his family is optimistic. He is relieved that he no longer has to deal with 10 homes at once and now will pursue a lifelong dream of starting his own business.
"Where I went wrong is I invested heavily in an area that wasn't my passion and I had a really demanding full-time job so I couldn't pay attention to nuances, the little indicators telling you the housing market was going soft," he said. "I was in over my head."