A financial adviser's big financial mistake

Carl Richards and his wife Cori revisit their home in an affluent suburb of Las Vegas, Nevada Thursday October 27, 2011. Carl is a financial planner who formerly lived in Las Vegas, but was forced to move after short-selling the family's home.

Tess Vigeland: And for our final story of this hour, we visit with a good friend of the program. Carl Richards is what we call the "Napkin Drawing Guy." You've also seen his work in the New York Times Bucks blog. He's a financial adviser in Park City, Utah, and loves using Sharpies to illustrate our brains on money. In one of his recent columns, Carl talked about how we all need to occupy our checkbooks, not just Occupy Wall Street. In other words, take responsibility for our own financial mistakes -- and talk openly about them.

Well, this week in the Times, Carl lived that advice. He wrote about an epic financial mistake he and his family made when they were living in Las Vegas. So we flew out to meet him there.

Vigeland: Why are you telling this story? Certainly, you must be...

Carl Richards: That's a damn good question.

Vigeland: I mean, you have clients who are going to hear it, who are going to read it in the Times -- and potentially wonder about your judgment as a financial adviser.

Carl: Financial decisions are complex. What we learned from it, at least, is to be a little bit slower to judge other people's decisions. Nobody's immune from making these mistakes.

Vigeland: Carl is 39, tall, athletic and hair-free. His wife Cori is 41. A petite blonde and a full-time mother to their four kids, ages 6-14.

We all know now that in the middle part of the last decade, gambling in Las Vegas was not restricted to casinos. Going all-in on a house was as sure a bet as you could find. For the Richards, the bet centered on a 3,500-square-foot home, bought eight years ago in a gated community west of Las Vegas. We talked on the street across from the house, as Cori explained why we weren't inside.

Cori Richards: I loved the house and we had good memories there, but it's a little hard to see that it's not ours anymore.

Vigeland: Last year, they lost the home in a short sale. You know this story. It's been told thousands of times over the last few years -- but not often by a financial professional who manages other people's money.

Carl: When we first moved down here, we were both convinced that it had already been too hot to buy. So we originally leased a home. And then within a couple of months, there was this sense of "if we didn't buy, we would never be able to afford a house."

Vigeland: You were a financial adviser, but you looked to what was going on here, and no alarm bells for you?

Carl: I think we both remember feeling like it just felt a little crazy. But at the same time, everywhere you looked, there was sort of reinforcement that you need to be sort of on this train or you may never get on.

Cori: I think more than the feeling of alarm, it was more a feeling of excitement of "it's growing, there's more, hurry, get in."

Vigeland: The house cost $575,000 and they put no down payment on it. Within a year, they refinanced and tapped their skyrocketing equity to help Carl start his own business. Then, in late 2008/early 2009, the stock market turned. His business started to slow and they could no longer tap their equity.

Carl: Nobody anticipated sort of this drop. And in fact, you didn't really want to know. It was just sort of this classic idea of not wanting to accept the party coming to an end.

Vigeland: You think you were deluding yourself at that point?

Carl: I think there was a lot of deluding ourselves. I mean, of course, you want to continue to believe that things are going to be OK.

Vigeland: But they weren't. The Richards had to sell their second car. They took all four kids out of any extracurricular activities that cost money. Carl moved out of his office and stopped funding their retirement accounts. They decided to leave Las Vegas and move to Park City, where 95 percent of Carl's clients live. But because of all the money they'd borrowed from phantom equity, the house was $200,000 underwater. A friend who worked in real estate suggested they try for a short sale. And that the first step was to stop making mortgage payments.

Carl: "Wait, what do you mean miss payments? Don't I have an ethical..." He said, "No, you're confused. You don't have an ethical or moral obligation to the bank. You have a contractual obligation to the bank. You have a moral obligation to your family. You're putting at risk your business, your income, you've already spent all your savings. You're using credit cards now -- all to fulfill this obligation you think you have to the bank."

Vigeland: Why do you think you felt that it was a moral issue? And you certainly were not alone in that. I mean, that's the big sticking point for a lot of people in this country. They feel there is a moral obligation, that it's probably the biggest payment you have in your life -- and you owe it.

Carl: I mean, it certainly is a societal belief, right, that you pay your debts. I have this theory that maybe it's even a genetic thing with my grandfather or certainly my great-great-grandfather. When he borrowed money to buy a farm, that generation borrowed money. They probably borrowed money from their neighbor who was a banker. They looked the banker in the eyes and they shook hands and said, "My word is my bond." And they made a commitment to repay that loan. I think that's sort of the sense that we all feel, is that this is some sort of "my word is my bond" ethical obligation to repay a loan. When in reality, it's a contract between two willing parties who should both understand the risk they're taking.

Vigeland: What ended up happening?

Carl: We stopped making mortgage payments, we went through the modification process. That didn't work. We had to relocate. So about that same time, Wachovia instituted a new short sale program.

Vigeland: So, what did you end up having forgiven? How much money did the bank leave on the table?

Carl: A lot, more than $200,000.

Vigeland: Well Carl, the question, of course, for you in any listener's mind is going to be: You're a finance professional, how did you get yourself into this kind of situation?

Carl: Yeah, I know. It's a fair question. I mean, Tess, it's making the same sort of classic mistakes that everybody makes. If you think about how fast things were growing, right? The value of the house is growing dramatically, my income's growing dramatically and we all have this tendency to base the future on a relatively recent past. Right? So we project that into the future. And when you project that into the future, we had no problems.

And then the next mistake we made was not realizing that things change. When we think back, particularly when we think back to the emotion of it, it was crushing. I think -- at least to me -- it's helpful to know there's a way out of that mistake and that you can... Look, we make mistakes, we can either sit around and complain and whine about the big, bad, mean people who got us here -- big, bad, mean banks. Or we can choose to make a plan, get out of this mistake and hopefully create a better future for ourselves.

Vigeland: Who do you blame?

Carl: Look, it's 100 percent clear that we're to blame. I mean, we made these decisions. We have a firm belief that we are personally responsible for our financial situation. And there's no one to blame but us.

Vigeland: You know, there are going to be a lot of people who'll hear your story and read your story and will be angry that you just walked away from this commitment that you made. What do you say to that sentiment?

Carl: I think that's a really tough question to answer. What I've certainly learned from this experience -- if I didn't know it already -- is there's two sides of every argument. We didn't get away with anything. We paid the price. It would be ethically and morally irresponsible to break a contract and not suffer from the consequences spelled out in the contract. The consequence is we lost our home, we lost our credit and also left with nothing, negative net worth. And again, I'm not saying this for anybody to feel sorry for me; I'm just trying to explain that it wasn't like we got away with anything. And then on top of that, it's an interesting societal price we're paying. 'Cause even though this is a common occurrence, people still don't... I mean, it's a pretty heated subject.

Vigeland: Do you still, after all this, see home ownership as part of your American Dream? Do you want to own a home again?

Cori: I do. Very much so. To me, I guess it's kind of a safe place to be, it's a place where you can nurture your children and they can always come home to.

Vigeland: Carl?

Carl: Me too. But my thinking about home ownership has totally changed, in terms of its role in a financial plan. I mean think, look, a home is where you live. It's not an investment; it's a place you live. And so my view now is I hope the next home we buy is the place we're there for a long, long, long time. I'm not thinking about it as part of the balance sheet.

Vigeland: Carl and Cori Richards, thank you.

Carl: Thanks Tess.

Cori: Thank you, Tess.

Carl: I guess. Just kidding.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.
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Nevada is a recourse state. How did Carl walk away from his second mortgage? The bank holding that paper can follow him forever, or until he declares Chapter 7 bankruptcy. Please explain....

I think there is a strange philosophy in this. Carl lost his home because he was not cautious with his finances. $575,000 and no downpayment - hmm - interesting. Takes out second mortgage and gets big cash check - hmm - very interesting. Now when he can't make his mortgage payment, suddenly he has no moral obligation to the institution that lent him the money - sort of "you should have been more cautious about who you lent money to". Sounds like stealing to me. What about the bank that finances his house. If he continues to make the payments, can the bank breach the contract and walk in and take his home away if it sees an advantage to be had? We would all say no, it can't. But why not - if one party to a deal can just leave when the deal is no longer advantageous, why not the other?
And Carl seems to be very apologetic and says he takes 100% of the responsibility for the mess. Really? What does it mean to take responsibility? Just say "my bad"? Because I didn't hear anything about him giving the money back that he stole from the bank. But then he is a financial planner and giving money back doesn't make good sense right?

While I admire Mr. Richards candor in coming forward with his story, regardless of the impact it might have on his business, I think he did rather well for himself. His house really only dropped less than 10% of its value, yet he walked away with over $200,000 in goods and services that he spent his home equity loan on that he did not have to pay back. That's about five years of income for me. All he gave up was his credit rating and some self respect. He could have done a lot worse.

I agree completely with Greg L. It took a lot of people following mis-guided leadership to let Hitler take control of Germany but in the end did we blame the multitudes of German citizens for their poor judgement or did we blame Hitler and the members of the Nazi party? I understand that the weight of the crimes may not be the same but it is the same game that was played and is being played. Just like Nazi sympathizers have no place in a Post WW2 world, there is no place for Wall Street sympathy now. Sympathy only starts the cycle of abuse over. This guy above is a great example to make. If the system works, he will be forced to find a job doing something legitimately within his physical and mental skills (which are not very good based on this story)...sorry if that doesn't pay for working out all day and living in Park City.

Oh, I’m angry, alright. But not because Carl and Cori ended up forfeiting their home. I’m angry because, as he said, there are two sides to every story, and in this fifty-minute broadcast, exclusively devoted to mortgage financing and the collapse of the housing market, I did not hear one word about the side that speaks to mortgage fraud, predatory lending practices, eviscerated usury laws, financial lobbying for a deregulated financial system in which lending standards were relaxed and oversight deemed unnecessary, a global derivatives market into which loan originators sold new loans, the legal and moral obligation of lenders for full disclosure and due diligence at all levels of the securitization process; the securitization process itself, as the primary motivator to engage in reckless lending and subsequent borrowing, the culture of utter corruption within lending organizations—how they played regulators and the ratings agencies off against one another, encouraging them to look the other way—how accounting irregularities in lending institutions was systemic and endemic. Various loan models could have been discussed here, and weren’t—there are hundreds: Adjustable rate mortgages (often written without borrowers’ knowledge and against their wishes), liar loans, piggyback loans. Fannie Mae’s role in the process, and their competitive but partnered relationship with Wall Street; the big players that enabled and fueled this bubble, eventually indicted for fraudulent accounting: Ameriquest, NovaStar Financial, Countrywide. Just forget all that and suck it back America? Is that the message here? It’s childish to blame others, so, a statement of contrition, a few stories on the moral value of individual responsibility and back to business as usual? What is this, Michael Milken week? Another player who down deep is really an honest guy and on his way up in the world of respected American icons of finance? THIS sort of perspective is what is wrong with America, not homeowners who can no longer afford to stay in their homes.

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