Sub Prime Mortgages
A few years back, I was living in Pennsylvania, working at a community college and in the process of buying my first house. The offer process was irritating as hell, the owner wanted to raise the purchase price and pay my closing costs and do a number of shifting balances of things, and I was refusing, and people were getting irritated with me.
Then came the mortgage brokers.
The first one arrived, late, and pulled out a wad of papers, including a credit report. He started by shaking his head.
"Ok, you have some late cell phone bills. I can help you, but we have to clear these things up."
He leaned back in the chair and folded his hands in front of his face and stared at me.
"I don't have a cell phone."
He ignored me and kept talking. He set up his "best plan" and then his "second best plan". The first was an adjustable rate mortgage (so my payments would be so low, he said, 200 dollars a month!) with a second mortgage for ten grand with some cash back feature "for all the repairs you'll obviously need."
The second plan was also and ARM with a second mortgage but this one was zero down! I'd pay a little more in the long run, but probably not, that's so far down the line he was sure, he said, I wouldn't be living in a 'starter home' at that point. I could do this tomorrow! Please just sign here! He handed me a pen and I refused.
I got the guy out of my house and called my brother Frank.
"Classic sub-prime lending," he told me.
"Frank, it's like charging part of the loan on a credit card. That's insane," I told him.
"Well, understandable," he said. But then he added, "For comparison's sake, though, interest rates in the 1980's were higher."
I was determined not to be sub-primed into eternity. The seller was getting irritated, the realtor told me. She wanted my loans to be done. I just needed to get on with this. I could be sued. I needed to find a mortgage.
The next loan guy pulled up to my apartment in a shiny silver VW Bug and brought in his fancy satchel; we sat down at my kitchen table. He set up a pile of papers and pulled out his orange calculator and set it on the table. I pulled out my trusty TI-83 plus graphing calculator and set it on the table with a thud. He laughed. "What is that?" he said.
"Scientific calculator," I replied.
He started tapping on the calculator. He proudly showed me the number on the screen: 201.40.
"That can be your payment!"
I asked him to show me how he arrived at such a number.
"Why wouldn't you want to pay 200 dollars a month for a home? You pay so much more now for this... this small apartment."
"Because in five years I'd be paying over a thousand a month and I don't want that."
He replied quickly, "But who is to say where you'll be in five years? Certainly you'll be in a better job, making more money! Then you can just sell your house and buy and even better house and guess what? Pay 200 dollars a month for that one! And that one might have a pool! And be fancier!"
I showed him the door.
I'm not in this crisis they are voting on now and and am not sure how I feel about it. Thoughts?
Then came the mortgage brokers.
The first one arrived, late, and pulled out a wad of papers, including a credit report. He started by shaking his head.
"Ok, you have some late cell phone bills. I can help you, but we have to clear these things up."
He leaned back in the chair and folded his hands in front of his face and stared at me.
"I don't have a cell phone."
He ignored me and kept talking. He set up his "best plan" and then his "second best plan". The first was an adjustable rate mortgage (so my payments would be so low, he said, 200 dollars a month!) with a second mortgage for ten grand with some cash back feature "for all the repairs you'll obviously need."
The second plan was also and ARM with a second mortgage but this one was zero down! I'd pay a little more in the long run, but probably not, that's so far down the line he was sure, he said, I wouldn't be living in a 'starter home' at that point. I could do this tomorrow! Please just sign here! He handed me a pen and I refused.
I got the guy out of my house and called my brother Frank.
"Classic sub-prime lending," he told me.
"Frank, it's like charging part of the loan on a credit card. That's insane," I told him.
"Well, understandable," he said. But then he added, "For comparison's sake, though, interest rates in the 1980's were higher."
I was determined not to be sub-primed into eternity. The seller was getting irritated, the realtor told me. She wanted my loans to be done. I just needed to get on with this. I could be sued. I needed to find a mortgage.
The next loan guy pulled up to my apartment in a shiny silver VW Bug and brought in his fancy satchel; we sat down at my kitchen table. He set up a pile of papers and pulled out his orange calculator and set it on the table. I pulled out my trusty TI-83 plus graphing calculator and set it on the table with a thud. He laughed. "What is that?" he said.
"Scientific calculator," I replied.
He started tapping on the calculator. He proudly showed me the number on the screen: 201.40.
"That can be your payment!"
I asked him to show me how he arrived at such a number.
"Why wouldn't you want to pay 200 dollars a month for a home? You pay so much more now for this... this small apartment."
"Because in five years I'd be paying over a thousand a month and I don't want that."
He replied quickly, "But who is to say where you'll be in five years? Certainly you'll be in a better job, making more money! Then you can just sell your house and buy and even better house and guess what? Pay 200 dollars a month for that one! And that one might have a pool! And be fancier!"
I showed him the door.
I'm not in this crisis they are voting on now and and am not sure how I feel about it. Thoughts?
Labels: real estate, scams, sub-prime mortgages
posted by Bernie at
10:57 PM
11 Comments:
Thanks for writing this. It was on my to-do list but felt too ambitious.
A recent analysis in my state found that the greatest concentrations of these subprime mortgages, by far, were in working-poor neighborhoods in Troy, Albany, and Buffalo. Not a case of buyers' bad taste at all. Maybe that's the situation in Arizona, but not here.
More later.
but in this case the broker was right. bernie wasn't in that house for anywhere near five years, let alone pennsylvania. she should have taken the deal!
"working at a community college and in the process of buying my first house."
how?!?!??!?!?!?!?!??!?!?
Anon,
Because the house cost about seventy grand, that's how!
I had a somewhat different experience than Bernie. We were coming out of grad school and nursing school, four very lean years, and I was hesitant to go to a traditional bank. How about one of these new-fangled "mortgage brokers", instead?
We were given the worst possible terms imaginable. 11+ percent, when the going rate was in the 7s. A "Bronx County Development Fee" of $2,800 listed on the Truth in Lending Statement, though we were 150 miles north of the Bronx, and just what does that mean, anyway? "I don't know why that came up. That shouldn't be there," said the broker, with fake puzzlement.
No thanks, we said. A few days later we got revised paperwork in the mail. The broker said he had talked to some different underwriters, was able to get us a better rate: 10.8%. The Bronx fee was still there.
Not a good business model, obviously, but as long there is occasionally someone who is too timid to ask questions, plenty of money to be made.
PS I don't think I would have said "classic subprime lending", because the term "subprime" hadn't yet trickled into the vernacular. I would have stopped at "classic". But I did predict where this would all be leading us in 5 or 6 years.
I don't think the broker was right, John. That second mortgage would have burnt me. I think it was their 'backup.'
I really enjoy John and Bernie communicating with each other via this blog. In my mind I envision John in his "Unawriter" cabin tapping out his reply while Bernie is only feet away in the Yurt answering back.
As for this whole sub-prime thing... man, it's a real shitty situation. I respect you, Bernie, for having the good common sense to spot a "too good to be true" situation. As for those who didn't possess such good sense, it's tough. I empathize on some level, but ultimately, isn't there some measure of personal responsibility and accountability here? We are a debtor's nation, and too many people have not been taught the golden rule of "if you ain't got the money... you ain't oughta buy it."
We can't continue to buy things we can't pay for in the long run. The war is just one more example. We were sold a serious sub-prime pitch on that one. Rumsfeld said, "Hey, it'll only cost about $60 billion." Yeah, tell that to Mr. Trillion. I think he's got a different idea.
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Suppose a top university, determining its finances were a little lean, quietly lowered its admissions standards one year. Its goal would be too see a boost in tuition for a couple years, with the expectation that a lot of the extra marginal students would flunk out. Your daughter is accepted. There are rumors that admissions standards have been lowered, but you don't know if this true, and whether it applies to your daughter even if it is true. Is she decides to enroll, does this make your daughter irresponsible and unaccountable? Why?
Or suppose you are a Lithuanian peasant in 1895. Colorado silver miners are dying almost every week, three times as often as miners in other places. John D. Rockefeller, has said (to paraphrase) that if people are willing to assume these kinds of risks, then that's their problem. A representative from Colorado Fuel and Iron comes to your village on day with an attractive sounding offer. You are ultimately shot and killed by the Colorado National Guard. Were you irresponsible and unaccountable? Really?
Or suppose you've been jogging 15 miles a week, have lost 20 pounds, and feel like you're in pretty good shape, so you and a couple friends decide to climb Mt. Hood. You get caught in a freak spring snowstorm, prompting a multi-day search and helicopter rescue. Were you irresponsible and unaccountable? Well, of course. The difference here is that you didn't enter into a contract in which crucial information was deliberately withheld.
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