From the Wall Street Journal:
One Family’s Journey Into a Subprime Trap
Monteses May Lose House as Rate Resets, Credit Options Dry Up
By JAMES R. HAGERTY and KEN GEPFERT
August 16, 2007; Page A1
Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.
The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. “We agreed we wanted to be homeowners again,” says Mr. Montes, “even if it meant the end of vacations and not eating out as often.”
Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then “reset” to a much higher level. Mr. and Mrs. Montes say their mortgage broker assured them they would be able to refinance in a couple of years to keep their payments affordable.
With a December “reset” on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses’ loan balance may exceed the value of their home.
The Monteses are caught in a trap — one that hundreds of thousands of people could face as the housing market totters and the easy credit of recent years dries up. They in effect bet that the boom in housing prices would continue. It was more important to hop onto the escalator than to wait until they could afford to make the leap according to traditional measures.
And with thousands of mortgage banks and brokers threatened with extinction, lenders that embraced all kinds of risky loans two years ago are enforcing increasingly strict standards. They are refusing even to consider extending new credit to people like the Monteses who lack any equity in their homes.
“We have a disaster on our hands,” says Mr. Montes, a 48-year-old warehouse manager. He fears he won’t be able to handle the payments after the December reset and wonders whether the family can avert foreclosure. “At this point,” he says, “we really don’t have a plan.”
Until recently, the Montes family didn’t seem like the type that would find itself faced with foreclosure. They live in a solid neighborhood and are both employed and in good health. “My wife and I make pretty good money,” says Mr. Montes. Mrs. Montes works as a school secretary. Together, they earned nearly $90,000 last year.
But they already pay about $38,400 a year on their home loans, even before taxes and insurance. In December, when their primary loan “resets” to a higher rate, that cost will rise to about $50,000 a year, Mr. Montes says.
…
The Montes family got their loan through a mortgage broker in Rancho Cucamonga. Using what was then a common formula, the broker offered to arrange for two loans, one to cover about 80% of the home price and the other, a so-called piggyback loan, for the rest. For the first two years, their total monthly mortgage payments are about $3,200. The loans are initially interest-only.Mr. Montes recalls feeling edgy about whether he would be able to afford the higher costs — about $900 more per month — due to take effect after two years. But he says the broker assured him he could refinance before those costs kicked in.
Mr. Montes preferred not to name the broker publicly because the broker has a business connection with a relative of the Monteses. The broker declined to comment.
Mrs. Montes says she was apprehensive about the broker’s assurances. “But I blame that on that I don’t understand the lingo they were talking,” she says. “It’s a scary experience…. All I could see was all these numbers flash before me…. I said, ‘Mario, I hope you don’t get into something that is going to hurt us.'”
There is nothing, in my judgment, that we should be doing in terms of guaranteeing market participants against losses or in terms of restraining risk taking,” Mr. Paulson said. “One of the natural consequences of the excesses is that some entities will cease to exist.”
http://calculatedrisk.blogspot.com/2007/08/paulson-turmoil-to-slow-growth.html
Unfortunately $100k a year is the new ‘living wage’……………
They bought something they couldn’t afford and didn’t do any homework into the biggest financial decision of their life.
They didn’t make a mistake, they made a decision to not educate themselves or read the paperwork they were signing. Lesson learned, next chapter.
$90,000 income + $567,000 house = disater.
It is people like this that sent home prices sky high. Meanwhile I have almost double their income, at least $150,000 down payment, and I would be hesitant to buy at that price.
I bet their taxes are about $12,000 too…but “who cares….I like that house…buy it for me dear”!
The whole “take it now you can always refinance later” thing is so delusional it is beyond belief. Buy whatever you want, borrow indescriminately without even considering the ability to ever pay it back. A plan to rent money forever.
Reading stories like this always makes my day. Condo-livin is 100% right. Its idiots like this who drove prices up beyond afforability in the first place. Its only going to get worse and I’m going to be belly laughing all the way as I watch housing prices drop 50% from the top.
Ho Ho Ho!!! Merry Christmas, for me.
The thing is, there are thousands of people like this. They all made bad decisions and will (as they deserve to) pay a price. Honestly, I don’t have a problem with that, but the banks/lenders/bondholders need to be right there with them.
In fact, they should get it worse because they are supposed to know what they are doing. What banker/lender in his right mind lends $500K to buy a home to someone making $90K?
What investor nods and says OK to buying a financial instrument they don’t come close to understanding?
Everybody on the ship when it left port should have to face their fate, but I very much doubt they will, and it is disgusting.
If people like the Montes’s have to take their lumps, so should the clowns who helped them down this road.
This is the end result of the debt-is-good culture that has arisen over the last decade or so…
Now the bill is due & the party is over.
I saw this snowball starting to roll when I went house hunting with $200K in my pocket in May-July 2002…my wife & I have an avg. combined income of $500K+ and got tired of being out-bid by sheepsters with liar-loans.
Those money for nuthin’ chicks for free idiots pushed me into Gold & Silver and I haven’t looked back since…renting for a fraction of the cost on the Hudson ;-)
Heck, if we had volunteered to be suckers for the RE leeches, I’d be scared to death to see what the corrupt politicos in Hudson County do with their creative property tax model following the crash and the subsequent fall in tax revenue!
Yes, they did take a chance to keep up with the Jone’s. However, that is where the market was taking them. The fact is they are trying to meet thier obligation. Working other jobs and not just walking away and leaving the rest of us with the bill as many others are doing, or expecting the goverment to bail them out.
What happened to any equity from the house they sold?? Is that why they had to cut back vacations? Did they spend the profits of their house sale?
“But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting.”
Something doesn’t add up there??
Keeping up with the Jones is what the average family does. It’s human nature…and there is nothing wrong with trying to attain the american dream.
The real villan of the piece is the mortgage broker. Let me explain.
I m a well educated person, and work with predictions and risk assessment every day.
When I first thought of a loan, i turned to my family friend, a mortgage broker.For a while, I held out…questioning thing and every trend.
I told him that Fannie Mae and such are going to be reigned in by congress and credit would dry up, and the house market will fall.
He wisened me up to the fact that the money for the mortgages are coming from overseas. Fannie mae or whatever was a drop in the ocean.
I told him property prices are rising at too fast a clip and that the current numbers arent working out, I would be in a zero saving situation in 10 years , according to my spreadsheeting.
He told me that the fast rise is in my favor… At the rising clip REFINANCING 12 months down the road, was a no brainer as Equity would build up. He also showed me an interest only loan, if i was interested…I was most definetly not!!!
I told him that this kind of a unrealistic pricing of housing cant go on forever. IT HAS TO CRASH!!!!
He told me that it will slow down but will take 5 more years. (HUH!!! where did he get that number from ? The boom was already 7 yrs old by that time and I knew it.)
Finally the wife and I, nervous but lulled in to his smooth talk, went into his office ready to sign the mortgage. (having signed FSBO house sales contract with a contingency clause on apprasial)
Something strange happened. That day, the rate seemed too high, and an extra $1500 fee was gently thrown in, very subtlely.
We walked out very nicely!!
1 day later, our contingeny kicked..the house appraised for less than the contract price
We cancelled the contract. (The house was sold to someone else 3 months later for the same price)
Yes it is true, we wanted to be like the joneses…but my constant trending and my wifes common sense saved us.
The market tanked 18 months later.
The villain ? us ? i think its pretty clear. The mortgage broker was painting heaven to us.
However, nothing bad happened to us and we arent victims.
Mortgage is a life long commitment to most folks.Let require mortgage brokers to have some substance.
Great comments.
There is something larger behind this though.
We have been taught there are no absolutes.
We have been lead to believe that if we just believe a certain way everything will work out.
We have been brain-washed to think that addressing obvious rights and wrongs and calling them out is “judgmental” and “close minded”. That if I just want it to be bad enough, it will be so.
There is nothing more closed minded than to think you if you simply want something to be a certain way and since “everyone else is doing it” it will continue, that the absolute truth (prices will eventually fall) will not happen.
Comes from a society that will teach you that our intricate, amazing bodies started with some big bang or chance vs. being created by a gracious God. Don’t like that. Does it offend you that I am saying there is an absolute answer. Really…which is more statistically likely to happen—by a wide margin– creationism. But that’s right our culture, trained us to just strain our brains enough so we will understand how it happened so, basically, we create our absolutes and become little Gods in a way.
Comes from a society that says oh “their” decisions and right to challenge “absolute truths” will not affect the rest of us (sub-prime addicts: brokers, financiers, and homebuyers can make bad decisions in a vacuum)….don’t be judgmental.
I’ve got news for us all (including me) that the “newspeople… act like they are the only one’s that should utter directives and their directives are “all-inclusive”, that…. challenging absolute truths is not a stand alone, never, ever does challenging an absolute truth or going against the principals that our Creator set forth… only affect you!
The problem is…us. We’ve stopped bearing one another’s burdens, (in part because they may feel judged—oh make me sick!) and speaking to our neighbor in firmness but kindness to perhaps stop our neighbor from putting a noose around their neck with a sub-prime mtg. We have become so isolated we don’t have time to know them or think about the absolute and we have listened to a brain-washed/”vain about their own brain” academia, media indoctrination system that bombards us with: (a) we have evolved past absolutes, (b) we aren’t accountable to absolutes or God, so don’t challenge one another and don’t tell me there is only one way/ an absolute because if you do you are “absolutely closed minded”.
Wake up America. Throw off the dullness. Because if you don’t, the absolute principals will require you to do so—–welcome to the next 10 years! [ This is after (1) we acted like oil would never run out until 2004. Score 1 for absolute “limits” to those resources. (2) told ourselves we simply need to work harder to understand the strive of the Islamic world (its ok as long as you don’t disagree with one of their absolutes—score 2 for the absolutes) and (3) just 6-7 yrs. ago we had an “absolutely new “tech economy”. Score 3 for absolutes and 0 for the sincerely believing brainwashed Americans.
Wake up!!! There are absolutes and there is an absolute Way.
Seems to me these folks have simply been renting under the guise of ownership. Since they didn’t save to make a down payment of any substance they have very little at stake other than their perceived right to stay in this house.
There is no one to blame here really but themselves. They bought a house they were clearly stretching to afford even on the low teaser rate no principal mortgage. Until we break this cycle of bailing people out from bad decisions this type of thing will continue to happen.
They can walk away virtually unscathed and leave the lenders holding the bag. That is also justice because it was a poor loan. The psychological price they pay is a good lesson in economics and personal responsibility. I hope they remember it and make sure their children learn the lesson as well. Live slightly beneath your means and save for your goals and for a rainy day.
By the way…what planet did that last writer arrive from? lol
The american dream is the American nightmare.
Thank you Mr Greed and Miss What In For Me.