The Case Of The Man Who Should Have Known Better

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.

Comments

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  1. bedofnails says:

    Because buying the second house this April seemed like a good idea.

  2. Eric says:

    I have no pity for this person. A lawyer above all should know to read the fine print. Nobody is going to refinance for you if the value of the house goes down, why do you think they appraise it when you buy it?

    RESEARCH before spending a ton of money.

  3. hypnotik_jello says:

    No sympathy.

    a) if it’s too good to be true, it probably is
    b) see a)
    c) how about a second or third opinion buddy?

    Trusting your broker is as dumb as dumb can be.

  4. Alexander says:

    I don’t understand how people can get into hundreds of thousands of dollars in debt (for 30 years) and NOT do any sort of research. I spent 15K in a car a couple of years ago and I did exhaustive research for weeks. All these people f’ed it up for people like my wife and me. We have 60k in savings, no debt whatsoever and we couldn’t afford a cardboard box here in CA even if we found one. Stupid flippers, stupid consumers and stupid greedy agents and lenders.

  5. JiminyChristmas says:

    The one thing you have to remember about mortgage brokers is they are first and foremost in sales. Unlike say, a buyer’s agent, a mortgage broker has no officially mandated fiduciary duty to the borrower in most states. That means if they sell you a bill of goods then, short of actual fraud, you are on the hook for whatever you sign off on.

    Yes, attorneys are generally smart people but like most professionals they tend to specialize. Having a JD on your wall doesn’t make you an expert in real estate finance or empower you to see through a masterful sales job. And that’s what I think happened here…a smart person was sold something they shouldn’t have bought by an even smarter salesman.

  6. fuzzycuffs says:

    It’s not just lenders that caused this housing bubble. Actually, they were just the facilitators. All the people over-valuating property because of this mad rush to “buy buy buy because it’s going up 20% in 2 years!” fueled it just as much as shortsighted people who jump into unfair loans.

  7. Trai_Dep says:

    Okay, there are some brokers that hoodwink customers and share some culpability. There are others that merely dangle a carrot within a 5-mile radius of senseless people and are the walking epitome of Buyer Beware. This is the latter.

    Burned up more than $60 THOUSAND on “improvements” (plus school & car loans, vacation…) when he had a mortgage that skeevy? When school loans are subsidized?

    MAN, if anyone typifies, A Fool And His Money…

  8. Charles Duffy says:

    @alexander: Entry-level houses (~1200sq ft, non-fixer-upper) in Austin start sub-$100K; two in my neighborhood sold recently in the $85-90K range (which is a bummer for me, because I paid more than that… though it means property taxes should be going down a little), and the rest of Texas considers us expensive. California (or most of it, anyhow) is just a bad deal.

    All that said — I almost got into a similar dual-mortgage, minimal-down scenario myself around `02/03, and now am very glad I didn’t.

  9. cashmerewhore says:

    Take out as many of those repairs as you can before you lose the house. Forclosure is sold “as-is”. If you can make some of it back on the fixtures, appliances, furnace, flooring….whatever, what’s stopping you?

  10. Crazytree says:

    Story Timeline:
    1. Schmoe buys a condo he can’t afford with a LIAR LOAN [no doc] with not even $1 out of pocket.
    2. Schmoe “comes into money” and instead of paying off his second at an exhorbant 9%… he blows the money on travel and remodeling.
    3. Schmoe gets even greedier, and buys a bigger house he can’t afford, even though he couldn’t afford the condo with ANOTHER LIAR LOAN.
    4. Schmoe, thinking he is a real estate genius, elects not to cash out on the condo and instead rent it out with a negative cash flow.
    5. Schmoe, who couldn’t even afford the condo, now owns a condo AND a house, NEITHER OF WHICH HE CAN AFFORD.
    6. ?????
    7. NO PROFIT!!!

  11. Alexander says:

    @Charles Duffy: Ugh, I know that all too well. My dad recently moved to Oregon and he bought a freaking palace for $250,000. I check the prices where he lives (Salem, OR) and they make me cry. The problem of course, is our jobs. More specifically mine. My wife could relocate easily. She is a dental assistant. We have contacted dental associations over there and they tell her they can get her a job no problem for just about the same as she makes. I’m a web designer getting into web development and lucked out by landing a really cushy job that is allowing me to become a web developer. They pay me really well and I don’t see jobs like that in Oregon. In time though, if things don’t improve I will have to really look seriously into it and determine if 20-30k more a year is worth it living in an onverpriced market.

  12. Crazytree says:

    don’t blame the broker.

    Schmoe was dead set on living a certain lifestyle he couldn’t afford, and now he has to pay the price.

    Reminds me of my wife’s best friend. Her and her husband probably bring home $65k on a good year. Somehow they got themselves into a $1.1MM home, with a LIAR LOAN of course, and they had the nerve to come to my house and talk down to me about their new McMansion and why am I still living in the same apartment.

    The point is, I could have gotten into a much bigger house then they could have, but I elected to be FINANCIALLY RESPONSIBLE AND LIVE WITHIN MY MEANS and continue to live in a very nice apartment while saving up for a large downpayment to avoid PMI [private mortgage insurance].

    So now fast-forward two years and they’re on the verge of divorce and their entire family has been stretched to the financial breaking point by subsidizing these idiots’ millionaire lifestyle that they couldn’t afford to begin with.

    I’m still in the same apartment, with my downpayment money sitting in an ING HYS [high-yield savings account], waiting for this wave of idiots to be driven out of their homes and for inventories to get swollen so I can score a sweet deal on one of these idiot foreclosures.

    The UGLY FACT OF THE MATTER is that these people who are losing their homes couldn’t afford the houses to begin with, hence the 100% financing and the huge 2nd loans and PMI payments.

    But every American feels that they DESERVE to be rich, and have a Louis Vuitton purse and a Mercedes C-Class… and the other accoutrements of this decade’s faux rich. With out-of-control consumer lending, these idiots have spent themselves back 15 years, and they’re barely figuring it out.

    F em.

  13. not_seth_brundle says:

    A broker’s bald promises about what you’ll be able to do in 2 years are worth exactly as much as the paper they’re not printed on. If you were relying on these assurances, you should have gotten a written guarantee that he’d get you a refi or pay the difference if he couldn’t. And preferably a guarantee from his firm as well. Called his bluff, in other words, because there’s no WAY he would sign a guarantee.

    I’m an attorney as well, and seeing this kind of story makes me SO glad that I haven’t fallen into the trap of trying to spend more than I earn. My condo expenses are less than 10% of my income, I don’t own a car, I’m aggressively paying off my student loan debt and saving and I don’t want for anything.

  14. chili_dog says:

    Proving yet again, taking business advice from a lawyer is the WORST possible option anyone can do.

    I suspect this guy is probly pretty good at what he does, like most SFO lawyers likely puts in 60 hrs a week and everything but the cases he is working is a blur. Income is fair and bills are being paid, why not buy more. Ben is absolutely correct in saying “but it’s just as easy for smart and successful people to get caught up in the conspicuous consumption game…maybe even easier”.

  15. homerjay says:

    “but it’s just as easy for smart and successful people to get caught up in the conspicuous consumption game…maybe even easier.”

    It is? Your headline makes more sense than your summary.

  16. Jon Mason says:

    To summarise his mistake:
    “We came into some money…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”

    If you are in over your head on your first home, you don’t buy a second home. You either sell up or make sure you can rent it for enough to cover the mortgage. Doesn’t take a fricking genius. I can understand someone being pissed when their ARM costs them another $1000 a month, but dude, seriously – you brought this on yourself.

  17. missdona says:

    Every story I hear like this makes me laugh, Snidley Whiplash style.

    My husband and I are so going to take advantage of this situation and buy when the market really drops.

  18. Crazytree says:

    it’s not that this particular attorney was an idiot… he’s just not as smart as he thought he was. however, there are plenty of idiots that have law licenses… I know because I went to school with a lot of them.

    plus I love how the broker is supposed to be able to GUARANTEE you peace of mind through market turbulences into the infinite future. the concept of an adjustable rate mortgage isn’t very complicated.

  19. QuantumRiff says:

    @ALEXANDER:
    I live in Oregon, and While I grew up in Salem, I now live down at the very south, about 20 min north of the CA border. My house as DOUBLED in value in 3 years. I have a 3bed1bath 1200 sq. foot home that I bought for $75k. The one and only reason that Oregon is going so sky high is Californians! They sell they’re 3bed 2bath 70’s ranch home in the middle of the suburb for $750k, then move up here. Then they think, Hey, I can buy 80 acres with a 2500sq foot house for that much.. They have no problem paying (what we Oregonians think is) a huge amount, because its so cheap compared to where they just lived. Also, with Salem, a few years ago, they made it very difficult to build out in the county, outside the city limits. They also put in strict rules about cutting down trees, and plowing over creek’s. They got tired of some of the best farmland in the country getting turned into suburbs. So, land is getting scarce inside their Urban Growth Boundary (this is modeled on what portland and Bend have done, with similar results to house values)

  20. ElenorR says:

    I feel for the guy. Real Estate is supposed to be a “solid” investment and putting additional money toward mortgages in the first five years often come with penalties.

    Someone like the Clintons play fast and loose with Real Estate, making a profit on the exact sort of financing that this guy used and it is only partially investigated. How much money did they make?

    This guy suffers from a bad lack of timing and we call his credibility into question?

    I have the feeling that historians are going to look back at the housing bubble the same way they look at the Stock Market of the 1920s and I am very afraid that the outcome will be very similar.

    Guys like this are just the ones who invested in late 1928 and didn’t realize the ride was over.

  21. weave says:

    Wow, chill out everyone. He said he wasn’t looking for sympathy. He knows he was a dumb ass. He was just sharing his story.

    I too had the arrogant people giving me a hard time for buying only half the house we could afford several years ago. We did go 80/10 at the time to avoid PMI, but the second is paid off and the first is now about 10% of our income. We didn’t “make our equity work (against) us” by getting equity loans. So seven years out even though we only paid down about 15% of the loan, our house would have to lose 2/3rds of its potential selling price before it would hit negative equity.

    Thinking we’ll be fine, thankfully.

  22. davebg5 says:

    “Let’s just say, I do OK…”

    Money don’t fix stoopid.

  23. humphrmi says:

    Personally, I’d love to see a bailout for people (not like me) who are getting hosed by the ARM adjustment

    Oh, yeah, let’s just bail out everyone who took out ARMs. And when they buy more car than they can afford, let’s bail them out again. And when the spend all their money on fabulous vacations and max out their credit cards, let’s bail them out again. Never mind the people who don’t do any of that and don’t get free money. They’re probably “the man” and sticking it to the poor schmoes who overextend themselves anyway.

    (how about just fixing them at prime at the time they were signed?).

    How about we send them free cookies and milk too?

    But that’s “class war.”

    No, it’s “stupid war.”

  24. pdxgrease says:

    I just got a $300,000 house at 5.6% fixed 30yr. No mortgage insurance, $800/down. No catches. Just a really great simple interest loan. The lender… Bank of America. My credit is 590. There are dream loans out there still. Acornhousing.org helped me do it.. again no catches. You just can’t have more than one house.

  25. missdona says:

    Holy S, PDXGREASE. I need that loan.

  26. 3drage says:

    Sorry bud, I can’t feel bad for you. You knew the kind of money you were going under with, and clouded yourself in a state of denial…as well as helped inflate home prices so that people with stable incomes couldn’t afford one. Take responsibility and stop trying to pawn your troubles off on the lenders. Buyer beware.

  27. Anonymous says:

    I truly think everyone needs to spend some serious time living paycheck to paycheck, meal to meal. That way, you will always remember what poor feels like. I did it (unwillingly!) for about 7 years after getting out of college. It really makes you think before signing your life away to the banks.

    That said, the lawyer who wrote this is not asking for sympathy. But for Pete’s sake, why did he not clean up his financial house before buying the second property? I am not in the real estate business and I took the time to do lots of homework (while holding down a job that was a 65 hour a week ordeal). Granted every situation is different but assuming that buying a house was a form of printing press is naive to be sure. The first house is a mistake. The second one is just plain hubris.

    Caveat Emptor. And better luck next time

  28. 3drage says:

    @QuantumRiff: You are just now seeing what we’ve had to suffer through in Nor Cal, people selling their Mc Mansions in Southern California then moving up here driving prices insane. The local incomes didn’t increase, just home prices. It’s like a swarm of locusts, and you should be happy you’re just now seeing it at the tail end. Wait until they start letting the homes go, no only will your neighborhood be peppered with for sale signs, but they’ll quickly have “foreclosure” stickers hastily placed over “price reduced”.

  29. FishingCrue says:

    So you got your first bonus, you went crazy thinking the money would just get better but you fucked up and bought real estate at the epoch of the most wacky RE market in the country and you come here looking for sympathy?

    CRAZYTREE — Agreed, sometimes I look around my office and wonder how some of these people get dressed in the morning, let alone passed the bar.

  30. Anonymous says:

    Where does this dude think the bailout money is coming from? Just another individual with no self control who doesn’t know anything about personal responsibility. Just to remind folks out there, the federal government doesn’t grow money on trees, people are taxed. Bailing out isn’t a costless exercise. Then he goes on to mention bailing out hedge funds – did I miss something?

    So, let me get this straight. I should pay for your houses and your decisions even though I haven’t been able to afford a house for myself? Sounds like a square deal.

    Maybe this D-Bag can bail me out on my Christmas shopping this year…

  31. mac-phisto says:

    @humphrmi: not for nothing, but we bail out agribusiness every time the farm bill comes up for a vote, we bail out the airlines every time their leases bloat their balance sheets, we bail out the automakers when they make more crapass suvs than americans can park in their driveways, we bail out the entire continent of south america to keep them from following the fate of cuba (& now venezuela – that’s certainly working)…is it really a whole lot to ask to have the feds pony up some funds to “bailout” a few million americans that are gonna end up on the street when the reset hits?

    i understand your point & i agree that sometimes the only way to teach johnny is to throw his ass on the street. but if that’s the case, then let’s at least have some f-ing uniformity. it pisses me off to no end that everyone gets a bailout but joe blow the voter. lord knows that if we started slathering washington with campaign contributions & champagne cruises, we’d probably all end up in interest-free loans.

  32. dazette says:

    Yeah, I agree we should take it a little easy on this guy. He is putting himself “out there” to tell his first person story and he appears to be taking his lumps like a man.

    I do have to wonder, though, what kind of financial education kids are getting from their parents these days. If I had been even tempted to sit in a room signing my life away for over a million in mortgages, the visage of my long dead depression era Grammy and the subtle influence of my fiscally responsible parents would have stopped me dead in my tracks no matter what the broker was saying!

  33. storm says:

    Hi, I’m Schmoe. I’m the guy you’re piling all the scorn on.

    First, I said I wasn’t looking for sympathy. I made my bed and I’m sleeping in it. I don’t care.

    Second, I think some of the factual analysis of what I did is incorrect. None of the loans I paid off were lower interest than the second, except for loans that were cosigned by the donee of the money, whom I promised to rid of any potential burden.

    Third, the improvements were all good ideas.

    Fourth, none of this was “more than I could afford” until lenders stopped doing refinances. assuming I could have re-fied the condo, even at the then-current market rate, I would be fine.

    Anyway, this wasn’t a whine. I understand that I’m gonna have bad credit, and I’m writing the losses off, instead of letting them get worse. I’m happy to take my lumps–that’s the system.

    This whole contention that I’m a dumbass because I listened to someone in a field about that field, and that I should know everything because I have a law license, is crap. If it makes you feel better to laugh at me, go ahead. I put myself in a high risk situation, and I lost.

    My point was this: if this happened to me, I feel bad for people in worse circumstances who aren’t getting bailed out.

    I don’t even disagree with a lot of the comments that say I was dumb. I learned a lot from this. So, anyway, I’m glad I could provide you a good laugh.

  34. storm says:

    @SuperBooyaKid:

    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.

  35. storm says:

    @FishingCrue:

    Again, I may have been dumb, but at least I can read. I am not asking for sympathy. Let me put this in small chunks so that dumb people like me that you wonder about can understand:

    I f-d up. I say I f-d up. That is ok with me. lol. I feel upset in my tummy for people with less munny that might not have things real nice like me and my ponies. boo hoo.

  36. storm says:

    Well, I guess I’ll avoid a career in politics. My attempt to make a point about the mortgage crisis turned into a rock-throwing forum against me, after I admitted that I sucked.

    I love my life and can’t complain. My finances are actually in better shape with that loser cast off, see? and… I could have afforded it just fine with a timely refi, but it’s probably even better this way because of the sunk costs.

    Anyway, I feel stupid about this, and you can say whatever you want.

    My worry isn’t for me. It’s about people who are even more retarded than me, if that’s even possible.

    Anyway — let he who has never made a financial mistake cast the first stone…

  37. Anonymous says:

    Dear Schmoe,

    Glad to see you are putting yourself out there. It takes courage (even if anonymous). That said, it seems like you were willing to borrow as much as you could afford, according to the lenders. This is like relying on the diamond industry to tell you how much to spend on an engagement ring.

    To make an inexact analogy, sure I invested in a few dotcoms in the late 90’s. We all did. Just don’t bet it all on Pets.com. Save a few bucks for the tried and true investments.

    Lesson learned, I assume.

  38. Anonymous says:

    Dear Storm (formerly schmoe),

    Don’t sweat it. People tend to get very sanctimonious behind the cloak of internet anonymity. Take the good advice and discard the bad. There will be plenty of both, trust me.

    Again, thanks for sharing your story and better luck next time

    (and try and remember many folks have a built in bias against lawyers – not your fault).

  39. tadowguy says:

    You are a lawyer, so if I went to you and said, hey, I’m about to spend a ton of money can you help? And you would say, “No, you need to consult a real estate lawyer”. Lawyer, law thyself, or whatever the legal equivalent is.

    Also I’m curious about these 2/28 ARMs, the main issue seems to be that they reset to prime + 18% or something insane. I had a second that was a 5 year ARM with a 15 year amortization, but it had a limit on how high it could go each year and an overall cap. Also since it was only a second, it was only worth about 30k which means even at 10% it wouldn’t kill me.

  40. storm says:

    @tadowguy:

    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.

    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.

    Apparently I can’t, and that’s one lesson learned. But, honestly, I’m taking my lumps, and enough about me.

    My point is–if they can make special loans to reinforce the value of these bad loans (like mine), why can’t they do something for Joe Working American NOT like me? Just askin’.

  41. hoo_foot says:

    @storm: If you truly “don’t care” what we think, then why continue to follow and respond to all of the comments? Someone who truly “doesn’t care” wouldn’t even bother reading them, let alone write numerous responses to them!

  42. bobcbobson says:

    Hey – Just a note, the tag for San Luis Obispo has a typo. Normally I wouldn’t care, but unfortunately, I live there. Ain’t housing prices a bitch?

  43. Alexander says:

    @QuantumRiff: Thanks for the info. Still, a 3 bd 1 br 1200 SQ FT home for $150k is just heavenly. If I could find anything for 150k here in Los Angeles I’d be all over it. To defend my dad, he is no urbanite who sold his 750k home. He is a working man who simply got sick and tired of city living and discovered his savings would go further in Oregon than in CA. He bought his house for his family and for him to live in, hopefully for the rest of their lives.

  44. zolielo says:

    No bailouts… No much more to say…

  45. zolielo says:

    oh typos

  46. LearningForever says:

    Reading all this articles in the news made me wonder:

    Who made out in this Housing BOOM?

    It is made to sound like everyone(hedge funds, lenders, real estate agents, retailers, home owners) is suffering and i am rather confused on who really benefited from the bad lending practise.

    Do we think that the yearly increase in profits by the business had come from from this boom either directly or indirectly?

    Well, even though it sounds like no one really made out on the housing boom, I do know that people who have been working hard and paying their taxes well will pay the price. Though I know we feel that we need to do a bail out in order not to go into a recession(or have our retirement fund drop to almost zero), it just hurts to know that no one is made responsible(and pay back what they have stolen) and we, the tax payers have to pay for it. Even worst, it means that we will not have enough funds to repair a bridge that might one day tumble on us.

  47. riggs says:

    Phase one: Take out $1.4 million in fishy loans.
    Phase two: ???
    Phase three: profit!

  48. Landru says:

    In the SF Bay Area here. I appreciate the poor folks in trouble – I know of one family near me that will probably lose their house. But you know, I have been struggling to clean up my credit and learning to save and sure haven’t been able to afford anything, tempted to do the 100% financing but just couldn’t do it. Now we will probably get to bail them out, and unless things really tank, I’ll probably never get to buy a place.

  49. Crazytree says:

    @storm: said “…none of this was “more than I could afford” until lenders stopped doing refinances”

    I’m not breaking your balls but let’s be honest here…

    you went into a deal with no money down, and were paying PMI and a very high rate on a second.

    you kept it as an investment and thought it would appreciate significantly and you would make a ton of money.

    then you got into another house with another no-doc loan, which you wouldn’t have done if you were able to demonstrate enough income that would have allowed you to “afford” the condo… not to mention the later house.

    in the interests of disclosure I am also a real estate broker, but the fact of the matter is that you thought you were going to make a ton of money through the apprecation on the condo. the market cooled down, and your unrealistic value expectations turned into a negative cash flow investment property.

    you had no reason to keep the condo unless you thought it was going to appreciate. and I won’t even get into whether or not you still had “owner-occupied” rates on the condo.

    the fact of the matter is that taking out a $1,000,000 loan is a huge business decision, and creates a RISK OF LOSS. you thought you were going to come out ahead on both deals, and that didn’t work out. and I think it’s not fair that you’re blaming the loan broker when he was just giving you what you wanted.

  50. Crazytree says:

    100% financing should be avoided at all costs. most lenders will only do 80% LTV, and your second is going to have a shitty rate… PLUS you’re going to be paying PMI which you’ll never get back and you can’t write off.

    100% financing itself is a red flag that you can’t afford the property. a no-doc loan is PROOF you can’t afford the property, or else you would get a full-doc loan with MUCH more favorable rates.

  51. jhofker says:

    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.

  52. razorbacker says:

    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.

  53. mac-phisto says:

    @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?

  54. j-yo says:

    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.

  55. loueloui says:

    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.

  56. Crazytree says:

    @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.

  57. Shred says:

    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.

  58. Rusted says:

    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.

  59. rbb says:

    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…

  60. pinkbunnyslippers says:

    @pdxgrease: That sounds like an FHA loan…

  61. CumaeanSibyl says:

    @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.

  62. killavanilla says:

    @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.

  63. WV.Hillbilly says:

    This guy is the king of the douchekateers.

    This guy was in over his head from the get-go.

    No bailouts for the stupid.

  64. cabalist says:

    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

  65. Mary says:

    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.

  66. AcidReign says:

        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.

  67. ThinkerToys says:

    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.

  68. pshah says:

    @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.

  69. samurailynn says:

    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.

  70. Litmajor says:

    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.

  71. Xerloq says:

    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.

  72. Xerloq says:

    @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.

  73. humphrmi says:

    @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.

  74. pinkbunnyslippers says:

    @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*

  75. NoWin says:

    @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.

  76. milqtost says:

    “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…”

  77. ThinkerToys says:

    @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…

  78. Mary says:

    @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?

  79. Mary says:

    @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.

  80. tadowguy says:

    @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…

  81. tadowguy says:

    @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%.

  82. traezer says:

    So much for living the SLO life eh? But Im glad that you are ok in the end.

  83. Anonymous says:

    @ 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….

  84. Charles Duffy says:

    @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.