A Financial Hurricane Katrina

News about the national mortgage foreclosure crisis dominates the media and Washington politics these days.

In February 2008 nearly 225,000 properties in the U.S. were in some stage of foreclosure, up nearly 60 percent versus a year ago, according to the New York Times. And thousands of families have lost -- or nearly lost -- their homes due to predatory foreclosure firms called "default servicing companies" and law firms that get paid by the number of motions they file in foreclosure cases. Up to two million families may default on their homes in 2008, writes Robert J. Samuelson in The Washington Post.

Relatively few homeowners are getting the help they need. In Boston, foreclosures increased 169 percent from 2006 to 2007, yet the city government made its first and only attempt to unite 1,500 at-risk homeowners with concerned lenders via a workshop two Saturdays ago. The department of Housing and Urban Development and the government-backed charity Hope Now, are ostensibly set up to help homeowners, with little success so far. "One reason," explains the New York Times, "is that the financial powers behind Hope Now -- mortgage lenders, loan servicers and big investors -- are reluctant to change loan terms substantially if doing so hurts them."

Politicians are tackling the problems -- or at least trying to -- with a national solution, but it's not easy. Yesterday on Capitol Hill, for the second week running the bipartisan squabbling over how best to help homeowners continued.

The unfolding crisis, and the predatory practices of some mortgage companies and "the foreclosure machine" that preys on homeowners, sickens me. It's like a financial Hurricane Katrina. Our most vulnerable citizens -- the nation's poorest borrowers including single moms, first-time homeowners, lower-income and minority families -- have been targeted in droves by unscrupulous lenders and financial bottom-feeders, with little to no government oversight or protection.

Yes, these borrowers should have read the fine print, should have been more cautious before signing mortages designed to balloon out.

However, like Hurricane Katrina's victims, who some accused as foolish to live in a city below sea level, these victims are not exclusively to blame.

They trusted some of our country's largest financial names, like Countrywide Financial, Wells Fargo, Fidelity and Washington Mutual -- companies that are now experiencing potentially crippling crises themselves. The crisis is sure to affect all of us, whether we keep our homes or not, because such massive financial problems ripple out to the entire U.S. economy, as we see already in record low consumer spending and confidence figures. And like Katrina, to date our government, business communities, and others seems to be floundering in their efforts to avert widespread chaos and personal tragedies. None of these potentially powerful entities seem to understand that the damage levied out at the house-by-house family level will, eventually, hurt all of us.

What does today's mortgage crisis mean to you? Is your family at risk of losing your home? Have the problems in the headlines spread to your neighborhood? What's your advice to families at risk? What can each of us do to help ourselves, our families and our neighbors?

By Leslie Morgan Steiner |  April 9, 2008; 7:00 AM ET  | Category:  Conflicts
Previous: Finding a Needle in a Haystack | Next: Getting Beyond the At-Home Dad Thing


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These people brought the problems on themselves. They bought houses which cost more than they could afford. They didn't read (or blindly read) the documents about how the loans reprice after a period of time. All they heard was "the value will go up and you'll get rich".

Posted by: r6345 | April 9, 2008 7:14 AM

Today's mortgage crisis means to me that I'm going to be asked to pay additional taxes in order to bail out people who made stupid financial decisions by purchasing things they couldn't afford -- out of some weird, misplaced sense of entitlement.

For years now my husband and I have gazed across the street at our neighbors with their shiny new cars and their trips to Hawaii and their boat and wondered how the heck they were affording all that excess -- and now we know the answer. Most people's finances are a house of cards built on a really shaky foundation.

for the record, there have been houses in our development that have been foreclosed -- and most of these people also had shiny new cars, boats and other adult toys, and never missed the latest movie or fun new vacation destination. Everyone who's staying put in their house with a conventional loan and no fear of foreclosure jokes about the party they're going to have when the car reaches 100,000 miles and the fact that our vacations consist of camping -- but at least we're not homeless.

Posted by: Anonymous | April 9, 2008 7:19 AM

"Is your family at risk of losing your home?"

No. I bought a VERY modest home and paid it off before I was 40.

"Have the problems in the headlines spread to your neighborhood?"

Yes. Two houses on my street are about to be foreclosed.

Posted by: Spike | April 9, 2008 7:44 AM

My aunt is in her 60s, but remarried after being widowed and had two more kids in her later 40s.

She is a pretty typical blue/pink-collar Detroit-area worker: she never went to university, and has spent her working life in various jobs, many in retail, and also was for about 8-9 years the "family caregiver" - paid by the family to take care of aging relatives, and then childcare in her home. During the years between marriages, she didn't have healthcare coverage and amassed some medical debt, which she put against her house. Her second husband works at a very regular, steady, but physical, blue-collar job that pays him in the area of $45k a year, including overtime.

I would say she has had a medium level of financial literacy all her life. She certainly is a capable woman, but susceptible to believing people who reassure her about the fine print.

When her two youngest went to college, she and her husband were making enough that they didn't qualify for super-duper financial aid. As a family they made the (IMHO stupid) decision to borrow against their home. So that was twice in the time that she had owned the home that she had refinanced it.

Then the payments went up, the market went down, and they found themselves in a house that wasn't worth the amount of the mortgage. They put it on the market and had one showing in nine months.

Being hard-working honest people, they went to the bank to try to renegotiate the payments. They didn't want to lower the amount owed, but they figured with Michigan in particular being so hard hit in housing values that the bank would prefer to get its money late than to lose their home.

Nope, so they went into foreclosure and lost the house last fall.

Now, I know there are things my aunt could have done along the way to change the outcome. But I resent her lifestyle being characterized as boats and expensive vacations - I don't think she's had an expensive vacation in her life, actually.

As someone who owns property in Canada I don't entirely understand how the US mortgages work myself - we don't generally have balloon payments here, and for a first home the minimum down payment is 10% and for a second home it's 25%, although there are some exceptions. It may just be luck of the market that we aren't having a similar issue... or it may be that the US allows a more predatory lending structure, I don't know.

Posted by: Shandra | April 9, 2008 7:44 AM

Whoa, no registration required now?

Wow! I feel a song coming on! One based on the greatest blue eye song ever written/recorded.

Posted by: Songster | April 9, 2008 7:57 AM

ummm....this would be more similar to Katrina had all the foreclosures been in a single geographic location. Since it is spread out across the country, I think the entire country will eventually absorb this crises and it will resolve. There's no way to regulate hurricanes striking the gulf coast, unlike the current financial crises. However, like Katrina, had government at all levels been doing what they were supposed to do (read: enact regulations already in place instead of being greedy) then the impact of the financial crises and Katrina would have been mollified.

Posted by: not-Katrina | April 9, 2008 8:30 AM

What drives me nuts is that so many people walked away with so much money--the real estate agents who should have advised their clients better about what they could really afford, the appraisers who signed off on the rapidly escalating valuations, the mortgage brokers and closing attorneys and all the other people who collected fees and apparently never told these people that they couldn't actually afford these houses. Yes, the people should have been able to figure it out, but I think there's a lot of folks who trust "professionals" and in these cases lots of different professionals all reassured them that they were making good decisions--and those people all walk away with all this money and the homeowners are now out of the street, with ruined credit to boot. The only bright side is all those agents and brokers are losing their jobs, but they still get to keep all that money they pocketed during the boom. I think that should be criminal.

Posted by: Arlmom | April 9, 2008 8:30 AM

Shandra: it's a new world out there. Used to be you needed 20% down. No exceptions. then people paid 10% down. and borrowed the second 10% at a higher rate. Then they didn't put more than 5% down. Then they had low low payments for 5 or so years, then the rate reset, and they thought: well, i can't afford the home, but in a few years it will be worth much more so i can borrow much more and that will pay it off. Well, that didn't happen this time.

The reality is, as george will put it some months ago, many of these people weren't homeowners - they were renters in the first place. If you put no money down, you don't 'own' anything, you have no stake in it, you think someone else (landlord, but in this case, there is none) is supposed to take care of everything.

Not everyone should be a homeowner - the ideal of the american dream and buying a home and building wealth, is not for everyone. Some people don't want to own, don't care about owning, don't want the responsibility. There's nothing wrong with that, but we as a nation shouldn't really be forcing that type of lifestyle on people.

Posted by: atlmom | April 9, 2008 8:30 AM

It seems people bought the hype when times were good. The media certainly did not argue for caution. All the stories were about the smart people who flipped houses, the grand remodeling projects, etc.

No one seemed to want to think about previous market corrections - was the early 90's really that long ago?

We financed conservatively through a bank. We were astonished at the amount they said we qualified for. There was no way I would feel comfortable borrowing so much that any
income loss would lead to the loss of our house.

I think alot of people dropped the ball on this one. The government for lax industry oversight. The greedy banks and financial institutions. The media for hyping the shiny lifestyle and easy path to riches. And the public for not giving these kind of transactions the serious consideration they needed to.

Posted by: MAmom | April 9, 2008 8:47 AM

I think there are a lot of people who feel they are somehow owed a wealthy lifestyle, and make stupid decisions and spend recklessly. I look at some of my neighbors and wonder how on earth they have their perfect homes (often more than one) and new cars and kids in private schools and then I hear through the ever-present grapevine that they are seriously struggling financially. Well, no kidding. It's simple math. It's the same in every language. I'm not sure I understand how a family with a combined income of $70,000 was allowed to take out a mortgage for a $600,000 home, but surely they deluded themselves into believing they could support such a choice. It's like we're all under mass hypnosis or something.

Posted by: WorkingMomX | April 9, 2008 8:49 AM

As somebody who chose a steady fixed 30 year mortgage in 2002/2003 over an ARM at a lower rate, I have little sympathy. On the other hand, my husband and I were always very conscious of trying to buy a house which we can afford on one salary if one of us got laid off. I think too much about money. It's a trait of mine that was not popular when I was in my 20's but probably paid off since then. But also we are lucky because we are educated and financially savvy, i.e we ALWAYS read the small print and are VERY SUSPICIOUS of anybody who is trying to sell us something for nothing. I actually don't feel that those poor homeowners have to pay for their mistakes. It would be nice if this crisis could have been averted -- it would have been better for the economy overall. When I hear about $1 million home foreclosures in Loudoun County, I instinctively think about tightening my own belt and that's not good for the economy.

Posted by: tight with money | April 9, 2008 8:50 AM

"The reality is, as george will put it some months ago, many of these people weren't homeowners - they were renters in the first place."

Well put. I feel fortunate that we have a modest, affordable, fixed rate mortgage on our (modest, affordable) home; have no credit card debt; have no debt on our used car. Well, that's because we save as much as we can and live within our means, and because I have a financially sensible husband. But I spent a lot of my life "renting" from Visa and Mastercard the clothes I wore and the things I thought I owned--I just never thought of it that way. I like being on the owning side!

Posted by: Anonymous | April 9, 2008 8:52 AM

The mortgage crisis doesn't seem to be affecting my neighborhood in terms of foreclosures but sales have gone down. Houses are on the market much longer and prices have come down. I agree with Arlmom that some blame needs to be placed on those in the banking and real estate industry. When we were buying our house we had some money saved for a downpayment and 2 full time job salaries. We could afford a mortgage but we were encouraged to put down less money than we thought we should and I was shocked at the amount of a mortgage they said we could get. We took a mortgage of $150K less than what they qualified us for. It was the best financial decision we ever made.

Although I know there are other stories like Shandra's aunt, and that is a sad story, many families are caught in the foreclosure situation because they were encouraged to buy homes they couldn't afford. My parents gave me great advice when I was starting out working and living independently -- "always make sure to live within your means." They sat down with me and looked at my first paycheck, after taxes, and said "here's what you can reasonably afford to pay in rent, so that you will have enough left over for a car payment and the rest you will need for food, entertainment and savings." Everyone needs that kind of sound financial advice.

My house definitely has some features I do not like but because my mortgage payment does not suck up all of our income, I was able to take a pay cut and go part time when we had kids. We just sold a 12 year old car with over 100,000 miles and a lot of our vacations are to visit family.

I really feel for these families and I worry about the long-term financial effects this crisis is going to have on the economy. I would love to think though that it will lead to more responsible spending and saving habits for these families.

Posted by: PT Fed Mof2 | April 9, 2008 8:58 AM

"I really feel for these families and I worry about the long-term financial effects this crisis is going to have on the economy. I would love to think though that it will lead to more responsible spending and saving habits for these families. "

Don't bet the ranch on it!

Posted by: Huh? | April 9, 2008 9:01 AM

To be honest, this is only going to be good for DH and me. We waited patiently, saved for many years, did not live extravagantly, and did not buy a home in the crazed DC housing market. We now find ourselves in a much better position to buy our first home. Our credit is good, prices and rates are dropping and we have quite a nice chunk of change saved up to be able to make a reasonable down payment. Having relocated to a more rural area will of course help us too!

It makes me feel a bit of guilt- there are so many people who, while they should have to claim some responsibility, really were blindsided by the whole ordeal. They (like many have said) trusted professionals to guide them through a confusing process, but did not receive the good advice they thought they were getting. I feel bad for the families who are struggling, who did not fill their home with excessive purchases or their driveways with BMWs, but who simply made a few mistakes and will now lose their homes thanks in part to an industry and government who refused to see the inevitable.

I do not, however, feel bad for all the upper middle class folks who spent money like it was going out of style and lived far beyond their means. They would have eventually felt some other sort of financial repercussions with such excessive spending habits. That lifestyle of excess is one of many reasons why DH and I have left the DC area for good.

Posted by: JessC | April 9, 2008 9:12 AM

Who here read their entire set of mortgage documents at closing? Go ahead, raise your hands? I'd be shocked if more than a couple hands went up.

The reality is that the "fine print" for virtually an contractual agreement is rarely read by anyone but lawyers. Why? Well, because we'd be spending nearly all our free time reading fine print.

These people, naive as they may be, were told by the media, the real estate agents, the corrupt appraisers (who overvalued homes), the pushy mortgage brokers, and the lenders themselves that taking on a no-down payment mortgage was OK because the value of their house would go up and they could refinance when their 2 year ARM ended.

Now, if you're not a real estate expert, why wouldn't you believe that whole list of real estate experts? What in the world would make you think that you knew better than them???? Think about it.

Also, BTW, for those of you worried about your tax dollars, the current plan before Congress would, most likely, have little to no effect on the federal budget. The reality is that bailing out firms like Bear Stearns or the S&L crisis from years ago costs a lot more money. Just something to think about before you all continue to whine about your tax dollars.

Posted by: Ryan | April 9, 2008 9:18 AM

"I do not, however, feel bad for all the upper middle class folks who spent money like it was going out of style and lived far beyond their means."

Just FYI, because I spent money like it was going out of style, this economy did not tank earlier. I spent money on goods and services that created jobs or kept jobs in place. Ostentatious spending is still spending in the US economy, the money is just recycled from one person to another.

Posted by: Anonymous | April 9, 2008 9:27 AM

As someone who bought in 2005, with 20% down and a fixed rate mortgage I also am being hurt. The value of the homes in my area have gone down so if I needed to sell I will have lost a great deal of that down payment (my savings). Now I am not planning on moving anytime soon so I am not worried, because the market will rebound eventually and my townhouse is in a good location, including good schools so my submarket is not as bad as some. However, I still feel for those who did it right and got caught buying at the hieght of the overinflated market and now due to job loss, illness, divorce, etc need to sell.

Posted by: mom_of_1 | April 9, 2008 9:30 AM

I share a lot of the opinions and emotions outlined here. I feel badly for people like Shandra's relatives who were targeted by brokers or mortgage agents or others and encouraged to buy above their means and take out too much debt. I don't read all the fine print either, as Ryan points out.

At the same time I agree it is not taxpayers duty to bail them out -- we all are adults here. We have to be held responsible for our errors. Our country will collapse if every citizen expects a bailout every time we make a financial mistake.

You should be rewarded for being prudent about your mortgage and spending. And Jess, more power to you -- my sister is in the same boat, just waiting for the market to sink a little lower so she can buy her first home. You and she are not greedy opportunists. This is just how our market works. Sadly, it's kind of like how a forest burns so that new trees can grow for the overall health of the ecosystem.

But I do think we, as a culture, and our government, have a duty to protect individual citizens from unscrupulous businesses who are taking advantage of people's naivete, lack of education, or desperation. To me that's the hallmark of a civilized country.

Posted by: Leslie | April 9, 2008 9:34 AM

"I do not, however, feel bad for all the upper middle class folks who spent money like it was going out of style and lived far beyond their means."

That's very judgemental of you. You get to decide who the people are who lived beyond their means as opposed to the people you think were taken advantage of. Hmmm.

Posted by: atlmom | April 9, 2008 9:37 AM

And the reality is that in the late 90s early 00s the administrations were wanting more and more people to be approved for mortgages, so they came up with all these 'exotic' loans. People who shouldn't have been buying, and the banks were getting pats on the back for lending to the 'sub prime' markets - i.e., those who probably shouldn't have gotten those loans.

Posted by: Anonymous | April 9, 2008 9:38 AM

I have to mostly concur with the widespread sentiments of schadenfreude being expressed here. There was a certain amount of aggressive marketing tactics used to sell both homes and the mortgages used to finance them, but guess what: That's the way most products and services are marketed in life. A big part of becoming a grownup is figuring out who's trying to snow you in any financial transaction. PT Barnum's admonition still applies 100 years later.
In most cases, as has been pointed out, those who were renting, bought a house, and are losing it, will again be renters, and since they didn't put much if any money down, they'll be back at square one without major repercussions.
Losing a house is not synonymous with losing a job, a loved one, etc. It's just a possession, and if you financed it in a way that was unsustainable, so be it.

Posted by: Caveat Emptor | April 9, 2008 9:41 AM

I agree that the dream of home ownership was grossly oversold ... and that renting can build savings -- to put toward a home or an emergency fund (which unfortunately many people who find themselves in foreclosure don't have). Montgomery County, MD used to have a model affordable housing program (so-called teachers, police and firefighters) that disintegrated in the housing boom. Developers bought their way out of adding moderately priced units and the buy-out rate did not match the replacement cost. The ongoing condo-ization of DC is pushing people of moderate incomes out of affordable rental units. Call it the free market -- but where do these people then move?!?

Posted by: Product of a Working Mother | April 9, 2008 9:46 AM

"The ongoing condo-ization of DC is pushing people of moderate incomes out of affordable rental units. Call it the free market -- but where do these people then move?!?"
They move where it is more affordable to live (PA,WV) and spend their life commuting and pay megabucks for gas. No win situation.

Posted by: KLB SS MD | April 9, 2008 10:06 AM

There's a difference between ostentatious spending and living beyond your means- which is what many people do. If you want to spend all your income and save none of it, that is your decision but it is completely different than what I was talking about- literally spending more than you make.

My point was that there are many people who are young with high paying jobs and no dependants, who routinely spend more than they earn on excessive extras. These are people who can easily keep a roof over their heads, food in their bellies and lead comfortable lives all while remaining solvent but choose to rely on credit to extend their buying power (homes, cars, $400 handbags etc.). So when these same people find themselves losing their luxury condos because they always overextended themselves when they didn't need to, I don't think they deserve the same amount of pity as someone who lost their home because they lost their job and had to use credit to feed their family or deal with a family illness. Two wildly different situations.

As a 28 year old with a good career in the DC area, I saw a lot of the first happening.

Posted by: JessC | April 9, 2008 10:13 AM

good points jess. good distinction.

Posted by: Leslie | April 9, 2008 10:15 AM

when we bought in Lorton in 2004, the bank assured us we could afford a $600,000 home. we very reasonably purchased a $295,000 home. this is what intelligent adults do: you see what others claim you can afford, you look at how much money you're talking about and the implications for the rest of your life, and YOU decide what to do.

people are not losing "their" homes--they're losing homes the bank owns that they have paid a moderate sum to live in for awhile. having failed to meet the terms of the home's OWNER--the bank--the owner evicts them. it's pretty straightforward and shouldn't surprise anyone.

Posted by: newslinks | April 9, 2008 10:15 AM

I waver between sympathy and non-sympathy. Sympathy because I am sure that there are people out there who made what were likely relatively sound decisions but are now suffering because of the housing market. Non-sympathy because I know someone who bought houses he couldn't afford that he rented at below mortgage payments because he thought he could absorb the loss for a few months while the house appreciated and he could sell it at a profit. Unfortunately, the housing market tanked and he walked away from like 4 houses. This I have little sympathy for.

I too was amazed at how much the bank said I could afford when I bought my condo. I bought a place worth significantly less and am very happy that I did so.

We are getting hurt by the housing crisis. I bought just as the market had taken a downturn. I got my condo for about 25k under the average value at that time. The valued stayed above my buying price for about 8 months but has now dropped below and I am watching my hard earned savings being eroded by the dropping housing values.

I just tried to re-finance the mortgage to get our monthly payment lower to help us out and discovered that it yields no benefit to me. I no longer own 25% of my condo so I would have to start paying mortgage insurance.

I guess I should feel lucky that we live fairly close to town and we have lost at most 10% of the value of the house. People further away from the city center have lost 1/3 or more. I drive through some of Manassas and it is like a ghost town. About 1 in 10 houses along the route I take appear to be empty.

Posted by: Billie | April 9, 2008 10:16 AM

"At the same time I agree it is not taxpayers duty to bail them out -- we all are adults here. We have to be held responsible for our errors. Our country will collapse if every citizen expects a bailout every time we make a financial mistake."

"But I do think we, as a culture, and our government, have a duty to protect individual citizens from unscrupulous businesses who are taking advantage of people's naivete, lack of education, or desperation. To me that's the hallmark of a civilized country."

And yet, we are currently bailing out the businesses who knowingly and intentionally made a mint off of those business practices, while leaving the homeowners to suffer so that they can "learn from their mistakes."

I'm all for capitalism. But it really, really gets under my skin when the very businesses who religiously invoked the free market to cut back regulation are the first to get in line for a government bailout when that market turns against them.

I have a lot more sympathy for Joe Homeowner -- who doesn't have a law degree or an MBA, who is faced with incomprehensible fine print, and who is told by every single professional in the industry that the real estate market is going up so he better buy now before he can't afford it, and sure he can afford 5X salary with current interest rates -- than I do for the MBAs on Wall Street who have the training and expertise, who should have known better than to drink their own kool-aid, but who were more interested in finding new ways to make a buck than in doing due diligence. And yet, they're the ones who get to keep their 6- and 7-figure bonuses, while Joe Homeowner loses his house.

Posted by: Laura | April 9, 2008 10:19 AM

Billie makes a good point. We are all getting hurt by this crisis.

Posted by: Leslie | April 9, 2008 10:27 AM

To Product of a Working Mother's question, "...but where do these people then move," KLB correctly replied that DC-area workers might choose to "move where it is more affordable to live (PA,WV) and spend their life commuting and pay megabucks for gas. No win situation."

Another approach is to live in a smaller home (which was all we could reasonably afford in the DC area) -- or, as we chose some years later when we moved to a different part of the country, in a more working-class neighborhood.

There are priorities to be determined and trade-offs to be made in life, so it's a matter of deciding the ones with which you can live -- not that it's always easy, of course. But for those of us who've had no alternative but to go through adult life without a financial safety net from relatives, it's a necessity.

Posted by: mehitabel | April 9, 2008 10:29 AM

I definitely agree that a bailout isn't appropriate, but I do think that people are pretty quick to paint everyone as crazed yuppies when in fact I just don't think that's the case.

My husband and I have always applied the "mortgage must be carry-able on one income" rule, but we have also had the luxury of living in markets where a) we could get into the market with the application of that rule and b) we haven't had a financial catastrophe in any other area. And oh yes, better than minimum-wage jobs.

In other words, I don't think we need to rescue these people, but we can have some sympathy for them. I agree with Laura's comments about the financial people drinking their own kool-aid too.

Posted by: Shandra | April 9, 2008 10:32 AM

Just curious: How many of you have children who share a bedroom? Or is that phenomenon obsolete in the middle class, other than as a plot device on TV shows?

Posted by: mehitabel | April 9, 2008 10:35 AM

"As somebody who chose a steady fixed 30 year mortgage in 2002/2003 over an ARM at a lower rate, I have little sympathy."

Goody for you, lil miss self-rightous. You didn't choose that steady fixed rate mortgage. You qualified for it and accepted it. Others don't fail to choose. They take the most financially sensible offer for which they qualify. Unless you bring a 20% downpayment to the table, that 30 year fixed rate option is not available to you. There are no points in life for accepting a marriage proposal from a handsome prince or for "choosing" a 30 year fixed-rate deal.


"If you put no money down, you don't 'own' anything, you have no stake in it, you think someone else (landlord, but in this case, there is none) is supposed to take care of everything."

bu*cough*ll*cough*it. You own something from your very first payment if you have a zero-down mortgage, which is the vehicle about which you are commenting. There's a world of difference between zero-down and interest-only. Your debt decreases, and your ownership increases on your initial payment with a zero-down deal and escalates from there. If you want to make your argument with respect to interest-only loans, have at it.

You might also recall, however, that responsible people are responsible people whether they rent, own or rule. Perhaps you need to make a more diverse group of friends.

I'm not defending people who don't read, don't consult an attorney on a house purchase, and don't understand financial terms. However, a little less condescension and a little more precision in these arguments would increase their value.

Posted by: Sheesh, Lord Almighty | April 9, 2008 10:36 AM

It never ceases to amaze me that lending standards are based on a percentage of gross income. When I bought my house with a former partner, we crunched our numbers on NET income and borrowed about 75K less than they said we could afford. Like Shandra we were lucky to buy into the market before it was crazy. (I remember looking at multiple single family homes in Montgomery County, near transit for under $200K).

Posted by: Product of a Working Mother | April 9, 2008 10:40 AM

My father always said that the bank owned our house and was kind enough to let us live there.

Posted by: KLB SS MD | April 9, 2008 10:40 AM

leslie

How much thought/research did you put into this topic?

Posted by: Another cut & paste job | April 9, 2008 10:45 AM

OK, let me start by saying this is my own opinion. I do not represent any government agency in this post or any subsequent post. The current credit crisis is a bit more complex then most of you realize. 1) The problem stems with Americas addiction to cheap credit. Everyone from wall street hedge funds, mortgage and real estate business, small businesses, to ordinary homeowners have lived the last decade on cheap credit. In essence, we, as a country, has lived beyond our means. 2) One of the main problem with the current mortgage crisis is that everyone along the chain has some responsibility in the current situation. Mortgages today (like credit card, commercial real estate, and student loans) are securitized loans. In short that means that the loans are bundled up and sold on wall street as bundled paper debt. Hedge funds were borrowing money from banks at a cheaper interest rate in order to buy these paper or commercial debt. In return, the "risk" was minimized because it was bundled together. So in the old days, you went to said bank and asked the bank to loan you money for a mortgage. If you defaulted on your loan, the bank loses money. So the bank took the proper precaution to see that you were credit worthy. But in a securitized debt market, you get 1,000s of mortgages bundled together as a debt instrument. These debt instrument are sold in shares. Like say 5% of the X debt instrument. Because the hedge fund borrowed 100% of the money to purchase this share of the debt instrument, they had NOTHING to loose if it failed. In return, banks borrowed from other banks to do exactly the same thing. So did pension plans and other investment firms. 3) Mortgage companies had nothing to loose to make a subprime or a bad loan. In essence, individual brokers make their money off of fees and commissions on the loan. Since they sell the bundled loans to banks or GSE they could care less if the homeowner paid the mortgage. 4) Of course real estate people purely make their money on the increase in the sales price. They have no stake in the fact if the person can afford the loan. 5) The valuation companies were getting huge commissions and fees on increasing the property value. Again, they don't own the debt instrument, so they had NO STAKE in whether the loan got repaid. It is a fee for service industry. 6) Lastly the stupid homeowners. Well let's just say some people don't read (like Ryan pointed out), can't read (and I don't mean that literally) or were obessed with living beyond their means. They were convinced or truly understood the terms of the loan. When you have zero down, or little down loan, then there is little stake in staying in the home if the ARM increases or the house devalues. There were a lot of greedy semi investors out there trying to make a quick buck, flipping homes. Big surprise, real estate is not an ever increasing asset. So I have absolutley NO sympathy for the semi real estate investors. There are the I need to live better then I can afford crew. And frankly that takes on a lot of different people. Everyone who took out interest only loans on a home they could not afford, to risky ARMs with the idea they could always refinance or the home value would increase, those who used their homes as a piggy bank for assets that do not increase in value and borrowed against their equity in their home, to people who simply bought more home they could afford. The only group that really deserves help and sympathy are the people who truly were victims of predatory lending. In this whole group of people it is relatively small minority. Lastly, there is an argument that there was a lack of regulation. We got into deregulation since Reagan. Again, this is a big issue and it will take time to sort out what is the proper amount of regulation needed. To be honest, investment firms like Bear Stearns have never been regulated the way banks have been and securitized loan debt is a new concept (about 15 years old). So it will take time for the FED, congress, SEC and GSEs to find the right regulation to correct some of the errors. But in reality, greed over powers regulation. There will always be those who find a way to make money, in the short term, by going around regulation. My last point is in response to Ryan. What he said about the 90s S&L crisis was correct. When the Fed bailed out the S&L (banks), they took on the debt that was considered bad debt from the banks. The debtors paid back the FED. In short, the goverment made money off the repayment of the debt. We will have to see what happens with BS. Again, that deal was slightly different because it also involved a commercial bank. But my guess is that the US tax payer will actually make some money on the deal. Let me reiterate, this is all my own opinions and I do NOT represent any private or public agency in this post or any subsequent post.

Posted by: foamgnome | April 9, 2008 10:47 AM

KLB, your dad was right. I'd just add, though, that even if one doesn't literally own the house till making the final payment, one still has a vested financial interest ("owning it," in psycho-babble) in it from the first payment.

Posted by: mehitabel | April 9, 2008 10:48 AM

I have some sympathy for those who were misled by their real estate agents or lenders, and are feeling the pain now. I don't have much sympathy for what seems to be a ridiculous sense of entitlement -- not just the I'm going to have a house when I'm 25 (I never would have considered this a possibility when I was 25), but it's got to have double bathroom sinks, a mudroom, and all the bells and whistles.

It's a standard of "luxury" that buyers tend to expect now, but the irony is that since most of it is put together so quickly by unscrupulous builders trying to make a quick buck, the luxury starter castle/garage Mahal they are buying will be falling apart in no time.

We were lucky (and I'd like to think, sane). We did not move up by a considerable margin, so our equity in our house is high. Houses in our close-in neighborhood have maintained their values. The problem is that builders are tearing down the cute, modest houses and replacing them with "bungalow" McMansions they plan to sell for $1.5 million. I don't know who can afford these houses, but they seem to be people about half our age (we're in our 40s). And they apparently "need" more space than families did when our neighborhood was built in the 1940s.

I'd like to think the problem was specific to the Washington region, but a quick look at any HGTV show (househunters griping, what do you mean there's no granite in the kitchen?) tells me that we are a nation of spoiled brats for whom bling trumps character every time.

So yes, greater scrutiny in lending would help. But how to combat the elevated expectations, and all-out greed? Is this just a nasty side effect of our country's relative prosperity?

Posted by: Labradorian | April 9, 2008 10:50 AM

Foamgnome, embrace the concept of multiple paragraphs.

Posted by: ¶ | April 9, 2008 10:51 AM

Not totally self-righteous--you could get a fixed 30-year loan with 3% or 5% down. My first mortgage, as first time homebuyer, I got a fixed rate and didn't have to pay PMI even though I only put 5% down. However, I masnaged this by buying a 60-year-old garden apartment with a tiny kitchen and bathroom, not a fancy new luxury condo near the metro, which I probably also could have qualified for with an exotic mortgage. Again, I'm annoyed that a lot of people made a lot of money off all this and now the homeowners are stuck holding the bag, but I don't feel too sorry for people who bought beyond their means and that includes plenty of people who should have known better.

Posted by: Arlmom | April 9, 2008 10:54 AM

OH, the current credit crisis affects all of us. I am not seeing a lot of foreclosures in my neighborhood but the value of my home is decreasing. So the property taxes are decreasing and government services are in a pinch. Lenders are restricting their lending, so small businesses are having trouble raising capital. In essence, what was caused by a few will affect the masses. Personally, we bought a modest three bedroom home that we could afford on one income with a fixed rate. WE make extra payments to the mortgage every month to pay the house off in 17 years versus 30. We would not borrow against the equity of our home unless we were forced to (job loss, severe medical issues, death of a spouse etc...) We own an 8 and 9 year old car with no debt. We carry over NO credit card debt. In essence we live by the old principals, we work hard, save money and live within our means. I do have to admit, I get a little tinge of jealousy when I see the beautiful new 5 bedroom single family homes, with two shiny new cars and European vacations. But I know that we fully fund our retirement, will pay our home off early, have two college funds for our kids, and a few other small luxuries (Disney versus Paris for us).

Posted by: foamgnome | April 9, 2008 10:55 AM

"... record low consumer spending ..."

Not me, I'm spending more than ever. Just yesterday I spent $80 to fill my gas tank in Silicon valley (gas is $3.80 per gallon here).

Posted by: Spanky | April 9, 2008 10:55 AM

Well done foamgnome! Bear Stearns et. al. are regulated... by too many different agencies. When the gov't began to peel back the Glass Steagall act and other legal artifacts of the Depression, brokerage firms were allowed to enter into banking functions that they were formerly prohibited from. I haven't analyzed the Treasury overhaul proposal but it is an attempt to streamline the regulatory streams/functions.

Posted by: Product of a Working Mother | April 9, 2008 10:56 AM

Product: I meant to say BS is not regulated in the same way as banks. Not that they run around totally unregulated. Sorry if that wasn't clear.

Posted by: foamgnome | April 9, 2008 11:04 AM

All I'll say is using the excuse "I didn't read the documents because NOBODY reads the documents" is lame. If you are signing something, you better be sure you read the documents. Yup, I read every word and I read my HOA documents before buying my house.

And as for "choosing" a 30-year fixed versus exotic loan - you are still choosing to buy a house. If you can't qualify for a 30-year fixed, you are choosing an exotic loan. You can choose to rent.

Posted by: Reader | April 9, 2008 11:15 AM

We have had some good news come our way. My husband passed the exam for the apprenticeship program and has entered step 2 of the application process. He got the letter last night saying that he is scheduled for an interview next week on Thursday.

Prayers and good thoughts are welcome. We may not find out for several months if he is accepted into the program.

Posted by: Billie_R | April 9, 2008 11:16 AM

I do think that luck -- good and bad -- plays a big role in this kind of trouble. That's part of schadenfreude, the feeling that someone else's misfortune hits a little too close to home. But also if something seems too good to be true -- "wow, i can't believe we could afford a house this nice" -- sometimes it is too good to be true.

Posted by: Leslie | April 9, 2008 11:17 AM

Congrats, Billie! A light at the end of the tunnel always makes things a little more bearable, doesn't it?

Posted by: Laura | April 9, 2008 11:17 AM

Bilie:Good news.

Oh one more thing to note, not just mortgages are sold as securitized debt instruments. Commercial real estate, student loans, car loans, and student loans are also packaged and sold in the same way.

So we may be only seeing the beginning of the securitized credit crisis. There may be more to come. Only time will tell.

Did you like my use of paragraphs? :)

Posted by: foamgnome | April 9, 2008 11:20 AM

"The major pieces of legislation signed Tuesday include a bill that will require mortgage lenders to verify a borrower's ability to repay a loan. It was the last piece of a far-reaching package of legislation designed to help combat the rise in foreclosures in Maryland."

--from the Baltimore Sun, April 8, 2008.

The effect of this fine law will be to prevent what people have called "liar loans," where the borrowers give the lender phony, made-up values for their income and assets. I assume that the term "liar" refers to the borrower who tells such lies. But actually, there are two liars in every "liar loan." Yes, the borrowers are lying. But they are being encouraged to lie by the lie that the lender (or mortgage broker, or real estate broker) tells them. This lie is that they are entitled to live in a house even though they have no down payment and will not be able to afford the market interest rate once the "teaser rate" expires.

My parents (and their parents) lived all their lives in rented apartments. That's because they had no down payment, and could not afford to make mortgage payments at the going interest rate. They did not complain because they knew that since a rented apartment was all they could afford, a rented apartment was all they deserved.

In the Soviet Union, commissars decided what kind of housing you deserved, and they assigned it to you, whether it was a fancy _dacha_ for the Party élite, or a cramped apartment for the ordinary working family. In pre-civil-rights America, racists often decided what kind of housing you deserved, so that even if you could afford a nice house in a white neighborhood or suburb, the brokers and sellers and landlords decided that you didn't deserve to live there and they would not sell or rent to you there. But in a free economy, the market decides where you deserve to live, viz., where you can afford to pay the rent or the mortgage.

Part of the blame for "liar loans" lies (heh-heh) with the lenders who told the lies. In my opinion, they were reckless about ensuring that they would get paid back, and they took the risk of not being paid back, and they don't deserve to get paid back. Another part of the blame lies with the government's "Community Reinvestment Act Program" (C.R.A.P.), which encouraged lenders to make loans to people with shaky credit histories. Maryland's new law, if it is enforced, will see to it that people who can't afford a particular home won't get to live in it. After all, they are no better than my parents.

Posted by: MattInAberden | April 9, 2008 11:21 AM

Just curious: How many of you have children who share a bedroom? Or is that phenomenon obsolete in the middle class, other than as a plot device on TV shows?

Posted by: mehitabel | April 9, 2008 10:35 AM

And bathrooms! I have friends who moved AGAIN (3 times in 4 years - condo to house to bigger house in VA Beach) because their 3 daughters (all under 8) were "fighting" over ONE bathroom. (The father grew up in a house with one sister and all 4, includes parents, shared a bathroom). Two shared a bedroom and one had her own, I don't know what it's like in the new McMansion. I also mom and dad work a lot of jobs and are renting out the other home...For what it's worth, parents are a firefighter and teacher.

Posted by: WDC 21113 | April 9, 2008 11:25 AM

"Unless you bring a 20% downpayment to the table, that 30 year fixed rate option is not available to you."

This is actually not true. We had decent credit, and had barely 5% down, and still got a 30 year fixed rate.

Posted by: To: Sheesh | April 9, 2008 11:29 AM

I grew up in the 70s and the 80s. We were a family of three children and two adults. Each child had their own room but all five us shared a bathroom. We did have two bathrooms in the home but one full bathroom was on the first floor. Not too many people want to trapse through the first floor in their bathrobe or towel to take a shower. We have a three bedroom house with two bathrooms. Each kid will have their own room but they will share a bathroom. My husband and I share a bathroom. I think growing up we were pretty middle class.

Posted by: foamgnome | April 9, 2008 11:30 AM

two good solutions to keep people in their homes are partial mortgages, where the goal is not an unaffordable full ownership of the home but some lower amount of equity, say 50% or more, and extended term mortgages, say 50 years. Since the mortgage lenders recklessly extended credit they shouldn't have, regardless of the sins of others, offering these alternatives shouldn't be optional, and I think would be in everyone's interest. Of course these aren't ideal mortgages, just much better than the alternative of foreclosing on 2 million families. Use your [censored] imagination for a change.

Posted by: newageblues | April 9, 2008 11:30 AM

We've got two daughters sharing a bedroom. I figure if you're feeling cramped in there with your sister, it's a good excuse to get outside and go for a bike ride or a walk. Also, in our house bedrooms are pretty much for sleeping -- no TV's, video games, etc. in the bedrooms.
I'll confess to having 3.5 bathrooms, however. The house came with that money, although 4.5 was also an option. (Seems excessive given that we're a family of five. AT this point, there's one that contains only a cat box and is known as "the kitty bathroom" and yes, my grandma who survived the Depression is surely rolling over in her grave at the thought of the "Kitty bathroom.") Only in America.

Posted by: Anonymous | April 9, 2008 11:32 AM

Matt:Again the mortgage lenders could care less about liar loans. They sell the debt in bundles which are resold as paper debt instruments on wall street. It is too complex to explain how the debt is categorized. But most of the hedge funds and buyers of commercial debt have no idea what the debt instrument is actually comprised of. When purchasing the paper debt they could not tell if an individual loan was a liar loan or a truthful loan.

Posted by: foamgnome | April 9, 2008 11:33 AM

w

Posted by: test | April 9, 2008 11:35 AM

I'm a local coordinator for an au pair organization, which means I deal with host families and au pairs. Part of the process includes a tour of the house (State Dept requires this). I am astonished at what I'm seeing. Granted these are middle class and upper middle class families, but there are lots of homes where each kid has their own bathroom, and some where each kid has their own playroom attached to the bedroom and a bathroom. I don't get why parents think their kids need that kind of space unless their trying to avoid them. These are probably the same parents that will be buying new cars for their 16 year old.

Posted by: LCC | April 9, 2008 11:38 AM

"I'm all for capitalism. But it really, really gets under my skin when the very businesses who religiously invoked the free market to cut back regulation are the first to get in line for a government bailout when that market turns against them."

Ditto, Laura.

Denver has been featured in several articles about this crisis because of the number of foreclosures, but it seems to me that they are very concentrated in the newer developments on the outskirts of town. The houses are huge, poorly built in my opinion, and generally financed by the builders. There's been such a drive to build and buy bigger, newer houses, and that seems to be what's falling apart here. The same trend others have mentioned - the builder/financers have aggressively marketed and encourage people to stretch to buy the most house possible; realistically more than they can really afford. Our neighborhood of 1950's ranch homes has seen a slow down in sales, but not a lot of foreclosures. We bought our house as a place to live, not with an eye toward flipping it anytime soon - of course we hope it will prove to be a good investment in the long haul, but we want to stay put. So my hope is if we can weather the general financial storm (and our own particular one) for the next few years, we'll be fine in the long run.

Posted by: LizaBean | April 9, 2008 11:40 AM

Is there a way to edit our posts? If we have too much info and maybe get "busted for gossiping"?

Thanks...

Posted by: Wondering | April 9, 2008 11:47 AM

Shandra - I live in Canada. While it's definitely true that the subprime market never really developed up here, it's not true that you need 10% down to buy a house or condo. Maybe it varies from area to area. In the Toronto market, 5% is generally acceptable and you occasionally see as low as 1%. This is probably due to the high prices of property in and around Toronto, and a housing market that remains strong.

Even with that, I'm glad I took the 10% down and fixed rate option, plus picked a property where I'd have wiggle room if rates are higher when it's time to renew (5 year mortgages are very common in Canada).

Posted by: Great White North | April 9, 2008 11:50 AM

As a reference point, we have a 3-bedroom 60s-era modest home. We decided our budget was more in line with the 60s. :-)

It does have two bathrooms, but the second is in the basement which we currently use as family space, but can be rented out as an in-law suite (this gives us additional options if we were to have a financial crisis). The bedrooms are 60s sizes - 10 x 12, 12 x 14, 14 x 20. The master bedroom has a double closet.

So, no McMansion here. This is our second house (our first was a total fixer-upper) and we learned what was important to us in the first house.

If we have a second child I'm not sure whether we would have them share or not. If they did, my husband and I would have to move our office into family space, and that might not work. We might have them share for a while and then change things around.

Having an elegant foyer is really nice, but we didn't want to heat or clean it, never mind pay mortgage dollars for it. We did want good family spaces and found a house with a big kitchen and a good sized living-dining room. However, the kitchen does need an update, which we'll do in time. Ditto the bathrooms.

We also wanted closets, and yay, we have good storage where we are.

However, neither of us is in a field where we entertain at home. That would have changed our requirements considerably. Our house sort of screams "we live here."

Posted by: Shandra | April 9, 2008 11:59 AM

MattInAberdeen quoted from the Baltimore Sun that "The major pieces of legislation signed Tuesday include a bill that will require mortgage lenders to verify a borrower's ability to repay a loan."

Do you mean to tell me that mortgage lenders never did that before? Obviously some didn't, which is part of the reason we're in this mess. But what idiot would lend money - hundreds of thousands of dollars - to somebody without making sure it could be paid back???

Posted by: Wash DC | April 9, 2008 12:00 PM

Shandra--that's the best kind of house! :)

Posted by: tsp 2007 | April 9, 2008 12:02 PM

Well we bought in the Toronto market and we definitely needed 10% down.

But it's true we weren't looking at new construction, and that first house was in '95. So maybe my info is outdated - which is very scary!

Posted by: Shandra | April 9, 2008 12:05 PM

Mehitabel;

The boys share a room (bunk beds), the girls share a room, and all 6 of us share the same bathroom. Do you think by posting here, I'm blogging out of my class?

Posted by: DandyLion | April 9, 2008 12:06 PM

To: Sheesh, Lord Almighty:

By the same token, if you can't get a good/comfortable/reasonable rate on the mortgage maybe you should forgo that house. It's a question of supply and demand. There was a huge demand for mortgages for people who would not have qualified under more conservative terms. So the lenders answered the need. Which came first, the chicken or the egg?

Posted by: Anonymous | April 9, 2008 12:06 PM

How is this crisis affecting me?

Well, my wife is mortgage originator working for a mortgage broker (she is one of the honest ones, to her own financial detriment). So for us, it really s^cks, I know I won't get any sympathy here because all mortgage brokers are scum. But losing 30% of our take home pay is a a real eyeopener.

As for blaming the appraisers: if three similar houses in the neighborhood just sold for 500K, the next house is worth the same. It wasn't the appraisers that overvalued the market, it was the consumers; by paying 20% over asking price or getting into a bidding war.

As far as fine print, some of you don't know what your talking about. There is a document called the Good faith estimate which spells out ALL the financial aspects of the contract you are about to sign. If you read and decide that you can perfectly well pay $2500 a month on $80000 a year salary, the bank was going to let you. And they let you because the government AND the public demanded that you should be able to. This is evident from statements like:

"The ongoing condo-ization of DC is pushing people of moderate incomes out of affordable rental units. Call it the free market -- but where do these people then move?!?"

One of the solutions to this problem was the creation of the sub-prime market. From my point of view, we as a country got what we asked for.


Posted by: Anonymous | April 9, 2008 12:08 PM

Do you mean to tell me that mortgage lenders never did that before? Obviously some didn't, which is part of the reason we're in this mess. But what idiot would lend money - hundreds of thousands of dollars - to somebody without making sure it could be paid back???

Posted by: Wash DC | April 9, 2008 12:00 PM

Of course they did, always have and always will. They just used lower standards. What (I assume) this bill will do is have the gov't set the acceptable standard.

Who is the best judge of what you can afford, you or the gov't? Obviously, as a population, it is not us.

Posted by: devils advocate | April 9, 2008 12:14 PM

But what idiot would lend money - hundreds of thousands of dollars - to somebody without making sure it could be paid back???

The idiot who sells the mortgage to someone else, after he gets his cut, of course.

Posted by: me | April 9, 2008 12:18 PM

"But what idiot would lend money - hundreds of thousands of dollars - to somebody without making sure it could be paid back???"

Someone who knows he can turn around and sell that mortgage to someone else. Who knows he can also turn around and sell it to someone else. Who knows he can break it into multiple pieces and combine it with 1000 other mortgages into a "security," which he can then sell to 1000 different people. Who know that they're buying a whole pool of mortgages, and so don't care whether any single loan fails, because one single failure won't have any significant effect on the value of the security. Read foamgnome's post, or the explanation in Pearlstein's chat last week.

When everyone gets paid for simply making a loan, without having to bear any of the risk if the loan fails, what's the incentive to do due diligence?

Posted by: Laura | April 9, 2008 12:23 PM

so this is like a reverse pyramid scheme. In a traditional pyramid scheme, you get money from new investors to pay old investors. Then it collapses. In the mortgage pyramid scheme you sell an unaffordable mortgage to somebody who is going to default, package this loan with other unaffordable loans and sell it to a third party who finances this purchase with borrowed money. This would be brilliant if it wasn't sad.

Posted by: Anonymous | April 9, 2008 12:27 PM

Wow some of you people are very nasty. It must feel great to have never made a mistake or trust someone in a position of power.

The bottom line is that many people made mistakes on their home purchases. You cannot fix the past. But all of you on your high horses that do not believe that helping those in a bad position now will not affect you think again. Foreclosures effect EVERYONE.

And the thing many seem to be missing is that there were predatory lenders out there just like there are predatory people who scam money from the elderly. But then I'm sure you sit there an think well the elderly deserved it - they shouldn't have been so trusting.

Posted by: Shocked | April 9, 2008 12:28 PM

I remember at the height of the housing hype, I was constantly asked when I was going to upgrade my very modest home. As much pressure as there was out there to buy, all that I could see what my particular situation, and the numbers did not lie. It would have been financial suicide to trade in my nice modest home in Rockville, which is in a great neighborhood and which I bought for a steal back in the 90s, for an overpriced house with a huge mortgage. So I stayed put, and boy am I glad that I did. My mortgage will be paid off this year, and then, I will buy another larger house (but still modest), and rent out my first home.

I do feel for the folks who bought into the hype and bought places that they could not afford, but it does not take a genius to figure out whether you can afford your mortgage or not. It is simple common sense. Are there really people out there who did not understand that those interest only loans would reset after some time to unaffordable mortgage payments? It blows my mind that people could be so naive.

Posted by: Emily | April 9, 2008 12:29 PM

Right, and when the corporate execs who cooked up this scheme all walk away with their fat bonuses and golden parachutes intact, where's the incentive to change? What do they care about the employees losing their jobs, taking pay cuts, and people losing their homes, they made out like bandits.

Posted by: uh yeah | April 9, 2008 12:30 PM

A lot of the problem comes from the interest only loans designed to get someone into a house they can't afford. These are basically, 2-3 years of interest only payments at a low adjustable rate. After that they become normal fixed rate (or adjustable rate) mortgages, but no longer interest only. This is not a balloon payment, it is clearly stated what happens to the payments. What follows is what stupid people do to lose their home.

My wife got a loan like this for one of her clients, since it was the only way they could afford the payments and they really wanted a house. My wife didn't hunt them down and force this on them, they came to her because they wanted a house, period.

My wife told them several times that the payment would go up in 2 years to something they couldn;t afford. They only put 5% down, so they were told to make extra payments beyond the interest only (they could afford to pay more than just the interest) to get some equity. They were also told to keep their financial house in order. If they did this, there would be a good chance that they could refinance before the 2 years was up.

What do you think they did?

Well, they never made any additional payment to the mortgage, so they had no equity when the value dropped and they actually now owed more than the house was worth. Also in the two years they were supposed to be getting their financial house in order, they bought a brand new car at 100% financing and then the wife quit her job when they had another child.

Should we feel sorry for these people? Maybe a little because thousands of people had done what they were planning to do in recent years. But probably not because they didn't do any of the financially prudent things they were suppoded to to avoid the risk.

Posted by: devils advocate | April 9, 2008 12:31 PM

Certainly part of the fault lies with the people we trust to tell us if we can afford a loan. But the person actually asking for the loan should have done their own due diligence. I have heard some of the stories and these people with half of my salary were being told they could afford a house twice the price of mine. If you are earning 2000$ a month, surely it is not rocket science to figure out if you can afford a 1500$ mortgage payment.

And for those who were hoping to cash in? Thanks for screwing the rest of us over who were simply trying to buy a house to live in that would hopefully also be a good investment.

Posted by: Billie_R | April 9, 2008 12:32 PM

Home prices will drop, and they should drop. They were artificially inflated. I just don't think there is any way around that. I am all for helping people who are facing forclosure, but I don't think it is wise to help in a way that will keep housing prices artificially inflated. Of course I don't have a solution to this. Perhaps someone else does.

Posted by: Emily | April 9, 2008 12:34 PM

To the tune of "You Lost that Loving Feeling" by Phil Spector, Barry Mann, and Cynthia Weil


You never tell your name anymore when your write your quips.
And there's no extra typing like before in your fingertips.
You're trying hard not to show it, (baby).
But baby, baby I know it...

You've lost that reg-is-tration,
Whoa, that reg-is-tration,
You've lost that reg-is-tration,
Good that it's gone...gone...gone...wooooooh.

(But) Now there's no recognition in your eyes
when I blog for you.
And now you can't criticize little things I do.
It makes me just feel like sighing, (baby).
'Cause baby, what you write can be trying.

You've lost that reg-is-tration,
Whoa, that reg-is-tration,
You've lost that reg-is-tration,
Now it's gone...gone...gone...wooooooh

Baby, baby, I post on the WaPo just for you.

If you would only recognize me like you used to do, yeah.

We had some words...words...a fight everyday.

So don't...don't...don't...don't you back away.

Baby (baby), baby (baby),
I beg of you please...please,
I need your name (I need your name),
I need your name (I need your name),
So bring it on back (So bring it on back),
Bring it on back (so bring it on back).

Bring back that namin' feeling,
Whoa, that namin' feeling
Bring back that naming' feeling,
'Cause it's gone...gone...gone,
and I can't write on,
noooo...

But don't want no registration,
Whoa, no reg-is-tration
Don't back that registration,
Now that it's gone, gone gone....

Posted by: Songster | April 9, 2008 12:38 PM

Billie - You make a very good point on those that were just looking to cash in. I worked with several married co-workers from 2003 - 2005 and all flipped at least 4 - 5 brand new homes in Loudoun county. I ticked me off to no end that they would buy a house under construction at the lower construction price and then shortly after closing on it sell the house for as much as 200k more.

I lost complete respect for these people because they could not understand they were taking away a home from someone who might have been able to afford the pre-construction price.

Obviously they didn't view themselves as greedy...

Posted by: Anonymous | April 9, 2008 12:46 PM

I suspect there's also a fair bit of learning through experience. I am old enough to remember the days of 16% mortgage rates -- so I've never been tempted by "teaser" rates, because my own experience is that rates go up, big-time. I also bought my first place near the end of the housing recession of the late 80s/early 90s -- so my own experience is that housing prices can fall, and that housing markets can basically shut down for years at a time.

But someone just a few years younger than me (I'm 42) would have had a completely different experience -- housing prices only go up, houses are selling faster and faster, mortgage rates always stay low, etc. etc. etc. And that can make people more susceptible to the hype, because they have quite simply never seen anything different. You know what they say about experience being the best teacher -- you need the perspective to push back against the people telling you that everything's ok.

It's a shame that this seems to be a lesson we seem to need to relearn every generation. You'd think we'd have learned something from the crash of '29 (which is ultimately what spurred the higher lending standards, 20% downpayment requirements, and Glass-Steagall in the first place), from the savings and loan crisis, from the junk bond crisis, etc. etc. etc. There is always going to be some hot new "thing" that will make tons of money, seemingly out of thin air. And people will always dismiss naysayers with the claim that "this time is different." And in the end, we'll all once again re-learn that it never really is.

Posted by: Laura | April 9, 2008 12:47 PM

Certainly part of the fault lies with the people we trust to tell us if we can afford a loan.

Posted by: Billie_R | April 9, 2008 12:32 PM

Why? You (not you personally) are the only one who know whether you can afford something. Contrary to what a lot of people think, you really can't get a mortgage without knowing the payments. It is all spelled out in the closing documents. Yes, some fo those docs are legal mumbo jumbo but there is always (at least in my state and the surrounding states I think is is federal requirement) at least on document that the consumer is required to sign stating the mortgage terms in plain english.

We, as a counrty, wanted these people to have homes, so we deregulated the banking industry and told the lenders they needed products that the less well off can afford, because it wasn;t fair that everyone couldn't own a home.

An open market requires an intelligent public, which we are now realizing isn't America.

Posted by: devils advocate | April 9, 2008 12:54 PM

Who is the best judge of what you can afford, you or the gov't? Obviously, as a population, it is not us.

Posted by: devils advocate | April 9, 2008 12:14 PM

I know I can't afford what the bank says I can afford. Why would the govt tell me any different, especially if they can make a profit? The bank and the govt know what I can afford on paper. I know what I can afford in real life - which is never the same as it is on paper.

Posted by: Wash DC | April 9, 2008 12:55 PM

"the feeling that someone else's misfortune hits a little too close to home"

That's not what schadenfreude means. Schadenfreude translates as taking pleasure from someone else's misforture. Whether or not somebody supports I bailout, I doubt many are experiencing schadenfreude in this situation.

While I have very little sympathy for those who misuse credit (either through ignorance or other means), I'm certainly not delighting in their situation.

Posted by: schadenfreude | April 9, 2008 12:59 PM

My wife got a loan like this for one of her clients, since it was the only way they could afford the payments and they really wanted a house.

Posted by: devils advocate | April 9, 2008 12:31 PM

I really want a souped-up Corvette, but let's face it, even with both of my jobs I can't afford one. I realize that if your wife didn't make the deal with these people, they'd have gone somewhere else, but that right there should have been their big clue that they can't afford a house. These people and so many others like them were no more entitled to a house than I am to my dream Corvette.

Posted by: Wash DC | April 9, 2008 1:02 PM

My wife got a loan like this for one of her clients, since it was the only way they could afford the payments and they really wanted a house.

Posted by: devils advocate | April 9, 2008 12:31 PM

I really want a souped-up Corvette, but let's face it, even with both of my jobs I can't afford one. I realize that if your wife didn't make the deal with these people, they'd have gone somewhere else, but that right there should have been their big clue that they can't afford a house. These people and so many others like them were no more entitled to a house than I am to my dream Corvette.

Posted by: Wash DC | April 9, 2008 1:02 PM

"Certainly part of the fault lies with the people we trust to tell us if we can afford a loan.

Posted by: Billie_R | April 9, 2008 12:32 PM

Why? You (not you personally) are the only one who know whether you can afford something. Contrary to what a lot of people think, you really can't get a mortgage without knowing the payments."


Many people "knew" they could afford the teaser rates, but it was the professionals who convinced them they could refinance before the rates reset. Why wouldn't someone who has never been a homebuyer and doesn't work in the housing/lending/real estate industries believe that they could refinance and not actually ever have to pay the higher rates?

Also, I think many people would be able to refinance or afford the higher payments if the cost of gas, electricity, oil, heating costs, and food hadn't also increased more than anyone imagined.

Posted by: anon | April 9, 2008 1:11 PM

"there is always (at least in my state and the surrounding states I think is is federal requirement) at least on document that the consumer is required to sign stating the mortgage terms in plain english."

I'm sure someone will correct me if I'm wrong, but I think if you get an ARM, the "plain English" document only spells out the initial mortgage payment. The mortgage documents themselves will tell you what the rate is tied to, how frequently it will jump, or how high it can go, but nowhere do they have to do the math and tell you what your payments WILL be if and when those jumps occur.

Oh, and that whole "good faith" form is a crock anyway -- it is completely not enforceable. As I found out when my mortgage company (Countrywide, btw) secretly changed the interest rate on me. As in, the original lock agreement listed one rate, which they they later crossed out and handwrote a rate 1% higher -- and didn't tell us about until closing. I even reported them to the state regulatory board and met with an agency representative several times. But the agency told me they couldn't do anything, because the pre-closing documents aren't enforceable -- my only options were to take the deal offered at closing, or walk from the deal (which would have meant getting stuck with an even higher rate with someone else, since rates had risen since my lock). Basically, standard, legal operating procedure in the mortgage business would pretty much be called "fraud" in most other businesses.

I think one of the first, most simple things to help this is to require a lot more plain English disclosure. Show people what the mortgage could cost at the maximum loan rate. And for heaven's sake, make those "good faith" estimates binding and enforceable.

Posted by: Laura | April 9, 2008 1:14 PM

Devil's Advocate,

Reality is that people trust the people giving financial advise in situations such as this. Wouldn't you trust your financial advisor/accountant if you had one? Wouldn't you follow their advice if it seemed reasonable? What about your doctor?

I think some of the advice dished out ranged from being somewhat unreasonable to being totally unreasonable. For that advice that was totally unreasonable, the customer's own due diligence should have caught it. For that which seemed somewhat unreasonable, a client who had doubt about their financial savvy could very well have believed it because it seemed reasonable and the person was _supposed_ to be trustworthy. It is unfortunate that people we put in positions of trust are not always trustworthy.

Posted by: Billie_R | April 9, 2008 1:24 PM

Part of the blame - and I would argue much of it - is due to our debt culture. How many college students take on too much in student loans, to be told they will be able to afford it later when they get a job? At the same time, credit card companies are parked in their dorm, offering low interest rate credit cards. It's a lot to counter with common sense.

This is a subject near to me as I watch my graduate students struggle and undergraduates taking on loans that will make decisions for them in a few years. I wish there was more financial training in high school, by parents or by the school. Unfortuantely, it's a cycle with parents - the entitlement mentality is inherited.

Said from experience, as I pay down my student loans and remember graduating with 5K in credit card debt not too long ago.

Posted by: Annarbor | April 9, 2008 1:24 PM

Another factor in people believing the professionals, is that at the beginning of the bubble people did make out. The house flippers, were able to make money because the prices were escalating, People had friends who stretched to buy houses who were then able to refinance because of the high equity that the bubble produced and it hadn't burst yet. This contributed to the problem.

Posted by: mom_of_1 | April 9, 2008 1:28 PM

"Reality is that people trust the people giving financial advise in situations such as this. Wouldn't you trust your financial advisor/accountant if you had one? Wouldn't you follow their advice if it seemed reasonable? What about your doctor?"

Billie, seriously, I would not trust any "financial advisor" that works on commission selling products. By this, I am not saying that they are all crooks -- I am just saying that you need to recognize that these people are not there to advise you, they are there to sell you something. If you want financial advice you can trust, find someone that is not trying to sell you something, and who do not have a vested interest in your buying whatever product they are selling.

Posted by: Emily | April 9, 2008 1:29 PM

i think some of the fault lies with the idea that home ownership for everybody is good. when politicians started quoting things like "during so&so administration homeownship rose so so&so was good". nobody wants to say that there are some people who should not be homeowners because they are too close to the edge.

Posted by: quark | April 9, 2008 1:38 PM

laura: you are correct. ARMs state when the rate will first rise, the index to which the loan is linked to and the caps on the rise. A good "quant" person could probably survey the historical patterns of the LIBOR (or the relevant index) and create a model of the most likely outcomes - Army Brat where are you? ;-)

Re flippers: I had a coworker who wanted a new construction condo in Arlington spend a YEAR going to pre-construction open houses/putting her name on lists/etc. She kept getting closed out by investment purchasers. Then she spent another year waiting for the darn thing to be built.

Posted by: Product of a Working Mother | April 9, 2008 1:53 PM

We moved to our 70's era house about 12 years ago, before the McMansions boom. Then, after the building started, I admit, I was envious of the soaking tubs, 12 foot ceilings, movie-theater basements. But we couldn't afford to move so soon, anyway. Then, about 5 years ago we needed to make a choice - spend $$ renovating some items in our current home (HVAC, windows, appliances, etc) or moving to a newer house. We looked and looked - we were tempted by the mortgage options, thought about moving farther out, but in the end decided to stay put.

It just seemed too scary to us - to buy a house before our current one was sold, to get exactly what we needed from the sale to buy the new. The homes nearby were selling for much more than we ever imagined possible, but so were the houses we were thinking about buying.

But we were interested - and the lender was telling us we were perfect candidates for these crazy loans. We saw all the beautiful houses at our disposal - just pick one!

Flash forward 3 years - home prices in our neighborhood have plummeted - what sold for 600,000 a few years ago now sells for 480,000. Some of the McMansions are on the market for over a year. Some are vacant.

I keep telling myself that we made the right choice - avoided going into more debt, the renovations are done and the house runs better, great neighborhood, etc. But part of me still wants that bigger better house with all the bells and whistles. Luckily, my logical side usually prevails over my 'free spirit'.

Posted by: house hunter | April 9, 2008 2:00 PM

My husband and I have gone through several real estate transactions in 3 states in the last 2 years. We've been derided by real estate agents (on both sides of a transaction), appraisers, and mortgage sellers as "readers" -- you know, those annoying people who actually read every single line and clause of every document (that's quite a feat in three different legal jurisdictions). They absolutely HATE people like us. We even ask questions that they don't know the answers to. And we require docs 48 hours in advance of closing, otherwise we won't sign. (Our thinking is, well, we have the money that they want. This is a business transaction. Fee for service: we pay the 5 or 6% fee, they provide the service.)

It's a good thing we do this. When we bought our current home with a 5/1 arm, we made it very clear that we wanted a no prepayment penalty for the loan, as we were planning to use proceeds from a sale to pay down a good portion of the balance within a few months. When the final papers came in, guess what -- a prepayment penalty was included. We got on the phone, said in no uncertain terms that the deal was off unless that was changed, and we closed the next day.

My unsolicited advice is that eternal vigilance is required, and take the time to be sure you understand what you are signing. The bankers/mortgage brokers/etc. are first and foremost salespeople -- that's why we tend to "like them." But there's a huge difference between liking an trusting them: they don't care one wit about the customer as anything other than a means to their end -- making as much risk-free money for themselves as possible. (Remember, if they are really such nice folks, you'd probably be friends with them after the transaction. Ask yourselves, are you?)

Posted by: a darn reader | April 9, 2008 2:15 PM

House Hunter,

I hear you. I was incredibly tempted by the bells and whistles. Really... who isn't? But I decided that granite wasn't necessary. It was simply necessary to have countertops and so on and so forth.

I also wanted an older home so that helped with some of the temptation. I figured that if the home had lasted 20 or 30 years it was probably going to last another 20 or 30 years. Who knows how long a new home will last and I have heard of stories about cracking foundations and so on with new homes.

I am still getting hurt by the market in terms of investment but as long as I don't lose my job (or some other catastrophe)... my house is safe from foreclosure.

Posted by: Billie_R | April 9, 2008 2:17 PM

(so-called teachers, police and firefighters)

"So-called"??? Please explain.

Posted by: Me | April 9, 2008 2:19 PM

But there's a huge difference between liking an trusting them: they don't care one wit about the customer as anything other than a means to their end -- making as much risk-free money for themselves as possible. (Remember, if they are really such nice folks, you'd probably be friends with them after the transaction. Ask yourselves, are you?)

Posted by: a darn reader | April 9, 2008 2:15 PM

You obviously picked the wrong people. Anybody that gives you a hard time for reading everything, shouldn;t get your business. Any sales person, in a business that relies on referrals for customers, that does not care about the customer will soon be out of business.

The money is not risk free, many wholesale lenders make you repay the loan if it is payed off or foreclosed on within a certain amount of time.

Are people expecting that mortgage brokers shouldn't make any money? Or that the bank shouldn;t make any money?

You think you mortgage broker should spend the 20-40 hours picking the right program (there used to be hundreds to choose from)for you for free? The appraiser should spend his 10 hours visiting your house and searching the neighborhood for comparable properties for free? Maybe the underwriter should review you loan for free? Most of the people you all are calling crooks and unscrupulous are just people like you or me who go to work every day trying to earn a living. The friends comment is such bu!!, it is a not so nice way of calling everyone who works on commission a greedy, untrustworthy ahole.

I don't think I know anybody who was "forced" to buy a house, do you?

Posted by: devils advocate | April 9, 2008 2:46 PM

Billie_R, I agree with you about the quality of homes. In our neighborhood, 2 builders when out of business, leaving the buyers stranded. One person put a sign out in the yard that said, " Before you buy here, come see me!".

I have seen burst pipes, basement ceilings sagging from the weight of the granite kitchens, carpet that has stretched and is bumpy. Not to mention the cost of heating and cooling.

Posted by: house hunter | April 9, 2008 2:48 PM

to me: the appellation "teachers, police and firefighters" is commonly used to distinguish moderately priced dwelling units from section 8(a) public housing. The teacher et. al label gets used because the idea is that public servants should be able to live in the communities that they serve.

Posted by: Product of a Working Mother | April 9, 2008 2:51 PM

Actually, Laura, my DH with his first house had something similar happen to him. He was buying from an elderly couple who had lived there forever.

So the mortgage company put in extra fees, or raised the rate or something. And my DH told me that what he did was to tell the mortgage company - on closing day - that he wasn't going to pay that. He was going to walk away from the deal.

LO AND BEHOLD. The fees were taken off, and he got the house (and the elderly couple, who each thought they were going to have a heart attack, were fine).

BUT most people will just pay whatever it says.

Posted by: atlmom | April 9, 2008 2:57 PM

I just wanted to point out, as some above have already said, that we're not talking about people getting into trouble because of some gotcha buried in page 45 of a mortgage. We're talking about very basic payment terms - the amount of your monthly payment, the interest rate, and whether or not that changes. I do not think we can simply write this off as people not reading a hundred page document.

Posted by: It's not the fine print | April 9, 2008 3:02 PM

I keep reading about fine print . . . and no, I didn't read all of mine when we bought our house. But, I did know generally what we could comfortably afford (vs what we qualified for, which was much more and which was "offered" to us) and I knew the type of mortgage we were getting into and at what interest rates. The "Fine Print" affected none of that.

I do feel bad for people losing their homes and their kids and losing what they thought that they had. I do. BUT . . . you don't need to be a lawyer, doctor, higher degree holder to know that if you have a combined income of $70k, you prob cannot afford a $600K home. And, if the financing is so tricky or complicated that you can't understand it, it probably isn't a good idea. Does it seem too good to be true? It probably is.

While I think that there are predatory lenders. There are scam artists. And, yes, there are a few that were generally taken advantage of. But, in my own view, from what I've seen, and from what I know about in my area, this is not the case for most people. So, my sympathy is limited.

Posted by: Jen | April 9, 2008 3:08 PM

atlmom, that's actually what we did -- we refused to pay and walked out of closing. They spent the next few days calling us to come back, but stuck with the same rate (apparently/allegedly, the loan officer had messed up, and they were no longer able to get the original quote). We spent that time researching other rates, only to discover that their new rate was still cheaper. So unfortunately, going back to them ended up still being the best deal.

So we were really stuck: either let them get away with the bait and switch, or get an even worse deal from elsewhere. Which is why I was really PO'd that the state regulator wouldn't do anything.

Posted by: Laura | April 9, 2008 3:11 PM

Devil's advocate: I am not implying that the people that work for commission or fee for service are crooks. What I was explaining was that they had no vested interest in whether the loan could be repaid reasonably. I actually said that there was a small number of people involved with predatory or illegal lending practices. In turn, the same people who say it is just business, should not be crying when their business dries up because of bad loans made by their employees. I believe the first fall out was mortgage firms that specialized in subprime mortgages. It is one of the worst mortgage markets in the last two decades. They are partly responsible for their own businesses going under. But from what you hear from them, it was always someone else's fault (regulators, banks, hedge funds). The problem as I stated from the beginning is multi level with everyone involved playing some part in the problem. Now there were some flat out predatory lenders and unscruplous real estate agents but they were few and far between. And of course those people should be held accountable. But the vast amount of lending was legal and was just part of business transactions. But those lenders shouldn't also be crying foul when their own lending standards led to a loss of business. BTW, BIL is a mortgage broker. So I understand and feel his personal pain.

Posted by: foamgnome | April 9, 2008 3:20 PM

I don't think many people here are being nasty or "holier than thou".

I think it's a case of realizing that a house is usually the biggest financial decision you'll make in your early-mid years. As such, it's one where you should do research and figure out if you should be buying a house, and how much you can afford. There are LOTS of factors that go into this decision.

Many people decided it was more prudent for them to buy less house than they "qualified" for, and to take the security of a fixed-rate over an ARM. It's less "never making a mistake" and more "I'm deciding to maybe sacrifice and do with less, knowing what I gain by doing that".

I'm in this boat, and I think it's less gloating than recognizing that the exact bad things in the future I tried to avoid are happening, and my choices (to give myself a cushion) are working exactly like they were designed to. Yeah I don't have a lot of the things my neighbors do, but I do go to sleep every night not worrying about losing my car/house. And that's worth something to!

Posted by: ATL Dad | April 9, 2008 3:35 PM

Devil's advocate: I am not implying that the people that work for commission or fee for service are crooks. What I was explaining was that they had no vested interest in whether the loan could be repaid reasonably.
...
The problem as I stated from the beginning is multi level with everyone involved playing some part in the problem.
...

_foamgnome

I don't think a I called you out on the "crook" thing. I thought I quoted emily. Your first post was well written and accurate.

But I do disagree with your second statement as it pertains to the honest ones. First, no honest mortgage broker will put thier customer in a mortgage that they know will be defaulted on. It is just bad business. They rely on referrals for their business and if they are willing to throw your customer under the bus for a commission, word will get around and they soon won't have any customers. Second, most wholesalers require a loan that has been defaulted on, within a certain period of time, to be repayed by the mortgage broker (the company) who then usually pass this cost onto the originator. That bad loan could end up costing the originator money. How would you like a negative paycheck?

My wife has customers who have bought 3 or 4 houses over the past 20? years, they wouldn;t come back if they didn't trust her.

I agree with the third statement, but I would include everyone, not just those involved. There was a concerted effort by consumer advocates (It is not right that a teacher can't afford to live where they teach), the government (this redlining has to stop, we need to stimulate the economy)and the financial sector (we should make money fot the risk you are asking us to take) to make sure everyone got their piece of the pie.

Posted by: Devils Advocate | April 9, 2008 3:42 PM

The appellation "teachers, police and firefighters" is not what brought me up short--it was the use of "so-called" that got to me. If the writer meant that to mean "people in this general category of public servants who deserve to live where they work" then I apologize for getting my nose out of joint.

BTW, I was a teacher, and my son is a firefighter. I guess I'm just a tad touchy when coming across a perceived put-down. :)

Posted by: Me | April 9, 2008 3:43 PM

Devil's Advocate: I guess in my mind I was using the term honest as a means of "legal" practices. There were and still are some mortgage broker firms (companies) that specialize in the subprime market. Although I would imagine in the last 6 months, they have changed their lending practices. They were conducting perfectly legal business. Even if in the long run, their business strategy did not work well for their company, they do not fall under the umbrella of predatory lending or illegal practices. If you want an example, Accredited mortgage was a primarily subprime mortgage brokerage until they almost went belly up and was bought out. My point was Accredited was still conducting perfectly legal transactions (ie. honest) but in the long run it was bad for their business. In the short run, they made a heck of a lot of money with no debt risk. Just customer/ business loss risk.

Posted by: foamgnome | April 9, 2008 3:51 PM

"First, no honest mortgage broker will put thier customer in a mortgage that they know will be defaulted on. It is just bad business."

If this is true, and we also have record numbers of people not being able to afford their loans, then apparently there are a whole heck of a lot of crooks, and you just proved the point that upset you so much. Alternatively, the mortgage brokers were part of a system that was broken on many levels, including inadequate safeguards and incentives to ensure the loan was a good risk. Which is, I believe, FG's argument that you are disputing. Are you really trying to make a point or just taking your appellation to the extreme?

Posted by: Anonymous | April 9, 2008 3:51 PM

I think it's a case of realizing that a house is usually the biggest financial decision you'll make in your early-mid years. As such, it's one where you should do research and figure out if you should be buying a house, and how much you can afford. There are LOTS of factors that go into this decision.

-ATLDad

Like I said earlier, I don't know anyone who was "forced" to buy a house.

The only factors the bank looks at when the "qualify" you is; your income, the amount of legal debt you have (defined as a total of all your minimum payments, it doesn't include food, gas and other important items) and your credit score (your "trustworthyness"). You should never, never borrow the maximum of what you qualify for, because even the banks know you can't really support the mortgage.


But, the assumption is that you are an adult and you know what you are doing. They also assume your income will most likely increase as the years go by, and a lot of people are willing to eat PB&J for a couple of years if it means getting the house they dreamed of.

Posted by: Devils Advocate | April 9, 2008 3:58 PM

Go back and read ALL of the comments from the beginning. Most of the comments (except those from the regulars) are being holier than thou.

Many, including you, are implying that people bought more house than they could afford. What stats do you have to back that up?

As someone mentioned earlier the houses in their neighborhood were going for 600k and they are now going for 480k. The people who bought at 600k had the option to buy at 600k NOT 480k as they do now.

As others have mentioned they have watched their downpayments be whittled away as the market has dwindled. And its not just the homes that were 480k. Its the 200k condo's that are now going for less than 100k. Being able to comfortably afford 200k when lets say you actually qualified for 300k and your home is now worth 100k doesn't make the pain anyless.

Its not just about buying within your means. Its about what the current value of your home is now. As this recession gets into full swing and more and more people lose their jobs and may have to sell their homes they won't be able to when they are upside down on their loan.

Again show some compassion to the full situation - not just the pieces you want to pick out.

Posted by: To ATL Dad | April 9, 2008 4:00 PM

" You should never, never borrow the maximum of what you qualify for, because even the banks know you can't really support the mortgage."

Which makes it a bad business decision by the bank. Sure, nobody was forced into buying a house, and homeowners are responsible for their choices.

But the fact remains that these banks were businesses taking on bad risk after bad risk, and they are responsible for that. Nobody forces the bank to make a bad loan either.

Posted by: Anonymous | April 9, 2008 4:12 PM

If this is true, and we also have record numbers of people not being able to afford their loans, then apparently there are a whole heck of a lot of crooks, and you just proved the point that upset you so much. Alternatively, the mortgage brokers were part of a system that was broken on many levels, including inadequate safeguards and incentives to ensure the loan was a good risk. Which is, I believe, FG's argument that you are disputing. Are you really trying to make a point or just taking your appellation to the extreme?

Posted by: | April 9, 2008 3:51 PM

Why blame the mortgage brokers for givng the customer what they want? No one forced the guy making 70k a year to buy $600K house, but he did anyways. And you know what, the risk the bank took was someday he may default and they will have to take the house back. Too bad, soo sad.

In case you haven't noticed, we, as a country, are headed for a recession, the cost of living has gone up and people wages haven't kept up. Of course those on the margins (people who over extended themselves) are going to pay for it when the $&^% hits the fan. Everyone loves the open market when it benefit them but scream "protect me, protect me" when it doesn't.

Hindsight is 20/20 and the risks were obviously greater than those at the top believed at the time, but the push (from everyone) was for more options for the less well off to buy their part of the "American Dream", not less. We as a country got what we asked for.

BTW, honest and legal are not synonyms to me. What is legal and what is honest are not the same thing anywhere in this country, why should it be so for the finanacial sector?

Posted by: Devils Advocate | April 9, 2008 4:22 PM

To me: Sorry about so-called. Yes, my intent was to refer to programs for people with moderate incomes to buy in communities they work in. Frankly I always thought using teacher/firefighter example was a way to alleviate people's NIMBY issues with traditional public housing.

This was a hot issue when I was community association president. As a policy geek I found infinitely more interesting than the "tree nazi" issues.

Posted by: Product of a Working Mother | April 9, 2008 4:25 PM

But the fact remains that these banks were businesses taking on bad risk after bad risk, and they are responsible for that. Nobody forces the bank to make a bad loan either.


Posted by: | April 9, 2008 4:12 PM

And I have even less sympathy for these banks than I do for the home-owners. These companies that based their entire business on the sub-prime market deserve what they get. They knew it was risky and should get no help from the federal government to bail them out. But I still don't think what they did should be illegal.

In my opinion, our entire economy is a house of cards built on the assumption of continual growth, a swe are finding out now, nothing grows forever.

Posted by: Anonymous | April 9, 2008 4:31 PM

What does the mortgage crisis mean to me? On the surface, not much directly - I live in New York City, which may be the only place in the nation where the housing market is as robust as ever. However, it does mean that just as I am at long last financially able to consider purchasing a place of my own, I may have more trouble getting a mortgage of any type.

It also means that my elderly mother in Arizona, who really should move into an assisted living facility, is staying in her (modest 2BR) home because she can't sell it for more than the mortgage and doesn't want to rent it out. Which leaves me to worry about her on the other side of the country. And don't suggest I should be the good daughter and move: I have a very good job in NY and no guarantee of similar in AZ - a "guarantee of not similar" probably more accurately describes the job market out there these days. Nor can she come to me in New York: how would she afford this town without cash from the biggest part of her nest egg, her house?

Posted by: BxNY | April 9, 2008 4:37 PM

"Why blame the mortgage brokers for givng the customer what they want?"

I'm not blaming them, I'm pointing out the fallacy of your argument. You're the one arguing that "no honest broker" would do what in fact was done over and over, thus begging the question.

Personally, I think the whole system was broken and bad choices were made all around, and I don't quite understand your resistance to that. Consumers, bankers and brokers all made bad calls, over and over again. They all bought into the same system and the same desires.

Posted by: Anonymous | April 9, 2008 4:45 PM

How has the housing bubble affected us? It means that we are still renting. It meant that back in 2005, when everyone was bidding up houses like crazy here in Seattle and the real estate agent was telling us we would have to waive an inspection and waive our financing clause, that we felt a little uncomfortable with the whole deal. The bank told us we could take out a mortgage that would give us payments of 50% of our take-home pay. That scared us. But if we took out a smaller amount, we wouldn't have been able to compete in the market. So we stopped trying to compete and decided that having a daycare payment was a better choice for us than having a mortgage payment (i.e. decided that we would rather start our family now instead of paying too much for a house). And we haven't regretted that decision.
What makes me a little angry now is that it feels like we are going to be penalized for being finacially smart. We couldn't afford a house so we didn't buy one. But if the govt takes on all of the loans and in effect props up the high prices, we still will not be able to afford a house. Or if the lenders start writing down the value of the houses, but that information is not made public, the prices stay inflated and we still cannot buy a house. Plus we don't get all of the tax breaks for owning a home...like being able to deduct your sales tax payments from your federal income tax. So right now we are feeling a little screwed over for making the responsible decision.

Posted by: Becky | April 9, 2008 4:46 PM

In July '01 we offered $240k on a fixer-upper in a neighborhood that was coming up. Other houses on our block were going for $100k more, but we were just four years past bankrutpcy and couldn't have gotten a loan for that much. There was one offer higher than ours, but it had too many contingencies for the seller and it fell through. Then Sept. 11 happened... We almost panicked and backed out - but we knew we had to get out of our rental which had been sold and the new owners wanted to live in it. We also knew that we weren't going to find a better neighborhood to live in, or a better house that we could still afford, so we gritted our teeth and jumped in.

We refinanced in April '03, at a 30-year fixed rate of 5.5%. Turned out that we were lucky enough to catch at/near the lowest rates of the entire bubble, and our little fixer-upper had gained over $100k in value, along with all the other houses in our neighborhood.

We kept watching the housing prices going up, up, up, during the next four years. We got a home-equity line of credit, did major work on our car, did work on our house, and - yes, I admit - we had two really great family vacations. At its peak, our house had more than doubled our original purchase price to $505k.

Now the house has declined about $80-100k, but we still have about $100k in equity, and we aren't at risk of losing our home. We did some smart things and we did some not-so-smart. I think luck has a lot to do with our being okay, and I think luck is also a factor for the people who are getting foreclosed now that the bubble has burst.

Posted by: Sue | April 9, 2008 5:00 PM

"Why blame the mortgage brokers for givng the customer what they want?"

I'm not blaming them, I'm pointing out the fallacy of your argument. You're the one arguing that "no honest broker" would do what in fact was done over and over, thus begging the question.

Personally, I think the whole system was broken and bad choices were made all around, and I don't quite understand your resistance to that. Consumers, bankers and brokers all made bad calls, over and over again. They all bought into the same system and the same desires.

Posted by: | April 9, 2008 4:45 PM

Why do you assume that those defaulting now were bad risks when they got the mortgage?

The real problem isn't that there are people defaulting, the real problem is that in the past these same people would have just sold their house to someone else and we would have never heard of it. We heve been doing 100% financing for years. The problem now is that those people are not just in trouble (unable to make the payments), they are upside down on the mortgage because the value of their house has dropped. So, instead of selling they get foreclosed.

Real estate pricing dropping hasn't happened in any significant way since the 80s. So it is kind of hard to blame people for using a system that has been working for 30 years.

Thats the problem with a bubble, you never know when it is going to pop.

I would spread the "blame" wider than you do, I would include the entire country, most of which stiil believe that the value of their house will go up not down.

Posted by: Devils Advocate | April 9, 2008 5:15 PM

Well, we're getting to the limits of my understanding of what's going on, but a couple things.

First, to the extent that all you're saying is that brokers are no more to blame than anyone else, I agree. From your earlier posts I thought you were essentially holding brokers and financers blameless and pinning it all on consumers, which is what I disagree with.

Second, the statement, "So it is kind of hard to blame people for using a system that has been working for 30 years." seems to me to apply to consumers as much as anyone else.

But I also think it's inaccurate - this is where my knowledge falls short, but I thought that the sub-prime lending craze, and the repackaging and selling of mortgages, and other financing schemes that went with it were relatively recent phenomenon. I certainly know that the first time we started looking into buying a house we were told we needed to have 10% down at a minimum, and other more traditional financial restrictions, which seemed to have gone out the window when we finally bought recently.

I also don't get your distinction about people who can't pay their mortgage being able to sell in the past. Are you saying that in the past brokers knew that people wouldn't be able to support their mortgage, but because the broker figured the buyer would be able to sell the house it was ok and that's why the loan was good? That seems shady to me.

Posted by: Anonymous | April 9, 2008 5:32 PM

Many, including you, are implying that people bought more house than they could afford. What stats do you have to back that up?

Posted by: To ATL Dad | April 9, 2008 4:00 PM

For starters:

"Loans that require little or no documentation of income soared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in 2001, according to estimates from analysts at Credit Suisse in New York. Home buyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5 percent of fully documented prime mortgages, said First American LoanPerformance, a consulting group in San Francisco.

A 2006 study cited by the Mortgage Asset Research Institute found that almost 60 percent of such stated-income loans were exaggerated by at least 50 percent."

http://www.iht.com/articles/2007/04/25/business/bxinvest.php

Posted by: MBA Mom | April 9, 2008 7:04 PM

Many, including you, are implying that people bought more house than they could afford. What stats do you have to back that up?

Posted by: To ATL Dad | April 9, 2008 4:00 PM

For starters:

"Loans that require little or no documentation of income soared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in 2001, according to estimates from analysts at Credit Suisse in New York. Home buyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5 percent of fully documented prime mortgages, said First American LoanPerformance, a consulting group in San Francisco."

This data is interesting and supports a conclusion that loans not requiring full documentation have a higher rate of default than loans requiring full documentation. It does not however speak to the issue about which To ATL Dad asked, e.g., these statistics do not show that people bought more house than the could afford.

To an earlier poster:

A zero-down loan is not "exotic" and it does not indicate that someone is buying beyond their means. Based on our income, we were approved for a mortgage up to $400K. We bought a house for $200K on a zero down. We pay an additional amount against the principal each month and have added on an addition, increasing the value of our house by 25% since we bought it. One of us has been out of work for several months and making our mortgage payment timely has never been a problem.

The level of condescension, and the sweep of some of the more insulting statements here today - many displaying a lack of knowledge about even the most fundamental sources of the foreclosure crisis -- should embarrass some of you. Large groups of responsible consumers have been tarred by your judgmental attitude simply because they've made different decisions than you.

You know who I have little sympathy for? Anyone who purchases a primary residence, taking on a 6 figure obligation with numerous risks, without thinking it worthwhile to spend $300 - 700 in obtaining the advice of an attorney -- someone who IS obligated only to the purchaser and can explain the risks and obligations of entering into a particular transaction. When you sell, sure, wing it. When you buy, you are being penny-wise and pound-foolish to rely on the advice of those with a vested interest in you closing the deal. But go ahead and ignore this advice, too. You're probably the same people downloading will forms from the Internet, but willing to spend an equivalent amount of money on landscaping your front lawn.

Posted by: Lives Down the Street From Devils Advocate | April 9, 2008 8:17 PM

Lives Down the Street From Devils Advocate make the correct response to MBA Mom. Qualifying for a subprime loan doesn't prove you bought a house more than your income could support. It just means that your credit placed you into the subprime category.

If you're going to id yourself as someone with an MBA you would think such person would be able to interpret an article correctly.

Posted by: Anonymous | April 9, 2008 8:32 PM

The tune is from CSN&Y "Our House" Lyrics & Music by Graham Nash

I'll light the fire
You put the notice in the vase
That came from the bank today

Staring at the papers
For hours and hours
While I watch you
Pay those housing bills
All night long but not for me
No, just not for me

Come to me now
And cry for just five minutes
Everything will be good
Such a yellow room
The windows are reflected
By the Ryder van through them
A moving van for you
Only for you

Our house is a very, very mortgaged house
With two cars in the yard
Life never been so hard
Now nothing is easy
'Cause we screwed
And our la,la,la, la,la, la, la, la, la, la, la.....

Our house is a very, very mortgaged house
With one car in the yard
Life never been so hard
Now nothing is easy
'Cause we screwed
And Our

I'll light the fire
And you place the notice in the jar
That came from the bank today

Posted by: Songster | April 9, 2008 10:26 PM

I think there is a little misconception about some of the mortgage types out there and their current usage. There are zero down, interest only, ARMS, and subprime. Each can exist separately. And in theory, none of them are necessarily irresponsible per se. It is like anything else, it is how it may be used or abused that is irresponsible. Of course there are people who took out a zero down loan and bought less then they can afford and pay responsibly to the principal. They are not necessarily the ones who are contributing to the mortgage default problem. On the other hand, there are a ton of people who took out these exotic (meaning non conventional 20 or 30 year fixed mortgages) who did not use them the way they were intended to use. Like taking out an interest only loan on a house they basically couldn't afford because they think they can always refinance at a later date for a similar or lower interest rate. Interest only loans were originally designed for people who had fluxuating incomes. Maybe they work on quarterly commissions or something to that effect. The point being that interest only loans are still designed to amortize the full prinicpal amount. If you use an interest only loan the way it was designed, it isn't an issue that it amortizes at a later point in time. Because "in theory" you should be making extra payments to principal when you have the cash flow, ie. the your quarterly commissions/bonuses/whatever. The problem lies in people who took out interest only loans in order to never pay the principal, effectively because they could never afford the house to begin with. DA points out the system worked for 30 years. Like anything else, these so called exotic mortgages have existed for a long time (I will take his word for it that it has been 30 years) but the abuse of the exotic loans (mainly by the purchaser) in large numbers has been fairly recent. Again, securitization of mortgage loans on the large scale is a new thing. About 15 years ago. Again, perfectly legal but someone on wall street didn't think about the idea of securitizing mortgages until fairly recently. My point is that almost everyone has been acting with in the legal framework of the system. But the system itself was missing some of the checks and balances that it should have all along. ie. securitization=minimizes risk of default= minimizes or almost eliminates personal responsibility if the loan fails= failure to the financial system. I think DA is going a little out on the forefront for blaming everyone in America. Some people bought responsibly, paid responsibly or choose not to buy at all. Unfortunately they are affected by the current credit crisis as well. But I don't see them contributing to the problem. But then again, America, in general, is big on passing the buck and blaming the next guy. I am less concerned with blame and more concerned at making changes to prevent the same financial catastrophe from happening again.

Posted by: foamgnome | April 10, 2008 7:25 AM

One of the best ideas that the Greeks ever envisioned! Learn to embrace and love this concept, please!

A paragraph (from the Greek paragraphos, "to write beside" or "written beside") is a self-contained unit of a discourse in writing dealing with a particular point or idea. The start of a paragraph is indicated by beginning on a new line. Sometimes the first line is indented; sometimes it is indented without beginning a new line. At various times the beginning of a paragraph has been indicated by the pilcrow: ¶.

Posted by: The Grammar Sheriff | April 10, 2008 8:02 AM

That previous post was 514 words without a breath!

The first one was 887 words.

I just wonder what the record in this blog is? Where is blogstats when you need him?

Posted by: The Grammar Sheriff | April 10, 2008 8:07 AM

Foamy,
Don't let the turkeys get you down. Paragraph breaks or no, you provide really great info, and explain it really well. Thank you!!!!

Posted by: Emily | April 10, 2008 4:27 PM

"Don't let the turkeys get you down. Paragraph breaks or no..."

It really doesn't matter about the quality of the content. If a post is viewed as unreadable, it will not be read by most. People have a tendency to scroll past one great blob of words that covers 2 ½ screens and over 40 sentences.

Whatever message you want to convey is lost.

Take a breath and then compose your thoughts in a readable manner.

Posted by: The Grammar Sheriff | April 10, 2008 6:28 PM

I've been an editor for 20 years, and I don't disagree with Grammar Sheriff's opinion that breaking large pieces of text into smaller paragraphs makes the text more readable. BUT I think these blog comments are more akin to casual conversation than formal writing, and it's rude to correct someone's grammar in conversation. (I've known so many editors over the years that do this, and it makes me crazy!)

And Foamgnome, I DID read your posts, and I learned a lot that I didn't understand about how housing markets work--thank you!!!! (It's also not proper to use more than one exclamation point at a time, but just try to stop me!!!!!!!)

Posted by: PQ | April 11, 2008 9:09 AM

Well for someone who doesn't want to read ongoing text, GS spends an awful lot of time critiquing my posts. :)

Posted by: foamgnome | April 14, 2008 7:42 AM

hey foamgnome, I didn't say one word about your misspellings!

Posted by: grammar sheriff | April 15, 2008 10:41 AM

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