Someone Should Have Stopped This Mortgage

Here’s another mortgage that should have never been made: A single mother earning $34,000 a year buys a ranch house for $385,000 by taking out two mortgages. Her then boyfriend was helping with payments, but then there wasn’t more more construction work. Blogger JLP figures she was probably putting 86% of her income towards the mortgage.

So who do you blame, her, or the layers of finance guys who gave the thumbs up? Is it a confederacy of dunces, or of the greedy? Either way, they got their commission payments, and she, well expecting a foreclosure any day, has put all her belongings in a crate in the yard and the only thing left inside is the mattress she and her children sleep on.

How the Heck Did This Woman Get a Mortgage? [All Financial Matters]

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  1. m0unds says:

    You can’t really expect banks/loan reps/etc to tell someone when they don’t think they should be buying a house– they won’t get their money that way. It’s not anyone’s fault but the woman’s that she signed the mortgage papers, likely knowing full well that she wouldn’t be able to afford it by herself.

  2. chrisgoh says:

    Both. They should not have approved it and even if they did, she sure as heck should not have accepted it.

  3. myrall says:

    *slaps self in forehead*

  4. savvy999 says:

    Any ‘confederacy of dunces’ reference in any post is top-notch in my book. Ignatius himself would be proud of this fine mess.

    For the record, I blame the pervasive personal greed. Greedy prospective homeowner wanting more house than she could afford, greedy brokers wanting commissions on a sale they had no ethical, moral, or even business sense making.

  5. cashmerewhore says:

    Well, the principal on that at 6% would’ve only been $2310/mo….

    It’s great if you don’t want to eat or have utilities!

  6. darkened says:

    I just want to point out I think it should be up to the consumer to decide if they want to make a decision to spend 86% of their income on their housing payment. Does it sound like a bad idea that most likely won’t work? Probably, but who’s to say it couldn’t have. Now if that was 86% at the teaser rate…

  7. emona says:

    I’m going to go with placing the blame on the woman. I don’t run around accepting every line of credit thrust in my face, and I make almost as much as her with no kids.

    You are your own responsibility, not anyone else’s.

  8. UESC says:

    well, some rich person/company looking for good PR will come and bail her out, so why is she worried?

  9. theDevilsDue says:

    @cashmerewhore:
    I doubt the lady could have gotten an interest rate that low.

    I can’t believe that 1. She was approved and 2. She actually signed. Both the lender and the buyer got what they deserved for being total morons.

  10. johnva says:

    I’m guessing this had to be one of the “stated income” mortgages and that she grossly overstated her income/financial resources. In other words, she basically committed fraud. It’s also possible that a mortgage broker was the one who committed fraud; some of them have been known to alter documents to inflate the stated income. Still, she should have known she couldn’t afford this. It’s obvious from simple math.

  11. JustRunTheDamnBallBillick. says:

    Just a guess based on the article. This was probably done as a stated income loan, with her telling the lender that she had extra money coming in, but being the boyfriend, wasnt going to be documented. Happens alot, and needs to be tightened up in the regs, but not illegal on either side. Another income source that may have been included was child support or alimony, since that is money coming into the household.

  12. HRHKingFriday says:

    @savvy999: And greedy markets. The house probably wasn’t even in a great neighborhood. That’s why I haven’t bought yet- anything under 250k where I live is in a bad (and I mean BAD) neighborhood. Like, get shot and don’t even think about buying a new car bad neighborhood.

  13. NoWin says:

    @savvy999: “Greedy prospective homeowner … greedy brokers …”

    Bingo! Takes two to make a deal.

    And here in Massachusetts, spending 56% of your average annual income just for housing is the norm considering our high real estate values (its dropping, but still not enough to make a severe impact to the better of ones income)

  14. SadSam says:

    Assuming no fraud on behalf of the mortgage company/bank, I blame both. She had to know she could not affort the monthly nut and the bank had to know same. Both to blame.

  15. ironchef says:

    you can thank the no doc idiots who greenlighted this AND the retard who thought a house was possible.

  16. DrGirlfriend says:

    This is a case of greed all around, but in the case of the homeowner, there’s an added layer of willfull ignorance. She had to have known she could not afford it, but if a bank lends her the money then that somehow means that she magically can. In other words, someone in an authority position gave her the green light, so it must be okay. I think both parties bear responsibility, but the brunt of it falls on the homeowner. No one knows (or should know) your financial situation better than you do.

  17. KJones says:

    They’re all to blame, but the financiers should bear the brunt of the damage. They’re supposed to be the experts and know that the borrowers could only keep up the payments under the most optimistic of events.

    With a boyfriend in construction work and her income of $34K, the couple could have bought a “fixer upper”, owned it in a decade, and made it worth more than when they bought it to sell at a profit. Or, they could have bought a trailer or small home and owned it outright in a short time with the largest payments they could manage; if you’re not wastign money paying rent or a mortgage, it’s easier to save for a bigger home later and pay for it with cash.

    Unfortunately, these people wanted their dream house NOW NOW NOW instead of dealing with reality.

  18. johnva says:

    @JustRunTheDamnBallBillick.: I could be wrong here, but isn’t it fraud to overstate your income even on a stated income loan? I thought the purpose of these loans was mainly for people who actually HAVE income but can’t document it to the degree that a conforming loan requires. For example, if you haven’t been at your job for 2 years, you are self-employed, or you just recently got a big raise that isn’t being accounted for in your old tax returns. I don’t think you can legally just make up any number you want and put it on there. There has to be a basis for it. Now that may have been the ex-boyfriend’s income in this case, but this loan is so big for her income that it sounds to me like she might have been pushing it even accounting for his income.

  19. nursetim says:

    This is a little off topic, but it sort of relates to the story.

    My parents bought their house back in 1966. We were talking about the subprime meltdown, and my mom said that when they were going through the mortgage process, the bank did not count her income, only my dad’s. This was several years before they even had kids, but the thinking was that once they had children, my mom’s income would disappear since she would be home with the kids. If you think about it, at that time it was normal, and the bank was making sure that worse case scenario my parents would still be able to afford the house. Kind of gives a little perspective on what the state of the mortgage industry is today.

  20. cashmerewhore says:

    @theDevilsDue:

    It was likely an ARM so it would’ve been a lower payment than that.

    That’s just what my mortgage broker suggested for estimating principal payments. That doesn’t include property taxes and any HOA fees (if applicable), or interest on fixed rate loans.

    Sadly, this has happened with two major developers in my area and I’m not surprised my metro city ranks in the top 25 for forclosures (granted, not all the forclosed properties are $350K+ homes)

  21. Starfury says:

    The real estate agent should have been able to look at her income and tell her how much she could afford. All the way down the line people were stupid/greedy.

  22. Pylon83 says:

    I too think blame falls on both sides, however ultimately I blame the buyer for overextending herself. I am amazed that she was able to get approved, and for that, I blame the mortgage company. I just don’t see how this happened without some sort of fraud or misrepresentation. Further, I do disagree with the idea that you should only spend 33% of your income on housing. In some markets, such as Chicago, it is difficult to spend only that much and have a decent place. Also, in cities like Chicago and New York where things like a car are not necessary, it makes it much easier to spend more on housing. When I moved from Kansas City to Chicago, our rent nearly tripled, but since we sold both cars, out monthly out-of-pocket expenses was basically a wash. I do think that some (not all) people can budget properly and spend more than the “normal” 1/3 gross income on housing. However, 86% is just dumb.

  23. JustRunTheDamnBallBillick. says:

    @johnva: You are right, stated should be for a limited number of scenarios, including irregular (but steady) bonuses and commissions, self employment, recent pay raises not reflected in tax returns, ect. I have seen an expansion over the years to include spousal income. This is often done (wrongly) to allow the main wage earner who may have bad credit, to stay off the loan. Assuming they didnt have a lot of outstanding debt, 50-55k would easily fall under most subprime guidelines, which I was guessing allowed for him to be making 20k or so.

    The main problem with liar loans (stated) is brokers and customers both wanted the deal to go through, so borrowers were encouraged to say they had second jobs or extra income that they couldnt fully document, and that was used to cover the spousal income.

    Both parties have some fault here, and if it was fraud she has standing to sue the broker/lender. But this is actually a bad example of a bad loan, since this woman is only losing her house because her boyfriend lost work, no because the loan increased. This could happen to someone with a fixed rate just as easily.

  24. notallcompaniesarebad says:

    @theDevilsDue: “Both the lender and the buyer got what they deserved for being total morons.”
    Correct. What’s the problem again? Seems like people made dumb choices, and got penalized for it. Isn’t it supposed to work that way?

  25. RagingBoehner says:

    @notallcompaniesarebad: Exactly! The bank made a bad business decision, the woman made a bad personal financial decision.

    The situation corrects itself when she loses the house.
    Since she didn’t even put any money down all she “loses” is the payments that she didn’t make on her mortgage.

    I’d say this is an example of the system working. I don’t mean to be crass when I say she “deserves” to lose the house (she does) but I rent it’s not like I’m homeless or anything. It’s kind of hard to lose something you have no equity in anyway.

  26. bohemian says:

    The problem is that the people originating these loans have no long term responsibility to the loan. They write it, get commission and wash their hands of it.

    Mortgage brokers could be some of the worst with this stuff. They have zero accountability for writing these loans. There are also many realtors that push really hard to get clients working with these brokers. Brokers have to be giving these realtors a cut or some other incentive to push people to get involved with sketch mortgage brokers.

    Out of four realtors we had contact with over the housing boom three of them tried to hard sell us on getting more house and a questionable loan from a broker. The one loan realtor that didn’t had been in business for 30 years and was fine with our decision to use our bank and a traditional loan.

  27. DrGirlfriend says:

    The system is working at its most basic level – borrower messes up, they lose house. Bank gives out loans indiscriminately, bank loses out on money. But this is not an isolated example of a borrower being lent too much money — it’s happening everywhere. Like i said above, the brunt of the responsibility, IMO, falls on the borrower in this case. But there is a part of the system that’s broken, in that banks are not being cautious when handing out mortgages. It’s bad for the borrower and it’s bad for the bank.

  28. Did y’all see the link in the comments that article had?

    Yearly Income, $14,000. Purchase of House, $720,000.
    [www.doctorhousingbubble.com]

    The whole thing gives me a headache.

  29. Rando says:

    @m0unds: they wont get their money if someone cant pay it…

  30. FLConsumer says:

    100% faulting the buyer on this one. Just because there are Rolls-Royce dealers & Frette linen stores out there doesn’t mean everyone can afford to shop there. Most people generally understand this, even those who get themselves into financial trouble usually don’t blow it by going THIS big.

    The only two areas I see this type of crap happen is with cars & homes. People totally fail to see the TCO.

    As far as the bank/lender goes, they screwed up, but they’re getting exactly what they deserved. Private investors wouldn’t consider making loans like this (except for the fools over at Prosper, but that’s a whole other mess), so why should businesses?

  31. anatak says:

    @m0unds: “You can’t really expect banks/loan reps/etc to tell someone when they don’t think they should be buying a house”

    yes, you can. Or you should expect it. That used to be their job. You qualify / you do not qualify. You are an acceptable risk / you are too big of a risk. This all went out the window when banks found they could make more money by not answering those questions. Thus they replaced the bankers with salesmen. Thought and judgment has been replaced with profits and commissions.

    Did she have any business even attempting this? No. Is this partially the borrower’s fault? yes. But this meltdown is happening for a reason, and its not because borrowers are getting dumber.

  32. humphrmi says:

    She probably figured her boyfriend would always be able to help her out with payments when his construction work was booming. If the construction boom had kept going, probably even this loan would have continued to work. But too many people don’t look at the worst-case-scenario anymore. Nobody ever has a long term view.

    I’m quite certain by the time I retire along with 40% of the people in the U.S., there will be two classes of people … those who saved for retirement (the “Rich”), and those who didn’t (the “Poor”). Then they’ll tax me to help bail them out.

  33. ManicPanic says:

    I too think this is the buyers fault.

    No joke, I knew a woman who last year traded in her old car that was in perfectly fine working condition because she wanted a new one. She went to the car dealership and bought a new mid-size SUV. She drove it for two weeks then realized she could not afford the gas. She took it back to the dealership and made them take it back.

    She “downgraded” to their large sedan type car. She had that for awhile-until getting the loan invoice in the mail and realizing that she couldn’t make the payments. Again, made them take the car back. She wound up with the mid-size sedan this time and had that for about a year.

    Recently she traded that in for a new car that undoubtebly cost more in addition to another car for her daughter. Her comment on the loan: well it is kinda high for me but I can refinance next year.

    At the moment she is under water with creditors calling her. But it wasn’t the car dealerships falut and the first one did her a service by taking the first two cars back.

    *smacks head*

  34. mac-phisto says:

    where’s the problem here? it says she “manages flower sales”. in broker language that translates to “sales executive” & would probably qualify her for $750,000 loan. book it (i’ll take my commission, thank you very much)! next!

  35. iamme99 says:

    Too many people play that they “didn’t understand” what they were signing. If you don’t understand something, then you shouldn’t sign it. That’s just common sense.

    No, I think that many people thought they could game the system. If it worked, then they could make some money by selling later. If they lost, then hey, just declare bankruptcy and walk away. Do you really think that someone making 34k a year with credit cards maxed out and barely getting by, cares about their credit rating?

    There’s just very little downside to playing this game for most people. Maybe we should bring back public flogging or debtor’s prison?

  36. BillyMumphry says:

    her. end thread.

  37. m0unds says:

    @anatak: I agree that you *SHOULD* expect loan reps to give a shit, but in practice, lots of them don’t. People need to know what the hell they’re getting into and not rely on someone to hold their hand.

  38. iamme99 says:

    @ANATAK: You don’t understand sales!

    Salespeople don’t make their numbers and commissions unless they close the sale. If they don’t make their numbers, they get fired and have to find another job.

    Most salespeople could give a rat’s ass about how qualified someone is for anything. They just want to book the sale. 2,3,5 years later, who cares. They probably won’t be working at that company then and any monies they made are already in their pockets.

  39. Trai_Dep says:

    It’s human nature for stupid people to want “free money”. Banks have faced this since, forever.

    It’s a bank’s JOB to say, “Thanks, but no thanks.”

    It’s a systemic fault, though. As soon as banks weren’t responsible for their own paper, the inevitable happened. Primarily, it was the (GOP-led) government’s fault for not correcting this.

    That said, who should pay? Everyone that acted like an idiot. The woman. The broker. The bank approving the broker’s paper. The Wall Street firms packaging the loans. The Fed and the GOP for letting this get out of control. But NOT sensible borrowers, sane people that rented rather than chase tulips or taxpayers.

  40. pirate says:

    It is called personal responsibility.

  41. chrissv says:

    I think banks should take every reasonable steps to be assured / believe that the buyer will be able to afford the loan. These programs where you don’t have to document your income should be done away with.
    Granted, there are some special cases where the person has more money coming in than is normal “income” but the banks could take special cases into account.

    The buyer is not totally blameless, but if I were parting with my assets I would want to be assured the person is credit worthy.

  42. char says:

    Where is the bank’s personal responsibility to itself? Who’s going to invest in a bank that is giving loans that will obviously be defaulted on?

    The lady’s predicament is her own fault, and the bank’s loss of money resides on its shoulders. Sadly the loss for the lady is of far greater relative value.

    I mean it’s a lose lose for everyone. I can’t imagine the shareholders of the bank are thrilled that the bank is throwing money out like that.

  43. Frank Grimes says:

    Moderately off topic but when the city of Houston sent me my consolidated property tax bill (I don’t escrow) they happily announced that they will now take Visa and MasterCard. Awesome deal I thought, I have the money (we take funds each week and deposit it into an ING account for Daycare, Property Tax and savings) and we could put it on the points CC, then pay off once the bill comes in. I then noticed the 2.5% fee that that will be added to your bill which ended that grand plan. All I could think is how many idiots will use this option to sink further and further into a black hole of debt.

  44. mac-phisto says:

    @iamme99: we go back & forth on this all the time, but i enjoy the discourse, so please don’t take it the wrong way.

    you can’t just “walk away” anymore. the bank will most likely sell this property at a loss & then go after this woman for the money. bankruptcy won’t protect her. the lenders made sure of that when they managed to get the reform act passed in 2005.

    i wonder if that played any role in the “opening of the floodgates” when it came to these loans. previous to that act, you’re right, a few grand thrown at a bankruptcy attorney would’ve made this all go away. if a lender had debt that was unsecured by collateral, they were basically screwed. in a way, this kept lenders in check.

    now it’s a whole new game. lenders have hope that they’ll receive payment on moneys owed even after bankruptcy – as long as the debtor has income. perhaps lenders loosened their belts a little bit when they got the legislation they’ve wanted for decades.

  45. RagingBoehner says:

    @Frank Grimes: Maybe idiots, maybe people who are willing to pay an extra 2.5% on their property tax bill to hold them over until they have some extra cash. Maybe they have a 0% interest card and would rather load that up.

    Ahh consumer choice. It’s a beautiful thing!

  46. RagingBoehner says:

    @mac-phisto: If you can work out a short sale, then banks will often forgive the amount that you’re upside down in exchange for saving them the expense of a foreclosure.

    Which is great, until the IRS sends you a bill for “income” that the bank just gave you.

  47. gretch9er says:

    My Dad recently retired from working as a lender for various banks during his 30+ year career. He helped a friend who owns a Realty company to start a Mortgage Broker firm, and was working in Mortgage lending for a year or so. He recently sold his shares in the business after various fallings out (not the least of which being one incident where my father would not approve a loan for a family who wanted to buy a home which would have been almost 60% of their monthly income – and they wanted to buy a trailer home). In banking, I’m told, there was a strict “30%” rule – a bank wouldn’t lend a person more for a mortgage than they could pay off using 30% of their regular monthly income. Believe me – there really is something to the phrase “Predatory Lending.” I have a friend who was trying to buy a home with her husband. They wanted a standard, 30-year fixed mortgage, but this guy kept trying to push a variable ARM on them. Even though they qualified for a standard 30-year fixed mortgage. They promptly found someone else to do their mortgage…

  48. dio says:

    I really think something should be done to prevent this type of lending because this is something that affects many people.

    For example, I make twice as much as her and have no consumer debt but I would never take try to buy a house that costs almost 400k. But, because of people like this, they drive up the price of homes. This is not simple supply and demand.

    This is artificial appreciation. Until housing is affordable for all, our economy will struggle.

  49. dio says:

    Stupid loans like this drive up the price of homes for people who actually want to buy a house they can afford. I can’t get a house because I am unwilling to pay the inflated housing price.

  50. nakmario says:

    People are just too dumb, these days, to make educated decisions.

    If you don’t know what you are signing then don’t sign it. It’s that simple.

    BTW it is not predatory lending if you have borrowers calling up banks and loan officers trying the get the biggest loan possible. You can blame the banks/lenders all you want but what you are really doing is disingenuous and dishonest. People need to own up to their actions.

    People will lose their homes and lenders will lose their money. It is how capitalism works.

  51. RandomHookup says:

    but then there wasn’t more more construction work

    I really loves more-mores when I go camping.

  52. niteflytes says:

    Why did she put her belongings outside in a crate and keep only mattress in the house just because she expects a foreclosure? WTF?! In the yard??? Where people can steal the stuff, bugs and rodents can get into it and it’s exposed to the weather? Sounds like a very strange situation and overall poor decision making skills.

  53. Me - now with more humidity says:

    raigingboehner: Forgive it? No, they’ll charge it off and it’ll show on your credit that way. It’s easier to negotiate with the IRS, however.

  54. Me - now with more humidity says:

    mac-phisto: don’t post what you don’t know. Most people who qualified for BK under the old laws qualify now — something like 70 percent. If they qualify for Chapter 7 and can’t keep the house and reaffirm the loan, the bank takes the house back and the debt is gone. If they go Chapter 13, they only pay for 60 months. And then only a percentage based on their disposable income which is calculated using a boiling cauldron and algorithms so complex they would make Google jealous.

  55. bravo says:

    I can’t figure out why someone would want to buy home THAT badly. Over 80% of her income???

  56. Buran says:

    @ironchef: Making a bad choice doesn’t make you retarded. Retardation is a real condition. This is not it.

  57. jeff303 says:

    @anatak: Er, not quite. They *can* extends loans to these people, but they cannot count on the income stream with any confidence. But if you simply lump them together with AAA grade vehicles in a small enough ratio, the entire product is still AAA grade (wink, wink)

  58. m4ximusprim3 says:

    @anatak: But this meltdown is happening for a reason, and its not entirely because borrowers are getting dumber.

    There, fixed that for ya ;)

  59. iamme99 says:

    @NAKMARIO wrote: “People are just too dumb, these days, to make educated decisions.

    If you don’t know what you are signing then don’t sign it. It’s that simple.”

    But I WANT it. In fact I need it for my psychic well-being!

    This of course give me a reason to post a link to one of my favorite SNL video’s – Don’t buy stuff you can’t afford:
    [danwho.net]

  60. skeleem_skalarm says:

    Greed knows no bounds.

  61. kromelizard says:

    It never ceases to amaze me that so many people who come to this site are enthusiastic in their support of large businesses conducting themselves in a manner harmful to anybody but their own bottom line. This lady was essentially loan sharked and people here are saying “Way to go, mortgage dude!”

  62. This lady was essentially loan sharked and people here are saying “Way to go, mortgage dude!”

    @kromelizard: Who’s saying that?
    Most people are blaming the mom, some people are putting 100% of the blame on here, but no one here has said or implied that what the banks did is good.

    Besides, “loan sharked” isn’t the right term for this. She was not threatened or blackmailed into taking these loans. She was not in a desperate situation where she needed the loan. She’s not even claiming that they fudged her paperwork after she signed it.

    What happened may have been fraudulent and unethical but loan shark implies she had little or no choice about getting the loan. She could have kept renting or gotten a smaller mortgage for a smaller house.

  63. humphrmi says:

    @Rectilinear Propagation: RENT??? What, like an APARTMENT??? You gotta be kidding me! :)

  64. kromelizard says:

    @Rectilinear Propagation: I implied she was extended a loan at terms the lender knew she couldn’t repay. That’s what loan sharks do, everything else people are saying about this is precisely the same justification you would hear from one while being beaten until you pee blood for falling behind on the vig.