Brokers Lured Naive Homebuyers Into Mortgages They Couldn't Afford

The core of the subprime meltdown are homeowners not paying their mortgages. A contributing factor to the default rate are people who signed up for loans with low teaser rates that ratcheted up afterwards, and now it’s time to give the devil his due. Why would people do such a foolish thing?

The Horns, a couple profiled in a New York Times story this weekend, were told by their broker that they could just re-fi two years later and get the low rate again. Mr. Horn is a 34-year-old truck driver, and Ms. Horn is a 39-year-old fast-food assistant manager, making $70,000 between them.

But when the music stops, and the lender band stops playing, they’re finding themselves without a chair, or a home…

The new mortgage was for $198,000, at a fixed rate of about 8 percent for two years and variable rates afterward. The monthly payment was about $1,600. The mortgage broker, Mr. Horn said, told them not to worry about the variable rate because they could refinance in two years and lock in a fixed rate again.

“They basically put us in a loan that they knew we couldn’t pay,” Mr. Horn said. “We never should have done it.”

When the fixed rate expired last year, the Horns found no willing lenders. The interest rate has jumped and the monthly payments rose to nearly $2,200, Ms. Horn said. “It just goes up and up,” she said.

The Horns are now filing for Chapter 13 bankruptcy, which basically just gives them more time on all their payments.

Loan by Loan, the Making of a Credit Squeeze [NYT]
(Photo: Christopher Capozziello)

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  1. nffcnnr says:

    Good article in the NYT. Take a few minutes to read it, it does well to humanize this concept of “the subprime mortgage meltdown” that to many of us has been an abstraction. Sadly, more and more people we know will be getting burned by it one way or another.

  2. wreckingcru says:

    In this whole sub-prime mess, I haven’t really heard anyone blaming the idiot consumer (who I – stereotypically – assume comes from the red and/or square states) who makes $40K/year but thinks that a $500K house is affordable.

    Human nature in today’s society is inherent in its desire to cheat one’s fellow man, so how are these people not taking any of the heat!? If I walk into a Rolls Royce dealership, with my high 5-figure salary and get lured into buying a $400K car, because I was too stupid to know that I couldn’t possibly generate the money to pay for it – isn’t the blame on my shoulders?

    I do agree that there was a lot of skulduggery on the part of the lenders, but a substantial part of this whole mess seems to me to be a lot like those late night commercials advertising a $200 DVD tutorial on how to make millions by setting up your own [place anything that can could be ambiguously profitable].

  3. raybury says:

    The payment of $1600 per month is textbook target range — just under 28% of their gross income. Of course that also means they went for the MOST they could afford. Nonetheless almost two years of timely mortgage payments should have (and probably would have) given them good enough credit to get a refi below 8%, and given that they were looking to refinance last year, before the meltdown, well… sometimes people are victims because they choose the role.

  4. SOhp101 says:

    Sucks for them, but it appears they didn’t do any research and put all their trust in the broker… someone who profits off of selling you a loan versus zero commission for advising you against taking a loan.

    Hope things turn out better for them.

  5. bigTrue says:

    Buyer Beware. All these people wandered in and heard something like “250,000 dollars for only 250 a month!” and never looked into it any further then signing the name.

    I used to work wholesale loans for Wamu, selling stuff to brokers. We’d do a 3 hour presentation on the Option ARM to new brokers. First, most didn’t even bother showing up, but the ones who did still didn’t know how it worked. For the people who payed attention and learned about neg am and the rest of the pitfalls, half of those were only looking for ways to hide it and sell more loans.

    It’s a commission business folks, and in Michigan you aren’t required to be anything but hired to sell loans. It’s the customers responsibility to do the research. Would these people walk in and buy a car without test driving it, reading reviews and checking with people who already have the same model? No, so why do we think they should be coddled and pitied now that they did the same routine with their home?

  6. chrisgoh says:

    I’m with Wreckingcru. While I am sure there are cases where the consumer was totally decived by an unscrupulous lender, I think the majority of the people with problems got in over their head because they used an artificially low rate to buy more house than they could afford once the rate went up. Sure, the lender probably should not have given them the rope, but the consumer hung themselves.

    Recent years have offered some great refi opportunities for fixed rates. We refied our 30 year mtg from 2000 that was at 7.875 to a 15 year mortgage at 4.375 a few years back. Our payment did not change by much and we cut over 10 years off our mortgage.

  7. quantum-shaman says:

    @wreckingcru: I think there’s a BIG difference between buying ambiguous money making opportunity DVD sets at 2 o’clock in the morning, and engaging in any kind of transaction where one party is basically ignorant (in the best sense of the word) and the other is an expert. That shifts the blame MUCH more towards the alleged “expert”. That’s why the real estate business is regulated. Allegedly. If I go to a lawyer and he gives me completely shitty advice, but I rely on it because I didn’t know any better, whose fault is that? I’ll probably suffer for it, but he could potentially be disbarred. If there is a presumption of correctness or “expert knowledge” along with potentially high risk scenarios, then there must be a proportionately much higher standard of behavior and responsibility for such people… lawyers, doctors, financial professionals… and yes mortgage brokers.

  8. Blueskylaw says:

    This will get worse before it gets better. Lowering the discount rate only helps the companies stay in business and make more money, yet the people they scammed will lose their homes. The cycle of big business starts all over again.

  9. danger says:

    These people don’t have mortgage problems. They have spending problems — and there’s noone to blame but themselves for that.

    All of the stories center around taking out additional money to pay off credit cards and other purchases (a motorcycle), but the reporter tries to couch this in a wrapper of predatory lending practices.

  10. CumaeanSibyl says:

    @wreckingcru: What? Are you new here? Every single time someone posts about subprime mortgages, the comments explode with “WHY ARE PEOPLE SUCH FUCKING MORONS GOD I HATE AMERICA.”

    And I still say the lenders were equally stupid, if not more so, for investing so heavily in high-risk assets that had obvious problems and then acting surprised when the gamble didn’t work out for them. “I invested all of my money in dot-com startups whose business plans consisted of ‘put pool table in office,’ how could I possibly have lost everything??”

    Consumers who trust a broker’s word without doing their own research are naive, yes. But what can we say about professional lending companies who have experts on staff, are able to pull credit reports, and who know their customers are a bad risk but lend them money anyway? That’s not naivete, that’s flat-ass stupidity. These are people who really, really ought to know better, and now their bad lending decisions are coming back to haunt them — and everybody else.

  11. muckpond says:

    best quote from the article: “Mr. Cossette said he may never again own a house. He would not consider buying, unless he could put 20 percent down, he said.”

    so true.

  12. timmus says:

    I’m wondering what the odds are that these people are struggling to pay the bills but have a financed $30,000 2-ton pickup truck in the driveway.

  13. costanza007 says:

    salesmen lie to sell cars too.

    also, it has nothing to do with red or blue states. thats pretty ridiculous.

  14. ncboxer says:

    I don’t know, I consider myself partly savvy about home mortgages- I initially got a 30 year fixed, then refinanced to a lower rate and changed to a 20 year fixed. I researched various options and stuff. I looked at various banks and studied when would be a good time to lock in, etc, etc.

    But still when I went look for a house, and my spouse and I sat down with a real estate agent (usually at those new neighborhood sales center), when they calculated what loan we could go for with our two incomes, I tended to believe them. I haven’t the slightest idea how to calculate our joint income minus our existing monthly spending rate, taking into account year end credits and such, to arrive at how much house we could afford.

    I would think most homeowners (or people looking for homes) would act the same when someone told them how much home they could afford- unless it was obviously ridiculous. And when someone tells them about ARMs and how they shouldn’t worry about this or that, etc, etc, most people probably like to believe the person that is talking.

    Just my humble opinion.

  15. gibsonic says:

    @wreckingcru:
    definatley a red/square/flyover state…owait!

    RTFA…

    “The modest Cape Cod-style house, in Meriden, Conn., had three bedrooms, and a backyard”

    [en.wikipedia.org]

  16. LionelEHutz says:

    Companies that put themselves at risk by underwriting these loans should not be given any help. Let them go out of business. I’m sick of all the taxpayer financed bailouts that go to bankers who make stupid decisions, while regular people who make stupid decisions can’t even go through bankruptcy as easily anymore since the credit card industry was allowed to rewrite the bankruptcy laws.

  17. sambwide says:

    Missing in everyone of these discussions is what will happen to the mortgage lender when they file for bankruptcy. The executives will be personally unharmed, and the taxpayers will eat the entire loss as a tax write-off by these big companies. Sure, the idiot consumer is guilty for getting in over his/her head, but why does everyone cheer for the ruining of these “idiot’s” lives while quietly watching the corporate bankruptcy screw this country a whole lot worse? We’re a vindictive bunch of pricks, ain’t we?

  18. j-o-h-n says:

    @timmus: That and something cute for the Mrs to drive too!

  19. ArtDonovansDrunkenLovechild says:

    Ill say this, as someone who was a broker straight through the boom and still involved in the industry. That is standard boilerplate pitch to sub prime customers. They want house x but thier fixed rate would be 10% IF they can qualify. Or you put them into an arm that can get them a rate in the 6-8% range and then at the end of thier locked period you refi them into an A-paper loan. This assumes two things, one, that they pay ALL thier bills with the money they are saving in mortgage for those 2 years and, two, that they get a little bump in home value to lower thier LTV. Either of these factors will lower thier rate but combined they will drop it significantly.

    There in are the 2 problems. Borrowers who refi to pay off bills, or buy a new house, and proceed to run up new debt in the interim, and the stagnating market in most areas that kept people from gaining value.

    Fact of the matter is, the broker probably could have educated these people more, but at 70k they should have no problems paying that bill and most of the fault should be put on them.

  20. elf6c says:

    In these “woe is me, I didn’t know, I’m a victim honest!” articles the home buyers are very careful not to mention what they spent the money on for the two years they got the teaser rates, or the 3-4 cash-out refinances. While they were buying cars, vacations and god knows what us “suckers” were getting fixed rate mortgages and ignoring the cash-out refi offers as the obvious fiscal suicide they were.

    Negative arms, option arms, and teaser arms with pre-payment penalties were well understood buy most of the buyers, they just bet wrong on the real estate and credit bubble. Additionally, the same mentality of “I deserve it” that has led to credit card over indulgence ported over to the refi and mortgage markets.

    Most of these “victims” have self-inflicted wounds.

    Maybe they can live in the $30K pick-up in the driveway.

  21. j-o-h-n says:

    @ncboxer: Here’s how my wife and I figured it: $(Amount we were paying in rent) + $(Amount we were saving for down payment) = $(Amount we could afford as PITI)

    Pretty simple. Pretty foolproof.

  22. ArtDonovansDrunkenLovechild says:

    @j-o-h-n: Thats great. I always liked to start with the FHA ratios, but your numbers are a simple rule of thumb that would serve most people to observe.

    Ill say this before I come off too pro-industry. I hate reverse mortgages and option arms. I refused to sign up for any option arm products and even now direct brokers away from selling it. There are VERY few customers (maybe 1%) who will truly benefit from a negative amortization product. The ONLY 2 people who I ever did an option arm for was a resident at the local hospital and a recent law school grad who was finishing up a clerk gig. Both were due LARGE pay increases in the next few years but were getting married or having kids and needed a larger place now. Even with them you needed to make sure they understood the reality of the product.

  23. umbriago says:

    Well, tough luck for the Cossettes there; in fact, it seems to be a Hard Luck Weekend since there’s another story just like this in the Washington Post. But really, there are enough books and websites out there telling you point-blank what a dumb idea variable rate mortgages are.

    “Maybe others can learn from this,” says Mr. Cossette (which is unlikely), but the time to do your learning is BEFORE you sign anything.

    I’m a thirty-year fixed man myself. Yup…been fixed for thirty years.

  24. Major-General says:

    @wreckingcru: Funny, most of the “red or square states” have houses that you can buy on incomes of 40 grand a year. Most of the meltdown I’ve heard about has been places like the left coast where people also assumed that they would have never ending increases in value on the home.

    Much like Robert Reich assumed that there would never be a deficit again because the stock market was expanding faster than government spending. (Something like that. Idiot; past performance cannot guarantee future behavior.)

    You are right about the late night infomercial bit. The one that annoys me is where the couple claimed that every few years they would “harvest” the equity from their investment properties.

    @muckpond: If you can’t put the 20% down, this isn’t the time for you to buy, period.

    @LionelEHutz: That’s the great thing about the market, when its allowed to work: the companies that did these things would get shut down.

  25. hustler says:

    No one is responsible for themselves. Its not their fault they can’t read. If the sub-prime meltdown caused this concern, what does it take for some reasonable regulation provisions on private student loans?

  26. JohnMc says:

    I have deep compassion for the Horns. But come on! These are adults. They did not do their research like what could they really afford. You never assume you can get a teaser rate forever by hopping mtgs. Just consider that the setup-teardown costs of the hop costs more than difference in the % rate.

    By the way, even billionaire investors are consumers. If you really want to cover consumer item go look at the meltdown that is going on in the rating agencies that helped get this started.

  27. chimmike says:

    we had a mortgage lender try to talk us into one of those ’5 year fixed, balloon payment’ loans 2 years ago. Effer promised us a fixed rate for 5 years, something like 5.75%, then we’d have a $10k balloon pmt after the 5 years, and the rate would be adjusted at that time. Yeah, that’s beautiful to me! alright……and so we said no.

    Consumers only cause their own problems in this arena, really. If you can barely afford the house at the subprime rate, how do you know rates will be low when you plan to refi? Makes no sense to me what was going through their minds.

    I just locked into a 30 yr fixed conventional mortgage for a house I’m building. No strings, no fine print.

  28. tadowguy says:

    I’ve said it before and I’ll continue to say it. When you’re going to spend 3x, 4x, or 5x your annual income, GET A %#$%ING CLUE or FIND SOMEONE WHO HAS ONE. IDIOTS!

  29. Woofer00 says:

    @JohnMc: When every research source (real estate agent or lender or financial magazine) is hailing the virtues of the loan, mostly because it lines their own pockets, how are you supposed to see through the charade?

  30. K J says:

    You guys might need to realize that real estate in the red states costs about a quarter to a third what it does in the blue states. I live in one of the fastest growing areas in the U.S. (near Nashville) and can still find a 2000 SF house for around 150k.

  31. GearheadGeek says:

    You don’t take out an ARM with rates at historic lows, unless there’s a clear trend that they’re still falling and will continue to do so for your lock period. The last time I bought an ARM was in the ’90s when rates were in the 8-10% range… and I watched my rate drop year after year until I did a fixed refi in a rate trough (it ended up going lower later but I was still satisfied with my mortgage.)

    I also bought MUCH less house than the realtor and mortgage broker were telling me I could afford. I like having savings and paying off my student loans (well, I don’t LIKE paying them off, but I know it’s a good idea.) To the poster asserting that with $70k in income they should easily be able to pay $2200/month or more… I make more than that, live in a state without state income tax and still wouldn’t want to pay $2200/month for my housing. I’d like to retire someday. If no one were willing to pay stupid prices, houses wouldn’t sell for stupid prices in these insane markets and it wouldn’t have required the painful adjustment, but everyone “needs” bigger fancier McMansions, and that also drives up the prices of practical houses in those markets just to make sure everyone gets screwed.

  32. speedwell (propagandist and secular snarkist) says:

    I’m a naive homebuyer and I can’t afford a mortgage. Who do I get to sue?

  33. CumaeanSibyl says:

    @ncboxer: Yeah, that’s pretty much my experience. I did research beforehand and all that, and I had some numbers in mind (namely, what I paid in rent at the time), but I figured that the guy who had a professional computer program using data from our current bank statements, our credit reports, and the past 3 years’ worth of W-2s and tax returns might actually know what he was talking about.

    I know, I’m a total greedy idiot loser and I probably own like 5 flat-screen TVs and a $100,000 car and blah blah blah, because everybody who’s in debt spent all their money on frivolous crap. Yep.

    @LionelEHutz, @sambwide: Agreed with everything you said. Whose stupidity really does more damage in the long run: the consumer’s or the company’s? And who’s going to suffer more because of it? The answer to both questions ought to be the same.

  34. tylerk4 says:

    Most people seem to have the mistaken idea that the brokers and lenders are one and the same. Not true.

    I blame the shady brokers for most of this mess. I’ve run into countless examples of low-life scum brokers who will flat out lie on every stated income loan application they put together, all in an effort to squeeze people into mortgages they can’t afford. What’s the broker’s motivation? The large origination fee they get from the lender.

    My firm also has defended a few lenders in cases where the scum bi-lingual brokers swindled non-english speaking immigrants and other “easy prey” into outrageous mortgages. Jose gets foreclosed upon, the lender gets sued for “fraud”, and the broker skips to the bank with his $10,000 check.

  35. G-Dog says:

    This is why I never trust anybody but myself when it comes to money. I don’t even order a chicken sandwich and Wendy’s w/o running conspiracy theories through my head.

    I’ve gone so far as to video tape repair guys when they work on my TV or Phone lines.

  36. legalbeagle123 says:

    2 years ago:

    ‘Dude, you are such a moron. I negotiated $198,000 at 8%. My note’s only $1,600 a month. That’s why I have a nicer house than you do.”

    Today:

    “They put me in a loan they knew I couldn’t pay.”

    Not: “I put myself and my family into a load I didn’t know whether I could pay or not.”

    They’re MORONS. Unfortunately, Hillary will promise to bail these people out by giving them guaranteed government loans.

    You and I pay for these dolts.

  37. ptr2void says:

    Anyone notice that all those in the article refinanced and took money out of it? These are people living beyond their means.

    “They refinanced in late 2005, folding other debts into the mortgage, but that proved to be only a stopgap.”

    “Two years later, they decided to refinance to pay off their truck and their credit card debt and to buy a $4,000 motorcycle.”

    “The first refinancing added $40,000 to her original mortgage of $140,000 on the small ranch house she bought in 1997…But the higher mortgage and other bills led to two more refinancings, in 2003 and 2005, each to pay off about $40,000 in credit card debt. “We were using credit cards to pay the bills and then we refinanced to pay off the credit cards,” she said. “It’s a vicious cycle.”

  38. kelmeister says:

    The formula for calculating payments my husband and I used was this: when considering the monthly mortgage payment, if one of us–God forbid–were to lose our job, would we be able to keep the house with the remaining salary? Our friends thought us too “doom and gloom,” but we’ll still have our tiny little house if anything should happen.

  39. Squeezer99 says:

    The mortgage broker, Mr. Horn said, told them not to worry about the variable rate because they could refinance in two years and lock in a fixed rate again.

    “They basically put us in a loan that they knew we couldn’t pay,” Mr. Horn said. “We never should have done it.”

    When the fixed rate expired last year, the Horns found no willing lenders.


    —-


    the only reason they couldn’t find willing lenders would be because their credit sucked, or they had a lot of other debt (cc’s, new cars), either way, its their (the homeowners, not the banks) own fault.

  40. wreckingcru says:

    @quantum-shaman: But if a doctor or a lawyer gives you “expert advice”, yes, there is an assumption that he/she knows more than you, and that you should follow their advice.

    HOWEVER, if it turns out that they screwed you over (doctor’s diagnosis made things worse, or lawyer’s work resulted in bigger problems) – then you can sue them for malpractice can’t you?

    The same doesn’t seem to apply to these mortgage lenders. And I really doubt a shifty, cheap-suit mortgage broker can be considered an expert and that you should be putting your financial health in his/her hands.

  41. ArtDonovansDrunkenLovechild says:

    @tylerk4: Tyler. You are very wrong on this subject. Brokers and Lenders on a CORPORATE level are very different. But at the loan officer level are the same pool of people. In fact, brokers are in many cases more accountable, being that one bad loan that gets dumped by the lender can bankrupt them where as a large lender has fewer QC checks. Many states, Maryland for example, require brokers to individually license thier LOs where Lenders dont need to. In this era of “net branches” and franchises you have no way to tell the difference. Is that Flagstar rep you are talking to a real lender, or a former broker that bought a franchise?

  42. bohemian says:

    Realtors need to shoulder some of the blame in this mess. I ran into many realtors who were pushing very hard that you go talk to a broker they know to get your financing. Some actively tried to talk people out of going to regular banks or using govt. backed loan programs.

    Twice we were house shopping during this bubble. During the first round all any of the realtors wanted to discuss was what broker had some great deal. When I stated we would use traditional bank financing or govt. backed loan programs and had no interest in the ARM loans these agents suddenly lost much of their interest in showing us homes.

    One has to assume that the commission real estate agents were getting back from these brokers was substantial. It also may have possibly been illegal or unethical by their industry standards.

    The hard sell from some of these agents was crazy. We finally went to our long time bank and arranged a FHA loan before we started looking.

    If people can’t find a home within the qualifying terms for most of the government programs maybe they shouldn’t be buying that much home.

  43. mac-phisto says:

    ha! ha! stupid MORON IDIOT parents didn’t test their kids’ hot wheels for lead paint before they let their toddlers play with them? they deserve whatever comes from it. any RESPONSIBLE parent would have known to do a lead test instead of trusting the world’s largest toymaker of producing lead-free toys! it’s not mattel’s fault that jimmy chews on his thomas the train playset. did they hold a gun to his head & say “EAT THIS POISONOUS TRAIN SET NOW!!1!1!”? of course not. jimmy chose a life of learning disabilities on his own. & now all us responsible taxpayers will have to pay for his special education. TSK! TSK! let’s put blame where blame is due.

    …oh wait. subprime forum? ehhh…whoops.

  44. porterism says:

    I think this is a shared responsibility. While it is true that many consumers nowadays need a reality check when it comes to spending and home ownership, it’s not entirely their fault. After all, consumers, especially those who are financially illiterate can be talked into an unfeasible loan… let’s face it, we’ve all been talked into doing something at one time or another, but the lender should have had the expertise to know better. High risk cases are just that… high risk.

  45. @wreckingcru: “In this whole sub-prime mess, I haven’t really heard anyone blaming the idiot consumer (who I – stereotypically – assume comes from the red and/or square states) who makes $40K/year but thinks that a $500K house is affordable.”

    I think there’s an ENORMOUS difference between an unsophisticated financial consumer who has never owned a house before and doesn’t have the financial or legal education to understand that mortgage and gets in over their head, and the MORON engineer who buys a $500,000 house to have an impressive house and then gets screwed by the ARM on a house he really couldn’t actually afford in the first place.

    The former are people who are being targeted and taken advantage of by companies who KNOW they are financially ignorant and ripe for the scamming. The latter are well-educated professionals who should either know better, or know enough to know to consult someone who knows better. I’m willing to blame the latter, but not the former.

    (Incidentally, we worked with a home-town bank and it was WAY old-fashioned with investigations into our earnings and discussions with the banker about budgeting and long-term mortgage planning. Now I’m sooooooooooo glad we did. It was our first time home-buying and there’s just a lot you don’t know about how it all works out until you’ve actually done it. I felt like the banker’s goal was to have us PAY OFF THE MORTGAGE and that he was being conservative in protecting his bank from risk, but at the same time he was on our side and didn’t want us overextended. Mortgage thereafter sold to ABN AMRO, which I’m also pretty happy with and get convenience I probably wouldn’t have gotten from the hometown bank that originated the mortgage, although customer service is obviously far less personal.)

    My question is, and I seriously want someone to answer, how could every financier in America all run off the cliff together like lemmings on this? How was it NOT CLEAR to people who do this for a living that eventually the scheme would collapse? Or at least to some of them?

  46. marsneedsrabbits says:

    WE have a fixed-rate, low interest mortgage. Fairies didn’t bring us the papers to sign. We didn’t get our mortgage based on the luck of the draw. Nor did a kindly old lender with a heart of gold go out on a limb to help two crazy kids with a dream of affordable home ownership.
    We worked for (and got) an affordable mortgage after reading and research. The boring stuff.
    I can’t feel even a little sorry for anyone involved in the sub-prime debacle. The fact that many people put more time into researching which gaming system to get or which movie to see on Friday night, rather than which mortgage to buy (and live with for a decade or more) is regrettable.
    No matter how many stories and artsy pictures of sad people outside the windows of their former homes you show me, I am disinclined to bail them out.
    I am inclined to let them learn from their mistakes and punish the loan officers who lied.

  47. rworne says:

    Something doesn’t jive here…

    I used my handy-dandy mortgage calculator, and $1600/mo is just about right for the numbers stated in the article, plus perhaps the withholding of property taxes.

    Oh, now I read the article – the summary above conveniently leaves out the fact they refinanced $250K to pay off other debts. This is where the big jump in mortgage payment came from.

    This is just a case of buyers getting in over their heads, not sub-prime shenanigans.

    What I don’t get is someone getting a “teaser rate” ARM at 8% – and this was a couple of years ago. 8% should have been easy to get at a fixed rate back then.

  48. Faerie says:

    This is almost exactly my situation. I bought a relatively small/affordable house ($145K) at a young age (24) and wasn’t very savvy about the process. I got into a bad credit situation a few years back when I as laid off and didn’t have enough $$ to pay anything but my mortgage and keep the lights on. When I refinanced, I was put into a 2 yr fixed then ARM “credit repair” program where I was told that I would just refinance after 2 years and get a better interest rate with my improved credit score. I wasn’t presented with other options, this was the plan and it was sold very well.

    2.5 years later, I have the better credit score, but I can’t get that interest rate. My ARM is about to adjust for the second time and it’s getting tougher. Some big changes went down in my personal life and I’ve moved out of that house and am trying to sell it. Ha. 45 days on the market so far and no bites. The market in that area is being flooded with foreclosures and any hope of selling soon is quickly fleeting.

    Looking back, I would have qualified for something other than what I was presented with, but that was the only option I was given. Yeah, I screwed up. But I fully believe that the lenders, realtors and other players in the market have the education and experience and should have done a bit more work to make sure people were well informed. I think the blame can be shared here.

  49. julienne says:

    This IRS assessment of “cancellation of indebtedness income” is NOT limited to foreclosures. Every time a consumer settles a debt to a credit card company for less than the demanded amount, SURPRISE! You have cancellation of debt income! The debt settlement companies (the ones that negotiate your debt down) don’t tell you about the 1099s that could come your way from the credit card companies. Bankruptcy specifically wipes out these taxes, but it’s a pretty nasty surprise to think these debt settlement companies are taking care of everything and then the IRS pops up.

  50. Toddsa says:

    I can understand how people jump into mortgages they can not afford nor understand they are being taken advantage of. I was one of them too, I had no credit and wanted to buy a house before getting married and made some supid mistakes that put about 15K in fees and higher rates into the pockets of others. From the article they had an 8% arm that went up to $2200 a month for 198K. That loan seems almost criminal. When my arm came up 6 months ago I refinanced and now I pay $2100 for a fixed 30yr on 350K. With the housing boom, it seemed there was a boom of people trying to make a buck off it. I wouldn’t be surprised if many of them used to be car salesmen.

  51. ArtDonovansDrunkenLovechild says:

    @Faerie: I call bullshit. If you are making the same amount you were 2 years ago, and your credit has improved then you should easily be able to find a new fixed rate mortgage. Again, its your responsibility to make sure you are in the position to take advantage of the refinance. If your Debt to Income is halfway decent you can get any type of mortgage, including an FHA. If its worst then the last time your refinanced then its not the lenders fault you have run up other debt (per your comments) or are making less. As for your contention that you werent given other options, my guess is that the arm WAS the only option. Brokers dont make more for arms then fixed rate, but if your credit was bad, and Im assuming you had income issues based on your comments, then Im guessing the only Refi you could qualify for was an Arm to make your DTI work.

  52. Alexander says:

    What a mess. My mother and her husband are being lured into a sub prime loan with the same “you can refinance in 2 years” and “you’ll be making more money in 2 years right?” routine. I have talked to both of them to no end but they won’t listen and just accuse me of not wanting them to own a home. Also, what is people’s obsession with wanting their kids to have a backyard? That is all I hear in this stories “the kids have to have a back yard! the kids have to have a back yard!” Don’t get me wrong, yards are nice to have but I don’t think they are a need to have a healthy and happy child. My coworker said it best when he said that kids don’t care/notice whether they are living in a house or an apartment. All they need is a happy family and to be taken care of.

  53. bfos7215 says:

    I was a first time home buyer a few years ago, and yet somehow, I was lucky enough to understand what ARM stood for.

    For anyone who isn’t an expert in home mortgages, it means that the “rate” for the “mortgage” is “adjustable”.

    Here’s the kicker, those rates just about never adjust downwards. So, when they do adjust, that, by process of elimination, means that they adjust upwards.

    It’s rather complicated logic and mathematics. I really have no answer for how I was able to figure that out on my own.

  54. Faerie says:

    @ArtDonovansDrunkenLovechild:

    Call bullshit all you want, but I’ve run the numbers and have spoken to other lenders since. My credit score has improved and I have incurred no further debt (used the refi to pay off everything but my student loans).

  55. Faerie says:

    @bfos7215:
    See, but the way my loan was sold to me was that I’d never hit the ARM. As soon as my fixed ran out, I’d refinance and all would be good again. So yes, I had a clear understanding of what ARM meant (and I surely hope others did as well).

  56. bfos7215 says:

    @Faerie,
    It wasn’t sold to you that you would never hit the ARM. The broker (or whoever) advised you off the contract that you should follow that plan of action.

    It sucks, and I do feel bad for people in this mess. But, an investment that big, and that important requires that you think very hard, on your own, about the decisions you make. That risk has got to be weighed when you are planning on completely refinancing after only 2 years. It wasn’t difficult to find answers to the questions about the risks in ARMs, even before the bottom started to drop out.

  57. @alexander: “Also, what is people’s obsession with wanting their kids to have a backyard?”

    I think a lot of it is that parents don’t feel comfortable letting their kids, say, run off the to park on their own anymore. Too much fear of Stranger Danger and Chester the Molester. So they want a bit of enclosed safe outdoor play space.

    Of course, whether the kids ever GO outside is a whole different question …..

  58. ArtDonovansDrunkenLovechild says:

    @Faerie: I dont know your score, but if you were able to get a loan 2.5 years ago, and are in a better position today (credit, income, LTV) then I know that there are a lot of lenders still making loans. New loans are down but not gone and good loans are still being offered to qualifying customers. Also, if you are 2.5 years out at most youve seen a 1% increase at this point.

    Point is you arent telling the full story. You didnt address my questions about income. Ill tell you this, if you havent missed a payment for the last 2.5 years and are making the same income there are 100s of lenders who will take you.

    I just had a former customer who has been in her loan 10 months refi into a fixed rate 3% lower then her initial arm. She payed off all debt in the first arm and made her payments. Her credit went up over 100 pts and she became a A paper borrower. I sent her to a local broker.

  59. kimsama says:

    @bfos7215: Hahahahahah! Brilliant!

    @Faerie: Didn’t you understand then, that there was a risk you couldn’t refinance? I mean, if it involves money and it’s happening in the future, there is always risk involved. It’s not a good idea to believe salesmen, whether they’re a loan broker or a car salesman, without good research into the product and associated risks.

    Not trying to be sassy, just wondering why you believed them (you implied naivete for your initial purchase, but I’m not sure if that lasted to when you got the ARM).

  60. Alexander says:

    @Eyebrows McGee: I suppose that is as good an explanation as any. You are right about the kids actually going outside though. I grew up with a big back yard and it didn’t really make a difference as I hardly ever used it a play pen. 90% of my interaction with it was mowing and watering it! Which needless to say I did not like to do…

  61. mac-phisto says:

    @bfos7215: wow. you figured that all out on your own? let’s all stand up & clap!

    ARMs are a lot more confusing than what you portray, & the devil’s in the details. perhaps, since you are such an expert, you could explain these other terms that are often overlooked: FLOOR, CAP, INDEX (margined?), LIBOR, RESET, RATE CAP (please be specific here, there’s about a half dozen terms that fall under that umbrella). also, if you could go over prepayment penalties, that would be helpful as many of these 2/28, 5/1 options & 7/23 or 5/25 balloons are ridden with them. oh, & please define the difference between those popular ARM products, Oh Wise One!

  62. mac-phisto says:

    @ArtDonovansDrunkenLovechild: he may be making the same income, but can he prove it? that’s where i think a lot of people are getting effed here. there are a lot of people that make their payments on time, have equity & have great credit, but no longer qualify for a loan b/c they can’t find a lender that will no doc.

  63. Faerie says:

    Of course I understood r@kimsama:

    I didn’t want to go into all the details above and bog down my post, but the company I as going through also happened to be run by my boss’s husband. I had some level of faith that he was sending me in the right direction and had at least some reason to present me with my best options.

    As I said above, I screwed up. I’m not saying that I’m not faultless in this, I don’t think I have said that in any of my comments here. I am just saying that yes, I think there is some blame/fault/responsibility in this whole thing that falls on the lenders and other players in the game to help educate those who are less informed.

  64. bcostin says:

    I’m with CONFUSEDRABBIT up a ways. I saved my money and and did a ton of boring online research before buying a home five years ago. I’ve refinanced to a lower rate just once since then, and I chose to go from a 30-year fixed to a 15-year fixed rather than cut my payment. And now, since I make a little more than I did 5 years ago, I can afford to spend extra on paying down the principle and get rid of the mortgage even faster. I never even considered an ARM.

    This wasn’t by accident. I’m not even that good with money; I bought well within my means because I was scared of miscalulating and getting in over my head.

    There are tons and tons of excellent and accurate resources out there to help calculate your income and forecast payments. It’s really not complicated. Buying a first home is the biggest purchase most people ever make. If the buyers can’t be bothered to spend a weekend or two doing research then, yeah, they’re probably going to get themselves into trouble.

  65. Gesualdo says:

    I’d love to see statistics about the average math grades of people who are in these crappy sub-prime loans. I’d bet they’re significantly lower than those in 30 year fixed rate ones.

  66. @mac-phisto: “LIBOR”

    London InterBank Offered Rate! I totally know that one!

  67. Nemesis_Enforcer says:

    Wow I am glad that there are so many heartless bastards hanging around here. What a lot of you ppl who scream that they should have known better is..a lot of these ppl were 1st time home buyers and there wasn’t the plethora of info on these loans and thier pitfalls there is today. All most of them got were little booklets from the FHA at best.

    Granted I am sure there are some bastards who used the system but I think those peole are a relativley small percenage. Most ppl just made a bad decision.

  68. adrock75 says:

    So according to this comment thread, it’s not Predatory Lending, it’s Predatory Borrowing! All these jerk borrowers are taking advantage of these poor lenders who only wanted them to get loan no matter what. I mean, I’m sure these kindly lenders fully explained the drawbacks of these loans and didn’t know at all that the slick borrowers wouldn’t be able to make the payments after the rates skyrocketed.
    That being said, I believe that BOTH sides are guilty of ignorance.

  69. bfos7215 says:

    @mac-phisto:
    No, sir or madam, I can’t answer those questions. I’m certainly no expert when it comes to mortgages. But, from reading the posts and hearing the groans from consumers, you’d think that knowing what ARM stands for *would* in fact make me one. That was the joke and that was the point.

    The issue at hand isn’t in the truly complex details of loans. It’s in the rather basic logical questions that a diligent consumer would typically ask upon making a major life decision such as buying a home. Had those questions been thoroughly considered, many of these people wouldn’t be in the sad states they find themselves.

    But, yah, I forgot about pre-payment penalties. It clearly takes an industry expert such as yourself to be smart enough to simply ask about those.

    Despite not having the awe inspiring knowledge of loans as you, the fact that I was able to stay out of this mess when buying my first home, must only be chalked up to a ridiculous amount of luck.

  70. j-o-h-n says:

    @Eyebrows McGee: I think a lot of it is that parents don’t feel comfortable letting their kids, say, run off the to park on their own anymore. Too much fear of Stranger Danger and Chester the Molester.

    They’re the least of my worries. I’m far more concerned about Charley Crotch-Rocket, Sally Cell-Phone, Dan All-I-Hear-Is-My-Stereo, Sammy Stickers-n-Spoilers and the rest of the idiots on the roads bewteen here and there — that and the fact that the idiots on the city council let the road to the park be build with no sidewalks.

  71. shfd739 says:

    I really dont fell sorry for these people in over their heads. We dont make much more than the 70K a year couple and there is no way I would take a $1600 month house note, that is about a third of my take home,sorry I have other wants and needs for my money.

    At least when we go to buy in a few years with all these forclosures we will have lots of cheap inventory to pick from. We havent bought yet due to wanting to payoff all debt and save up a bigger down payment so we wouldnt be borderline or subprime, but I guess smart isnt everywhere. Oh and the house prices,though affordable have been overinflated lately around here and that is finally reversing.

  72. samurailynn says:

    Refinanced to pay off $40k of credit card debt… twice???

    I’m sorry, but this is not entirely the fault of a predatory loan.

  73. monaflambe says:

    Read an article here in San Diego about a guy who flips houses – he said he just follows the Hummers as they are a house in foreclosure…. if you ahve to have EVERYTHING NOW, you will get screwed. The stupid shall be punished.
    I am sure there are TONS of you out there to tell me about predatory lending, brokers, shady deals, etc, but the bottom line? If you have no idea how to balance a checkbook, or think you only have to pay the bills that land face-up, you have no business whining about your foreclosure.
    That is all.

  74. mac-phisto says:

    @bfos7215: listen, i shouldn’t have jumped on your comment & singled it out, so for that i apologize. there were certainly more callous comments than yours. i just get a little hot-tempered on this subprime crap b/c i see a whole lot of people getting played for the fool & at the end of the day, it’s going to cost EVERYONE. a lot of people that were so close to snagging their piece of the pie are going to see it slip away.

    & the worst part in all of this is that so many people that have so much in common with them are going to stand by & wave their fingers at them when the bank comes to take their home away.

    i’m not talking about the people that deserve to lose their home (read: i bought the house & stopped making payments after month 2). i’m talking about people who would have kept their home a year ago if they were in the same situation they are today. instead, they’re packing up the kids’ rooms, hoping to god they get a short sale & wondering where the hell it all went wrong.

  75. betatron says:

    A quick perusal of the NYT article leads one to believe that the Horns bought a $180K house, nothing down and then, less than 24 months later, ran up an additional $50K in debt! The NYT article “kinda” glosses over this fact.

    From the limited photographic evidence it would appear that the Horns spent at least their fair share at the local home improvement box store (that’s some nice landscaping over their shoulders). It’s my experience that such things bespeak similar …refinements… indoors.

    Combining the knowledge leaked from that picture with the glossed-over implications of the NYT story leads me to strongly question the rectitude of their “poor us” routine.

    In a case v. similar to this, which I personally witnessed, the real problem was a nearly boundless disappative spending spree to acquire all of the mall-culture box-store gracious living accoutrements they could get their hands on.

    Again: $50K additional debt in two years: credit card problems, indeed!

    Call ‘em poster children, but for what?