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.

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].

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.

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.

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?

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.

@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.

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.

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.

@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.

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.

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.

salesmen lie to sell cars too.

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

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.

@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]

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.

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?

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

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.

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.

@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.

@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.

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.

@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.

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?

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.

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.

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!

@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?

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.

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.

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

@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.

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.

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.

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.

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."

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.

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.

@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.

@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?

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.

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.

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.

@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?

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.

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.

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.

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.