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.