Back in 2005, my wife and I bought our first condo. We live in the Central Coast of California, in San Luis Obispo, where the property values were skyrocketing, and were not supported by the wage base, similar to Monterey and Santa Barbara. It was the top of the market and I knew it, but we had a very slick mortgage broker who got us qualified (it wasn’t a no-doc loan, but it was a 100% finance, 80/20 with a first and a second, the first was a 6.5% 2/28 ARM, the second a 9% fixed.) We were assured at the time and up to as recently as this Summer, that we would have no problem re-fi-ing that loan (and even paying off our lower-interest student loans by taking some cash out in the process=wtf???) by the same broker. Of course that didn’t happen…
We came into some money in the time in between and paid off a bunch of student debt, credit cards, and car loans, and took some trips AND significantly, spend 60k improving that condo. We did not pay off the second or any principal on the first or re-fi it.
Then, this April, we bought a new house with more room and a yard. We bought it 100% financing zero-down, but FIXED, but also no-doc. (I also was able to get a no-doc loan for my sister’s condo, bringing my mortgage total to $1.4M. Let’s just say, I do ok, but that’s INSANE.) We knew we were upside down on the first condo, but tried to rent it because everyone tells you that real estate here is such a good investment. Tried to re-fi, got tenants, tried to re-fi…….. then we get the ARM readjustment. $1,000 more, on something we’re already losing about $2k a month on even after the rent.
Long story short, I’m losing the condo, losing the $60k of improvements we put into it. Now I read (I think on your site) that I’m probably getting hosed by the IRS for it too. (Not sure since the deficiency is protected under California law–they have no option but to forgive it.) Plus, I’ve had to spend another $5k or so settling with my tenants who had a one year lease.
I’m a big boy. I can handle the ding on my credit. But I can’t be an expert at everything. My irrationally exuberant broker made me believe I would always be able to get out of the ARM, and that it would let me get more house and rely on an income going up, and probably not need to worry about the adjustment much anyway. In this particular market, that was literally one of the 10 cheapest properties on the market at the time, and I needed voodoo financing to get into it????
If I gave a client that kind of advice, I probably wouldn’t lose my license, but I would probably get sued for malpractice. I guess the Department of Real Estate doesn’t have standards as high as other professions in this state.
Personally, I’d love to see a bailout for people (not like me) who are getting hosed by the ARM adjustment (how about just fixing them at prime at the time they were signed?). But that’s “class war.” It’s only OK to bailout Wall Street hedge funds who borrow even more recklessly to invest in this paper that would be better used in toilets.
I’m not looking for sympathy, since I’m not losing my roof, but it still sheds light on the current crisis. I’m an attorney, and I arguably could have known better. But a law license doesn’t make me omniscient, and real estate isn’t my field. So, if this happened to me, imagine what happens to people who know even less!
-Jon
Now here’s a guy you think would know better… but it’s just as easy for smart and successful people to get caught up in the conspicuous consumption game…maybe even easier.
A quintessential tale from the epicenter of the housing bubble…. You can’t get something for nothing…. No money down is an invitation to disaster. That’s like deciding the best way to purchase a new couch is through a Rent-A-Center…. Irrational exuberance…. A broker is not your friend. He didn’t get in the business to make dreams came true. He’s there to make money. You gotta take full responsibility for your own decisions, past, present, and future, otherwise you’ll be an easy mark for the next huckster that comes along. Own your actions and then you also completely own their positive outcomes, one of the highest ROIs around.
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Anyone want to make a quick “cheat sheet” of the terms and abbreviations used throughout this post and the comments? It’d be helpful for those of us that aren’t entirely up on these things.
Thanks in advance.
I’m about to exhibit my advanced age, and total lack of cool, hipness, or whatever the current phrase is.
1. Your housing costs should not be more than 25% of your income.
2. In the past, you ponied up 20% down.
3. That ARM thingy? It stands for Adjustable Rate Mortage. Chances are pretty good that if your mortgage is at or near record lows that adjustable part is going to be up.
4. Mortgage brokers are salespeople, most on commission. Their pay is increased by selling you more expensive property. Use some of the deductive reasoning you use in your profession.
I realize that this next statement disqualifies me as a good American, but you should pay as you go. The only thing I have financed is my home. An 1800 square foot single family residence with a garage/shop, a storage building, and 36 acres. I paid $82K. My taxes and mortgage probably cost me less per month than most folks’ car payment. I owm a 4×4, a sedan, an antique convertible, a fishing boat, and a four wheeler (quad bike). I paid cash for all of them. I have zero credit card debt, and an 830 credit score. My household income is less than 50K/year. My net worth is only about $500K, but we have a comfortable life.
The thing is, I aquired my worldly goods as I could afford them, not when I wanted them.
@Crazytree: wait…aren’t you a broker? then you would know that piggybacks are designed to meet the 20% requirement in an equity loan so the buyer doesn’t have to cough up pmi. if a person is taking an 80/20, they’re not paying pmi.
also, being a broker, i’m sure you’ve come across more than one individual that needed a “liar loan” b/c they were, say a small business owner or were paid heavily in bonuses or commission or were just relocated & promoted, all of which don’t fit the equations well . no docs serve a legitimate purpose (on rare occasions) – they were just extremely abused & usually with the coaxing of a knowledgeable professional. how else would someone know that redefining “fast food shift manager” as “food industry executive” would get them qualified for a $500K loan on a $25K salary?
My husband is a mortgage loan officer for a well-established bank and he knows a few honest mortgage brokers, but he knows even more who are unscrupulous and desparate for their commissions. Mortgage brokers are basically free agents who work for themselves. They don’t have employers to rein them in with conservative company policies. A lot of those ugly loans that you’re hearing about now, my husband has never been allowed to do (nor would he want to).
BTW, last I heard, even if you have what you consider a “great deal” on a mortgage, it’s still good to live within your means.
I have mixed feelings about schmoe -er, Storm.
One the one hand I am tempted to point my finger and say HA HA! at him for being a party to the mechanism that forced housing prices up, and made me and my wife spend more on our home. However I can’t blame him for wanting somewhere to live. Although we didn’t go crazy, we still paid double what the previous owner paid 5 years ago. One distinction is that we can comfortably afford our home. Having put financial principle before our wants, we moved to a city that was not our first choice.
On the other hand I can see his point on how getting taken by a dishonest broker can ruin you financially. I had look at several lenders before I selected my current mortgage, and there were some who were definitely to screw me. Some were very persistent. If I had just picked our first lender I would be in this guy’s shoes. How about 7.85% variable with points and a pre payment penalty? This is when mortgages were at record lows. I finally settled on a 6% 30 year fixed, and if I ever see Clark Howard in person again I’ll kiss his feet.
I agree there should be more regulation in the financial industry, especially now that we see all of these mortgages go bad. The only problem is that when people are doing well -they’re not asking any questions. Apparently it takes a crisis to get anyone to take action.
@mac-phisto: you’re right about PMI. mistake on my part. I do multi-family residential and commercial so I don’t deal with PMI very much. so yes, you’re 100% right about the 80/20. primary reason is for lenders that won’t do more than 80% LTV but avoiding PMI can be helpful.
as for the liar loans… I would say they were used appropriately in 1% of the situations.
you should also keep in mind that there are various levels of “no-doc” or “low-doc” loans. three parts:
1. income
2. job
3. assets
you can get sporadic pay and and still prove #2 and #3.
the problem is with the so-called NINJA loans.
NO
INCOME
NO
JOB OR
ASSETS
no legitimate reason for this type of loan IMO.
but it’s also the fault of the lenders for not being more stringent about verifying tax information, because all the low/no-doc loans I saw all included in the package a IRS Form 4506. I can only imagine they they didn’t bother to get the tax transcripts.
jeez, the people who comment on this site can be really judgmental and antagonistic. firstly, this guy said *several times* that he wasn’t looking for sympathy and that he should have known better. secondly, this guy isn’t the only person this happened to. bad loans were a friggen epidemic, people. that means, something is wrong with the system, not with this guy.
I’ve dope slapped myself for under-buying. Think I’ll quit now. It’s all mine and I don’t even use half of the square footage.
Arrgh…..My Firefox is not happy with Consumerist today….no reply button.
Shred’s so right. I was trading up and the mortgage broker was trotting out all sorts of stuff. Circumstances compelled me to become an Equity Refugee instead and wound up paying cash for a smaller place far, far, away. Kinda glad I did. I’d be in same boat as the lawyer, they were pushing these ARM’s like dope peddlers selling crack.
Storm -
When you closed on your properties, did you use a lawyer specializing in Real Estate? If not, why not?
I remember listening to Bruce William’s talk radio show ([en.wikipedia.org] ) all through the 80s. Whenever a person called in about a real estate problem, his first question was always “Did you have a real estate lawyer present at closing?” And that was usually followed by “Why not?” In just about every case, the problem could have been avoided ifonly the person had consulted with a lawyer first…
@pdxgrease: That sounds like an FHA loan…
@homerjay: It’s definitely easier for people with more money to get into more trouble, though, which might have been what he meant.
People with low incomes overextend their credit and make unwise purchases like this, sure, but I know a lot of those people — $10K in credit card debt is “drowning” for them. Not so huge, in the grand scheme of things. It’s folks with nice high incomes who really have the ability to fuck themselves over and wind up owing hundreds of thousands, even millions of dollars.
@mac-phisto: Lord, thank you. At least nobody seems to be talking about bailing out the lenders — maybe folks have finally had enough of corporate welfare.
@storm:
Thanks for sharing your story Jon.
I almost made a similar mistake here in Chicago. I found an awesome condo that was pre-construction in what will be a converted cold storage facility. Concrete slab would make it quiet and the area is going to be going through a major overhaul in the next five years (they are turning the area around the building into a town square, complete with an actual square in the middle that will become a park). The price seemed high for the space, but the slimy mortgage broker told me how easy it was to refi a 5/1 arm on a 5% down loan.
Now, if it hadn’t been for the fact that I am trying to get into law school, I’d likely have bought. Knowing I was likely to start law school at some point in the year, I chose to keep renting.
Then the crash came.
Property values dropped and rates went up.
My girlfriend sold her condo just before the values started dropping, and then turned around and bought just before prices dropped enough to make it really sweet.
Thanks for sharing – hopefully people will learn something about what not to do in between taking the time out to call you a big dummy!
Hey, we all make mistakes, right? Even lawyers.
This guy is the king of the douchekateers.
This guy was in over his head from the get-go.
No bailouts for the stupid.
It sucks, and there is no way around that. It sucks.
However…
Whose fault is it?
#1 – It is PRIMARILY the fault of the person (or persons) who bought the property. On a purchase as substantial as that I would assume that a little due diligence would be in order. My wife and I bought a house several years ago. We looked for two years (TWO YEARS) before buying because we could not afford what we wanted and had to find the best compromise that we could. A friend of mine at work, who makes less than me and whose wife makes half of what my wife makes, looked for about a month. After a month he decided that they couldn’t find what they wanted for the price they had planned on so they decided to spend 3 times what we spent and go ahead and get the house. They are about to hit this ARM-adjustment and I know that it isn’t going to be pretty.
People know what they can afford and that is that.
#2 – Unscrupulous mortgage brokers. Very few mortgage brokers did anything illegal in selling these ARMs to these people. However there is a difference between immoral and illegal…
#3 – The government. The government is “for the people, by the people” and many have forgotten that. The government allowed this fiasco to happen (Allen Greenspan said recently that he saw issues and knew that there would be a major problem down the road) and now they are going to bail the interested parties out, both institutions and consumers, with your and my tax dollars. If the government had restricted the use of ARMs, or made some other adjustment to an obviously dangerous product, this money could go to fund many of the domestic projects that are so sorely in need of funding, especially after King George’s disastrous, expensive (on so many levels) War.
My two cents.
cabalist
Without 100% financing, my husband and I could not have afforded ANY homes in the area where we live (Northern Virginia, where a bedroom costs you $200,000) for the next 10-15 years or something.
We did the math, we thought about what we were doing. We did our research, we talked to our parents, we crunched the numbers. But the fact was that saving $100,000 for down payment + closing costs would have taken an amazing amount of time, and by that point we would have needed even MORE.
This is our first home. Like I said, we ran the numbers. We did the research. Absolutely nothing we got was adjustable rate, that we made sure of. We went to several different banks, and ended up with good interest rates and while we’ll have to give up going out to eat once a week, we now have actual assets.
Gloom and doom, assumptions, and generalizations help no one. This guy? I wouldn’t have made any of the choices that he did. But declaring that anybody who would take 100% financing is living in a fantasy world?
No, they’re probably living in some of the insane housing markets out there. D.C. and NoVA are both just painful.
I was fortunate, growing up the child of two tightwads. And, my granddad was a retired trust officer of a local bank, and not shy about giving advice. Fixed rate, fixed rate, fixed rate. Don’t let the brokers shyster you into ANY other kind of loan, no matter how good it sounds!
I didn’t feel like I was ready, when I bought my first house, but I did rely on those relatives’ advice, who told me that there’d never be a better time to jump in. I married into a situation where 4 different in-law family members had a share in my wife’s house, and several of those members were helping make the payment each month. I moved in, and there was a considerable amount of pressure on me to buy in.
Ah, but, they had overpaid for the house. And it was shoddily built. And the total mortgage payment was 90% of my take-home pay. And the house was built on a cliff-side where you could NEVER allow small children outside to play, and fall off the mountain. Even if I COULD have bought everyone out, I’d never have been able to afford to eat, or maintain a car. I refused to buy in, which didn’t please ‘em. They put the house on the market. Two years, no offers.
My wife and I made the decision that we were getting out, even if her credit got torched. We had never mixed funds, separate accounts, etc. I ended up buying an old fixer-upper in a good neighborhood ($85k, 17k down, 6% 30-year-fixed mortgage), and we moved out. The inlaws ended up dumping the old house at a $50,000 loss.
The payment on the new house was about 40% of my take-home, and things were a bit tight for a while, but since we never had car or credit card payments, we did ok. And of course, I have gotten some promotions in 15 years. The kicker: that $85k house is now appraised at $240k. Tripled my money in 15 years.
We could sell, and move out to a big spread of land in the Alabama countryside, but I’ve gotten really spoiled at being close-in enough to walk to local grocery stores, the library, and the mall. And not to mention fire protection, trash pick-up, police protection, sewer, good DSL available, etc.
I’m glad he didn’t ask for sympathy, he certainly deserves none. He listened to a sales weasel on a huge investment that failed and now has to pay the price. His assertion that
“No one can know everything. I need to rely on doctors for medical advice, lawyers for legal advice, and real estate people for real estate advice.”
doesn’t jibe. He did not rely on ‘real estate people’ he relied on a commissioned sales weasel. An attorney would have been a better choice. What this indicates to me is that, despite his protestations otherwise, he relied on HIS OWN JUDGMENT in this decision and his judgment was found wanting.
He didn’t ask for sympathy but he sure tried to weasel out of responsibility for his own actions.
@meiran:
“But the fact was that saving $100,000 for down payment + closing costs would have taken an amazing amount of time, and by that point we would have needed even MORE.”
Fact is that you don’t need to put 100k down but if you can’t afford to put a penny down on the loan, you shouldn’t get it.
P-E-R-I-O-D
Yes house prices may go up and things might work out but you are setting yourself up for a crisis.
@STORM – Felt kinda disgusted reading the article but have to commend you for putting yourself out there. You are not passing your burden to others and you are paying your dues… kudos on that.
Storm:
I think the problem people have with you listening to the broker’s advice is that the broker is, above all, a salesman. Any salesman you talk to (no matter what product they are selling) wants you to buy. And if they work on commission, they want you to buy the most expensive thing they can get you to (or the thing they get the highest commission from). There are good salesmen and bad salesmen – you can’t expect that all of them will watch out for your best interests. After all, each of them are trying to feed their families and buy their own piece of the pie.
Guys like this one are killing us in California. He’s not a victim of this astronomical price run-up and the bubble burst–he’s the cause. Why did he think that he needed two residences? Why did he think that he could afford them? The brokers in this area are absolutely insane, and will sell unspeakably bad loans. It’s time for reality to come back to the Central Coast.
I pay taxes. Taxes are where the government gets their money. When the government bail’s someone out, that means I (and all other taxpayers) am bailing these people out.
Hell no!
I’m working hard, saving pennies at a time to save my 20% down-payment to be able to afford a home, pay off my student loans, and college credit card.
Bailing out these people with foreclosures is rewarding stupidity while penalizing smart taxpayers.
By the way, they’re not ending up on the street; they’ll end up renting while they pay their bankruptcy settlements.
@meiran: Are you buying a two-million dollar house or a two-hundred thousand dollar house? Why would you save a 50% down when you only really need 20%?
If you can’t afford a house, rent. Sometimes it’s actually better than buying. Google it.
@mac-phisto: Just because the government bails out other undeserving situations doesn’t mean that I agree with it. I think they should stop bailing out everyone.
@meiran: I’m with you — I too live in NoVA and just bought my first house with like 99% financing and a 5-yr ARM. I have no intentions of staying in this home for more than 5 years, so an ARM makes sense, but it’s getting to be ridiculous to live here anymore! Rent for a 2bd/1 ba is $1350, and buying a home isn’t much better. *sigh*
@ElenorR: “Real Esate is supposed to be a solid investment…”
It often is, unless you are buying at the top half of that biggest bubble I’ve ever lived through, and the last few years of value escalation was just so over-blown, it was inevitable it would fall like a Ponzi scheme. Doesn’t help the OP, but I admire his straightforwardness…for a lawyer, that is.
Hopefully this retrospective look at situation will help make him a better person and a better lawyer.
re: RAZORBACKER …”The thing is, I acquired my worldly goods as I could afford them, not when I wanted them.”….hard sell to many people these days.
I have a few friends (living here in Mass.) that are of the same situation. New to market (or want to get a 2nd vaca home or something), want house, want big house, want car, want truck, average wages, over-paid for all, all on spec. Now bummin’ big-time.
I don’t blame “just” the mortgage industry, but also the buyers. It takes 2 to make a deal.
“If I gave a client that kind of advice, I probably wouldn’t lose my license, but I would probably get sued for malpractice. I guess the Department of Real Estate doesn’t have standards as high as other professions in this state.”
In most states mortgage brokers aren’t governed by the same rules realtors are. In Colorado, they aren’t governed at all. So blame your state for not regulating them. Or repeat to yourself “If it sounds too good to be true, it isn’t true. If it sounds too good to be true…”
@Xerloq: I read it this way: the price Meiran was quoting was per bedroom, not $200,000 total. The $100,000 down payment reflects 20% of a house or condo priced @ $500,000…
@Xerloq: “If you can’t afford a house, rent. Sometimes it’s actually better than buying. Google it.”
I did. As I said, we did a massive amount of research and talked to a great number of people who knew even more than we could gather. I actually work in real estate and he works in architecture. We know a lot about the whole situation.
The best option for us was to build equity and have an asset to our name.
100% financing isn’t automatically evil. We could have put 3% down, but in the end after crunching all the numbers it wasn’t beneficial to do it that way, and we retained some savings to build an emergency fund.
Sometimes people do things differently than you would, and they still know what they’re doing. Sometimes they’re just as knowledgeable and have all the same data you do and choose a different course.
Which is why I hate generalizations. Everyone who wants to buy a home should do research and talk to a lot of people, and make the decision that is best for them. No one piece of advice will hold true for everyone in the entire country.
@pinkbunnyslippers: That was about what we were paying in rent on our apartment, and with the housing market like it is, for not much more a month we have equity, we no longer have a negative net worth, and we’re not really paying that much more than we would to rent a similar place. Most people I know who don’t live here don’t understand just how bad the situation is, and how hard it is to afford housing. It’s just gotten crazy, hasn’t it?
@ThinkerToys: Exactly. $100,000 would be a piece of pie for us to finance. But once you take 20% and fees and closing costs, that’s about what we would have had to pay out of pocket. I did estimate up, but two bedrooms in Fairfax County are about $300,000. Two bedrooms in the particular community we were looking at were even more, depending on the age of construction, etc. It wasn’t rare for them to climb towards $600,000.
@storm Sort of. If you were asking about banking, I’d say go see a banker. At some point, the system breaks down if we can’t rely on information from professionals in their respective field.
I think the mistake you are making is the assumption that the mortgage broker is on your side. He/She is in the same league as a used-car salesman, and I know you wouldn’t fall for any of their lies. I’m sure you know this now of course…
@MERION: 100% financing isn’t automatically evil. We could have put 3% down, but in the end after crunching all the numbers it wasn’t beneficial to do it that way, and we retained some savings to build an emergency fund.
I agree 100%. We did put down about 5% on our house, but when my wife had trouble finding an equivalent job (we moved to a new state), I figured out that we would have been better off having that money as an emergency fund.
If you have a fixed first and a fixed second, what’s the harm in no money down loans? After my mortgage + insurance + taxes – tax break, I come out slightly ahead of renting, and since houses aren’t ridiculously priced where I live, I will still have equity even if the market drops 20%.
So much for living the SLO life eh? But Im glad that you are ok in the end.
@ Storm: “Good question: where is the bailout money coming from? It’s going to people at the top. Why is that ok?
I explicitly said I shouldn’t get one. I just wonder about people that are going to lose their roofs.
I may be dumb to take on too much debt, but at least I can read.”
I have to admit I am giving you a hard time by calling you a D-Bag. Probably a good guy and just yanking your chain. But, what are you talking about when you say all the money is going to the top? I don’t follow? To the top earners? If that is what you are saying, they are top earners for a reason because they’re not piling all their money into two houses like this.
In terms of the poor people who will lose their roofs. Cry me a river. I don’t have a roof, I rent. I can’t afford the absurd prices because I had to bis against lots of people like you living beyond their means.
And I am glad you can read but don’t follow that comment either… Congrats though. Should have read more about refinancing I guess….
@alexander: Austin has tech jobs — I wouldn’t have moved otherwise. Not the same kind of talent as in the Bay Area, and I somewhat miss working next to people who are literally the best in the world at what they do — but my money goes much, much further here, more than enough to make up for the difference in income.