Subprime Mortgage Troubles Caused By Both Bad Lenders, and Bad Borrowers

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I’ve been seeing a lot of media coverage on the increase in foreclosures recently. It’s clear that there have been examples of predatory and misleading lending practices, as well as examples of people showing poor financial judgment, although most articles seem to focus on the former. But I couldn’t help finding this Wall Street Journal article ‘Subprime’ Aftermath: Losing the Family Home to be almost amusing. If it was trying to illustrate how sub-prime lenders were evil, it did a really bad job.

Take Ms. April Williams, who is the main character interviewed for this story and also featured in the box to the right.

“This has stripped us of our whole pride,” says April Williams, 47 years old, who has until August to pay off her mortgage or vacate the two-story Colonial at 5170, where she and her husband have lived for 11 years. “There’s going to be no people left in Detroit if they keep doing this to them.”

They did this to them? Let’s see here – they have an unstable job, but still decide to purchase stainless-steel appliances, custom tile, a new bay window, central air-conditioning, a backyard koi pond… and is that a $50,000 Lincoln Navigator luxury SUV parked in her driveway??

For this specific situation, I feel like both sides are in many ways getting their just desserts. Borrowers like Ms. Williams were greedy, bought more toys than they could afford, and now have to deal with the penalties. Their lenders were also greedy in extending them so much undeserved credit, and I’m sure will be losing money in the event of a foreclosure.

As for the big picture, I have mixed feelings. The capitalistic pro-free markets side of me thinks the system will fix itself. Lenders who got hit with all these defaults will tighten borrowing standards accordingly to maintain profits, while continuing competition will keep them honest. A bail-out would just create a bigger mess of things.

At the same time, I do think there should be regulations that require more simplicity and transparency in mortgage lending and real estate transactions. Everyone I talk to says that they are faced with 6 inches of paperwork when closing on a new home, and none of them fully understands it all. Everybody says “just sign”. There could be a clause that gives up your first-born child for $19.95 and you wouldn’t know it in all that legalese.

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  1. I totally agree. It is lame that subprime mortgage lenders would take advantage of people like that but on the other hand, anyone with the slightest financial clue would see they were getting fleeced.

    I used to work at a subprime mortgage broker (not in sales, just the computer guy) and it was always amazing to me that borrowers would even sign paperwork that clearly shows the loan officer making $12k, $15k and sometimes up to $20k off of the deal. Should you really trust someone saying “just sign” when they benefit so greatly?

  2. Siggyboss says

    “At the same time, I do think there should be regulations that require more simplicity and transparency in mortgage lending and real estate transactions. Everyone I talk to says that they are faced with 6 inches of paperwork when closing on a new home, and none of them fully understands it all.”

    The regulations themselves increase the complexity of real estate transactions. Forms that are inches thick tell you to in essence be careful in a language used by either children or accountants. Nobody cares when their neighbors are getting rich via refinancing or selling. In addition, there’s less competition due to all the paperwork required by the same regulations. These socialists, that’s what they are, believe they can legislate away stupidity and still preserve dumb luck.

  3. Good post and I fully agree. I’d change the title to “Predatory lending or just stupid borrowing” since the problem is often the person taking out the loan who uses no common financial sense.

  4. Listen, I’m with you on people making stupid decisions and companies getting greedy. But clearly this story is going with the usual sensationalist bent. “We’re losing our house but we have our Navigator!” As a previous commenter mentioned, if her husband works at Ford, then they’re probably paying very little on that vehicle. Moreover, he’s probably got great health benefits for very little cost, and no-doubt is making nothing less than $60k a year — although I’d venture to say more than that. Just because he’s a black man doesn’t mean he’s making pennies to our dollars. People working at Ford factories make more than you’d expect. And just because his pay was “shrinking” doesn’t mean his job was unstable.

    Point-being: this couple probably had a great deal of liquid income to work with, which is why they were able to refi-in such a manner.

    Again, I’m not saying to void personal responsibility, but we have to look at this in a balanced eye. Did anyone ever explain to them, in their refi process, that rates would jump up 1.5x what they were paying at the beginning of the mortgage? The whole problem with the sub-prime lending issue is that most of the time they were rubber-stamping these people with little regard for preparation or education.

  5. crsandus says

    Just to give a small “devil’s advocate” argument for the vehicle, if her husband worked at Ford, they are basically leasing that car directly from Ford for a song. I know of many white collared workers that worked for the Big Three who rarely purchased cars because it was so much cheaper to continually lease them from their employers, or had special benefits from the companies where the cars were basically free.

  6. I’m sick and tired of ZERO responsiblity about personal choices.

    Eat your fish for dinner and live out of the car. It’s a total insult to people who save their money. However, mortgage brokers are total lying you-know-whats, and when you tell people to lie on their documents and ‘nothing will happen, nobody checks’, you’re also at fault.

    Hopefully no tax-payer funded bailouts. It’s amazing how everyone wants to give Fannie and Freddie cheap credit steroids to promote housing without giving an education on how to fund it properly.

  7. I have zero sympathy for her or the lender. A lot of people, and I mean a lot, are materialistic and think that one’s home equity is a cash station machine. It should only be used in case of emergency or if you know you have the means to pay back those funds. She obviously did not use the money for emergency purposes. On the other hand, I don’t believe the lender is at fault here. People need to step back, analyze what’s being presented, and ask a lot of questions. Unfortunately, the only thing that people hear/see is the money that they will receive.

    On the flip side, the lender is out looking for a quick buck. They had to know that the housing boom wasn’t going to last forever and created far out (but ingenious) lending terms. So, even though the lender will go or had gone bankrupt, the people who ran the business had already made their money – leaving homeowners and their employees out on the streets. My cousin’s former employee in San Diego had done exactly this.

  8. Hah, these types of examples just amuse me and it is all too common. I met with a client just this past week in a situation where he was begging to cash out his whole 401k (which he couldn’t since he was still employed) because two years ago he built a brand new house on 5 acres and he may lose it because he can’t sell it for what he thinks it is worth.

    Of course in his situation he just made a poor investment choice. He thought he could buy a piece of land, throw a nice house on it and sell it for a quick profit. Boo hoo for him.

    But in the situation you highlighted above it is almost as comical. Is it partly the lender’s fault? You could say that. Sure if they had more stringent lending requirements this person may never have qualified to take out that equity to begin with. But given the information in the example about the things they spent money on and the vehicle in their driveway it is clear that the most likely culprit for this problem is bad spending habits, not the big bad bank that gave them the money.

  9. I also have mixed feelings. I’m all for stricter regulations that would force all lending companies to be more transparent and to spell out in simple, unambiguous terms the consequences of the document you are about to sign.

    But still, I have never bought, sold or refinanced a house without having an attorney that works for me approve the paperwork. For sure, that is one more ‘fee’ tacked onto the transaction, but when you are talking about thousands and hundreds-of-thousands of dollars of debt, it’s stupid not to.

    That said, if you sign a contract and don’t understand what it says, you have no one to blame but yourself. So quit whining.


  10. I changed the title a bit.

    Is it socialistic to ask for how much procedures cost upfront when I go the hospital as well? I would think most free-market proponents would welcome that. Transparency in all financial transaction helps us all make informed decisions. If people still want to be stupid, then that’s fine with me.

  11. If assembly-line workers get to lease Lincoln Navigators for a song, then Ford is going to have a longer road ahead of them than I thought!

  12. The mortgage paperwork isn’t *that* hard to read and understand; you just have to take the time and initiative to do so. For my first home, I went FHA (3% down), by far the largest amount of paperwork, but my agent explained everything (closing took forever as a result). I also read it very very carefully the evening after closing.

    My second home (+refi) I requested and had copies of all the paperwork 24hrs before closing so that I could review it. It’s not the most exciting read, but well worth the time. Found 1 error on the original mortgage (wrong ARM index) and an error on the refi (wrong rate/ysp).

    My 3rd (and likely final) house I also had all the paperwork 24hrs in advance. After a thorough review there was two financial issues ($5k in earnest money got lost somehow) and some goofyness in the landscape allowance which required me to come up with additional money day of closing, but which I would receive back in a check due to lender sillyness. There was also a release which I couldn’t sign and after some back and forth we agreed it was appropriate for the builder to sign (much crazyness the morning of closing).

    You just have to take the time to educate yourself. There’s no excuse for not doing so. Particularly in the internet age.


  13. I think the last quote from the article leaves me with the least sympathy for this couple. “All the hard work we did, just to give it to a fricking mortgage company.” Um, yes. When you BORROW money, you have to PAY IT BACK.

  14. When people are desperate, they will do anything, even if it defies common sense. Certainly there are borrowers who take out massive HELOC loans or agree to obscene subprime mortgage rates that exceed their payback capacity, but there are also many more who, with less than stellar credits, just need to put a roof over their family’s heads and have no choice but to take a gamble. Do they have “zero financial responsibility”? Are they in this mess because they are inherently ignorant, cant do simple math, and can’t read the pages of fine point? Or is it because they are forced into it by various socio-economic factors that most of us don’t care to understand, and face blame when they have to choose between dealing with subprime lenders or having to tell their family that they need to sleep in their cars? Having hungry lenders who are only too eager to package and sell the mortgage securities to investors only worsens the situation. I think we need to keep some perspective and at the very least know more about their situations before calling these borrowers lazy or irresponsible.
    As for your comments on having regulations to increase simplicity and transparency, I fully agree. And to Siggyboss’ comment that “forms that are inches thick tell you to in essence be careful in a language used by either children or accountants”, clearly he/she has never actually read these fine points. I challenge Siggyboss to find mortage agreement forms that serve to clarify rather than to obfuscate.

  15. I totally disagree with Jordan on this. This couple obvious does not have enough liquid income or else they won’t be in this situation. Of course, Jordan’s definition of enough might be totally different from mine. After all, enough to one person is totally too much or too little to the next.

    People should stop blaming the lending industry and take responsibility for their own stupid decisions. Guess what? Lenders are running a business and there is only one purpose to running a business. To make MONEY! Also guess what? People will try to make as much money as possible. Ask this of yourself. If your boss is willing to pay you 100K a year would you tell him you rather take 70K a year in salary? No, you will take that 100K a year and run with it. Since you are doing that, why do you think the lenders will take less money from you when you are willing to give them more money? We are not living in a communist country here. We have our freedom to make our own decisions. And since we are making our own decisions, we are also responsible for our decisions. So, don’t blame people for your own decisions because they didn’t make that decision for you.

  16. April Williams was feeling the pain of the downturn back in 2002, when she saw an ad from subprime lender World Wide Financial Services Inc. offering cash to solve her financial problems. At the time, production slowdowns at Ford Motor Co. were squeezing her husband’s income from an assembly-line job, and they’d heard rumors that more cutbacks were coming. Still, after a loan officer from World Wide paid a visit, they became convinced they could afford stainless-steel appliances, custom tile, a new bay window, and central air-conditioning — and a $195,500 loan to retire their old mortgage and pay for the improvements.

    Decreasing hours, shrinking pay, and rumors of cutbacks… that sure sounds unstable to me. It’s Ford… from what I hear all of Detroit is hurting right now.

  17. Siggyboss says

    “Is it socialistic to ask for how much procedures cost upfront when I go the hospital as well? I would think most free-market proponents would welcome that. Transparency in all financial transaction helps us all make informed decisions.”

    That’s two different issues. If a person asks for more information, that’s perfectly acceptable. Let them get advice from family, friends, and services (Consumer Reports, etc.). Government mandated disclosure on the basis of what a politician believes what he/she should ask for is just socialism. All this paperwork increases costs and actually helps hide fraud as the buyer becomes overwhelmed. Information is not costless, and too much information can even costs more so.

  18. Jonathan,

    This is a prime example of just one of the many reasons that I think you should wait on your home buying. This subprime/rates and payments resetting/foreclosure problem is just in the early stages still. This is not a problem confined to coastal areas or manufacturing areas…it is across the country.

    All of these people who are currently having rates reset and payments go higher are still able to hang on to their properties…for now.

    In 6-12-18 months, the weakest will have been foreclosed on and some of the stronger folks will end up having to sell under somewhat distressed conditions. Foreclosures take a long time to work their way through the system…

    So while the pacific northwest may not be showing the same pain as some of its neighboring areas (I hear Seattle is still doing well), I see it all as just a matter of time before almost all areas will follow the declines currently being seen in Florida and San Diego, etc.

    I don’t care if I am being repetitive or if you are planning on being a very long term homeowner or if you are able to save X% of your income. In almost all areas, right now (and the next year or two) will most likely be a very bad time to buy.

    I know when you do buy, you will do it in the best and most responsible way…but as you are in your planning stages here, I will continue to advise exercising caution and patience.

    Sorry to be such a downer…great blog, keep up the good work

  19. “I couldn?t help finding this Wall Street Journal article ?Subprime? Aftermath: Losing the Family Home to be almost amusing. If it was trying to illustrate how sub-prime lenders were evil, it did a really bad job.” Given the editorial bent of the WSJ I think we can assume they picked this example to show what greedy fools these people are rather than how evil the lender is. As so many of the above comments have already stated, both are to blame. There should be stronger regulation of lenders but no taxpayer bailout for foolish borrowers.

  20. i only wanted to say that i am surprised by how many comments mention that people are stupid when making these decisions. While I agree that the WSJ could not have used a worse client story to illustrate that sub-prime lending is evil, from my experience of working with immigrants and other groups on financial education – i can say that most people are just not educated. They don’t know some of the most basic things related to money management yet they are faced every single day with what it seems to be great deals, etc. In addition, there is a whole range of emotional stuff related to spending, money management, etc…Not to defend anyone’s “stupid decisions”, it is just so much more complicated that it seems.

  21. Mortgage Rate says

    I’d be interested to know more about the math behind this mortgage. Even at sub-prime rates, $2,750 / month (up from $1700!) seems awfully high. Interest rates haven’t risen that much. Perhaps they’re now lumping in penalties, etc., to exaggerate the shift in payments between 2002 and 2007.

  22. My father-in-law retired from Ford, so we were able to lease our Volvo XC90 on the ’employee discount’. Let me assure you it wasn’t for a song, although the discount was very nice. My in-laws have a Navigator and it wasn’t dirt cheap, either. The discount varies per vehicle, and there were definitely more affordable options out there for them.

    They may not have understood the consequences of their actions, but they’re still responsible. I have some sympathy for job loss (more for illness) but we put off buying a house for a year due to potential instability in the tech industry, where we both work. Way I see it, you either hedge your bets or take the fall if things go bad. Not my responsibility to dig you out of your hole.

  23. Joseph Sangl says

    When people do not take personal accountability to fully understand their purchasing decisions, they WILL be taken advantage of.

    This is why people are able to sell an upside down car to get into another new car. This is why people are able to finance their houses up to 125% of the home’s value. This is why people are able to obtain loads of credit on a credit card at 27.9% interest. This is why rip-off payday and cash advance places can thrive while charging 379.99% interest.

    The day I stopped acquiring debt without FULLY UNDERSTANDING what I was signing up for was THE DAY that I truly started winning with money.

  24. “Lenders who got hit with all these defaults will tighten borrowing standards accordingly to maintain profits”

    Yeah, cause this is the first time in the history of mankind where something like this has happened. Oh wait, this stuff happens again and again and again, year after year, going in cycles.

  25. They seem to be the type that the Dave Ramsey system was made for. If they could not come close to affording the house on a 15 year mortgage, they had no business purchasing the house. Murphy obviously came aknockin’.

    In the end, they went to wrong person for their advice. They trusted the mortgage broker, who told them they could afford all of their wants, so they went ahead and did it without consulting another less compromised advisor.

    Hard to say who is to blame in this case, though taking some responsibility for their situation is the best way for them to learn from it. I hope that the Williams’ never get themselves into this situation again.

  26. Good post. It’s hard for me to take sides as well. One one hand, the lender is loosing their rear in all these foreclosures, while the borrower is loosing much more.


  27. how sneaky is it when you sign and understand that you have a variable interest mortgage rate? people like to gamble, is the bottom line. both the person and the lending company gambled. the person gambled that interest rates wouldn’t go up. the lending company gambled they could make more money. i don’t fault lending companies. i fault the people. $50k navigator…good catch.

  28. You know, one thing I haven’t seen anyone ask is whether or not these people should have been in a house in the first place. Yes they managed to buy the house and had some equity that they pulled out and burned, but given their situation (which we’ll never know all the details about), should they have been homeowners to begin with?

    I realize owning a home is a dream for so many people and for those that work hard and achieve that dream it’s a wonderful feeling. Unfortunately, it turns into a nightmare for many people, particularly with society’s emphasis on bigger and bigger houses, must have brand new cars, etc etc.

    Even for the financially conscious folks, owning a home, particularly the first home can be tough. As I mentioned in a previous post, my first home was a very modest (and older home), while I didn’t jump into any major upgrades/remodeling, I did a number of smaller projects and some necessary repairs and ultimately ran up more debt than I was comfortable carrying in those first couple years. No ill effects, but I think there’s another lesson to be learned — the cost of owning a home isn’t just the up-front cost, but there’s also an ongoing cost — cost to fill up all that new space with stuff, maintenance/repairs, lawn equipment for those coming from apartments, etc etc.

    I just read an article on how so many people were starting to freak out about their hybrid ARMs starting to adjust in the more mainstream loan market, so there may be more carnage on the way. Hybrid ARMs are great products, but you _really_ have to be prepared to take some risk (and cope with the risk). I’ve had two myself, the first was refi’d after about 3 years into a fixed loan at a lower rate which was paid off when I came into some money unexpectedly. I just paid off my second, about 2 months before its first adjustment — 4.25% and never had to worry about adjustments.

    The days of ultra-cheap credit are, IMHO, on the way out. I doubt we’ll see a return to normal mortgages in the mid/high teens, but I don’t see the ultra-low rates we’ve had over the last decade lasting too much longer. I’m amazed at how lucky I’ve been to purchase at a time of low rates.

    First house. 8% FHA, eventually refi’d into a first position HELOC at 6% which eventually dropped to around 4% (yes I had enough equity to pull that off), eventually
    paid off. Now a rental property.

    Second house. 7.125% 7/1 ARM. Refi’d into a 6.5% fixed after a few years, then paid off with an unexpected cash windfall. Ex-wife has it now.. Only downside is I could have avoided the refi cost if I had known I was going to come into enough cash to pay it off… Oh well.

    Third house. 4.25% 3/1 ARM. Paid off just shy of 3 years. Home.

  29. Lol, it’s easy to look at this people with disgust and say that they are getting what is coming to them.. In general I can’t help but be annoyed by the media. During the boom years all they can tlak about how great an investment housing is and during the bust years their only reaction is how bad an investment housing is.

    I am a big believer in the free market. Federal regulation that provides bail outs or requires more “transparency” often does not accomplish the things it was intended to do, in fact many times it only serves to break the very things that it is trying to fix. More paperwork does not make things more transparent or do a great deal to educate people. But as situations like this arise and the media picks up on them it will hopefully educate the public to make better financial decisions so they don’t end up on the streets.

  30. I think we have a skewed vision of people’s money-savvyness here. All of us who read this excellent blog are interested in how money works, and we do know better than these borrowers. But as long as my (30-year-old) student friends buy new SUVs on credit and don’t know how to save, I’m with JW – most people have no clue.

    May I just say – I love how people debate here! No one is calling each other stupid or ignorant for having a different opinion. Big contrast with other sites.

  31. Has anyone notice the interest rates that these people agreed to. For a payment of 1700 (assuming that does not include tax and insurance), on a $195,500.00 mortgage for 30 years they would have had to be paying 10% interest. To make their payment $2700/mo the interest would have had to balloon to 16.5%.

    Those are insane interest rates, some people have argued that these people should have had enough liquid income. If they did they must have had a seriously bad credit history.

    Also, correct me if I am wrong but I believe you can declare bankruptcy and your home is protected. Obviously not an optimal situation but foreclosure is not the only option facing these people.

  32. It is the WSJ they are not on the side of the borrower so of course they are going to make the borrower look bad without saying it. Why didn’t they do a piece about a greedy mortgage broker who sold a house to a person with not proof of income no money down–that broker basically stole from the neighborhood and the city because that house is going into foreclosure. The borrower is partly to blame but how is it capitalism if the bank is basically giving the house to someone with no money up front–the borrowers have not done what capitalism rewards–saving over spending–being shrewd–thinking ahead–we are all grown ups but there must be limits–look at why social security came about–the old did not save or lost all there savings–so yes there should be some regulation but just how much is up to our elected officials.

  33. Good blog, Jonathan. I like this one. I totally agree that things are way out of hand. I see way too many people in this situation in So Cal. The “OC” is the worst example. Everybody’s got to have a couple $50K+ cars in the driveway w/ their 3,000sq ft house, pool, pool guy, landscaper, home theater, marble, granite, bamboo, etc. etc. etc.

    It’s just out of control, imho. And despite the recent slight fluctuations in economic prosperity, I notice nobody’s slowing down. I still think my sub-$2K pymt is rough……(I still live in the past a lot)……..but we know one couple who are holding down 2 houses right now to try & get the house they want (house #2) and the house they thought was their windfall (house #1) and house #1 is probably not going to sell. Now what??

    House #1 is on the market for $679K (down from $799K 7 months ago)

    House #2, they bought for 1.2M!!!!!

    They’re literally holding down $9K/mo in mortgages. (two 1sts and two 2nds).

    I’m about 99% sure they don’t bring home (at lest not NET) $9K/mo.

    I’m also about 99% sure that us tax payers who handle life more responsibly are definitely going to be the ones bailing everybody out.

  34. …I just noticed, there is no longer a photo of April Williams and her luxury Lincoln in the article. Just a drawn portrait…. 😉

  35. Jonathon:

    Great blog. Always very good information.

    I apologize but I do have to take a small issue with one of your comments:

    “Is it socialistic to ask for how much procedures cost upfront when I go the hospital as well?”

    No, it is not socialistic for you to ask about any fee up front. It would be socialistic if the government ordered the hospital to provide you with that information without asking.

    I have rentals. The amount of government interference I have to contend with is really astounding. Every step of the way, the government dictates how I may handle my properties. They are present at closing, when I offer the home for rent, when I sign the lease and when I sell. This is without even mentioning the fact that I cannot rent to whom I want.

    I applaud your call for transparency but if that is what I am experiencing I’d gladly take a little less of it.

    There are laws in place if these lenders did something wrong and they should be held accountable if they broke any of them. But our government should not be in the business of protecting people from themselves.


  36. So, I went to Zillow and put in the address where the 40 Koi live.

    Current Estimate: $21,876
    Sold in 2/2007 for $149,400 (refi, forclosere sale?)

    (with the Koi, the estimated value is $21,916)

    Morbid Curiosity.

  37. Ok Jonathan, you got your own blog response on this one: link

    OK, US median household income: right around the $45k range with about 1.4 income earners. A quick search brings up some median 6.84% maybe causing less house competition and the WSJ is writing articles about people losing their (150k) places. We’re all talking about housing being kind of a giant bubble right now and we now have the wonder of the 50-year mortgage.

    I mean 45k = $3750/month or about 3k after taxes. On this salary you have an allowance of maybe 1700/month for housing if you want to stretch it, especially if you plan to operate a car and still feed the family. Now really, between utilities, repairs, insurance and taxes, you’re talking like 5-700/month, which leaves you with about 1000 for a mortgage.

    Clearly, 1000k/month doesn’t buy the median 220k home. So the median income does not safely buy the median home. Let me put this differently: average people cannot afford average homes.

    Jonathan, I’m with JW here these numbers just don’t look good. Obviously, as you’ve pointed out, housing cost increases are also coinciding with larger houses. Some markets (like Vancouver) actually have people taking “interest-only” mortgages (let’s not even talk about that level of crazy). As you’ve also discussed, the inflation adjusted median income hasn’t changed very much in 30 years. So technology may have provided us the means for somewhat larger houses, but I don’t think that we’ve magically doubled our ability to make larger houses, people are just taking out 50-year mortgages instead.

    So with all of this talk, maybe we’re finally pushing the edge of the big bubble. I mean, check out this board, look at Red’s example, people are in really deep and digging deeper b/c they don’t what they can afford. We all know people in too deep, heck we probably all know a dozen people in too deep and the american economy is sliding downwards. The market will only bear this hysteria for so long.

    People will miss their payments, interest rates will rise, banks will foreclose record numbers (already happening?) and the value of homes will go downhill b/c nobody will be able to afford them.

    There will be resistance of course, people will avoid selling for less than they owe, but then the foreclosures will come, rates will go up and the cycle will continue until those people that really can’t afford homes will be shoved out. Banks don’t care, it’s not their job and the US government can’t stpe in. If the US government intervenes in foreclosures, then USD will plummet internationally.

    Either way Jonathan, I’m with JW here when it comes to buying, patience will definitely be a virtue b/c we’re peaking here.

  38. Good post, Jonathan. This is actually how I felt about “Maxed Out” too. At the risk of sounding like Dave Ramsey, everyone who had racked up debt had done it on stupid things they couldn’t afford. It wasn’t ever, say someone got sick. It was their own stupidity and greed.

  39. Ted Valentine says

    Ha. That last sentence was funny. I think my favorite paper to sign when you close the mortgage is the page that says you are really who you are signing you are. Or something.

  40. Couple of points:

    I OFTEN suspect the WSJ of making subtle points–when posters write “the WSJ couldn’t have picked a worse couple to highlight predatory lenders,” I say, “Exactly!” Their point, albeit somewhat subtle, is that business is business and caveat emptor.

    Point the second: some posters have written that the couple just wasn’t very educated or was stupid or whatever, and that many folks fall into that boat. My response is “So what?” When entering a situation with sub-optimal information, why not move conservatively?

    That is, if I didn’t understand the implications a financial move would have on my house, I would…WAIT! When I am unsure about my future income, I…SPEND LESS! One need not be “smart” or “educated” to move carefully, to choose saving over spending, to live within their means.


    And maybe stupid (if stupid can be defined as susceptible to peer pressure and marketing and a slick huckster or two). But mostly greedy.

  41. No sympathy. Educate yourself, sell that ridiculous car, and don’t buy things you don’t need. (Wouldn’t we all love stainless steel cabinets). Even agreeing to be interviewed for this article shows their lack of intelligence and maturity.

    “We worked SO HARD for this Lincoln Navigator, Stainless steel cabinets, and koi pond…and now we’re paying it all to the frickin’ mortgage company!”

    Excuse me while I go vomit.

  42. Sometimes I am amazed by the poor decisions people make in the culture of debt present in the united states. It no longer seems like people feel they have to live within their means. Many times the government will try to step in to create new regulations to protect people from themselves, which I think is not appropriate.

  43. These people got some awful rates — even before it adjusted. Come on $195K shouldn’t have cost more than $1200 a month (and fixed!) back in 2003. They were ripped off. If they had had the extra $500 a month, they could have their koi pond or whatever. I don’t think the improvements they made were so bad anyway — a new kitchen, central A/C and most likely even the bay window would be considered a capital improvement. The pond was probably something they did for fun – and we all do something that’s not necessary. No, I feel like these people got ripped off. Their biggest fault lies in that they were naive enough to fall for a predatory lender.

  44. Wow, what a bunch of tough guys. No outsmarting you, no siree! But has it ever occurred to you that 90% of the population doesn’t have the sophistication to understand adjustable mortgages? Or that these mortgages and the refi craze were created — by large, profitable corporations with far more resources and sophistication than the average joe — to generate short term profits and with full awareness that many ‘customers’ will lose their houses? Why anyone would defend greedy corporations is beyond me…

  45. joelkton says

    Thanks for that post, Gates VP. I’m new to the blog and didn’t see it at the time.

    Clearly, 1000k/month doesn?t buy the median 220k home. So the median income does not safely buy the median home. Let me put this differently: average people cannot afford average homes.

    This sums up what I’ve been seeing and thinking for years. I drive around the suburbs of Portland, OR., looking at all the expensive housing going up and I’m thinking, who’s buying these things? How many doctors and lawyers can live in Portland? What is happening here?!

    I really don’t see any “average” homes being built anywhere, certainly none that will list for 200k. This almost seems like one of those “unmentionable” topics that cannot be discussed. So for years poeple have had to slave themselves to a mortgage that they can’t hope to pay off. They must also enlist the help of another wage earner to provide decent housing. What happens to an economy when housing and healtcare combined take up 50% or more of income? And a *family* income of 45k means many, many individuals earn far less. (I wonder when “family income” became a popular phrase in order to help give the impression Americans are making more than they used to? Perhaps a search for Family Income in a search engine will reveal when this was first used.)

    Great blog, btw, really enjoy it.

    Oh, yeah, one thing: couldn’t the Navigator belong to the RE agent?

  46. Sol Rosenberg says

    Wow, that zillow estimate is amazing. I had to check it myself to make sure it wasn’t a typo. Are things really that bad in Detroit?

  47. MDR, then they shouldn’t be signing the dotted line. it doesn’t take any sophistication that you don’t get into something if you don’t understand it. are companies greedy? sure, but so is the consumer. supply and demand. no demand, then the greedy companies can’t exist. unfortunately, there is demand, so obvious there will be someone to fill that need.

  48. The first page of the note spells out what your payment is, when it might adjust and what rate in might adjust to. It’s a pretty simple read. As far as not knowing; I don’y know how to do surgery. If forced I would use the three minutes, or three weeks, or whatever time I had to prepare. So those that signed without reading can just shut up.
    Those that misunderstood can just shut up. I misunderstood in Vegas, hit the button that said ‘max bet’ on a penny machine and it ate $3.30 per spin! Not a penny but 330 pennies. I guess I should of read before I acted. Can I get my money back please?
    If we wre to bail out these goofs, what happened to the money? If the items added to the home do not fit within the neighborhood, i guess that’s bad. If the items bought with the funds do not attach to the house, like cars, clothes, vacations, then I guess IT’S THEFT! ANY jusry will see it as theft. They stole from the mortgage. If they do not replace the funds stolen, they can’t be bailed out. It’s pretty simple. Mr and Ms jury is gonna hate anyone that has had a house for 11 years and suddenly got snooty. Mrs jury doesn’t have koi, mr jury can’t afford a Lincoln, mrs juury didn’t hock her house for baubles. I think the misconception is that a jury will be in the same boat as these goofs. When it boils down to it, so few are in this boat that the disdain the generate will probably send them to jail.

  49. As someone who worked in the home equity mortgage business for the last 10 years, I was interested to see the different opinions on this subject. One can tell that almost every reader of this blog has taken the time and energy to understand money, both debt and investing, unlike the borrowers who are now struggling!
    One issue I have with the media and regulators is how all non-traditional mortgages have been grouped together as “sub-prime”, and then the media talks about these loans going generally to people with less income and poorer credit scores. Most of the issues borrowers and lenders are facing now are not due to loans made to true “sub-prime” (i.e. poor credit score) borrowers, but instead due to making loans without verifying income, and/or making loans that start at 1.25% rates and have immediate negative amortization, while qualifying the borrowers at that start rate, not the projected payment in a few years, and in lending 100% or more of the value of the home, over and over as property values rose, while ignoring that the borrower could not manage their spending, etc. etc. Many of the borrowers now facing foreclosure had good credit scores. Many of them had long term jobs. They were “prime” type borrowers put into risky loans.
    How much blame should be laid on the mortgage brokers, lenders and investors? A lot of the blame lies in the investors offering these loans, because honestly, the credit became so easy that it was stupid. And mortgage brokers will make any loan that an investor will buy, and they will charge the highest fee a borrower will pay and an investor will allow, so unless the broker lied on the applications sent in to the lender/investor, or blatantly deceived the borrowers, you cannot blame the brokers too much. The borrowers really have to take most of the responsibility. But in my mind, it is not so much because they bought too many things and could not control spending, but for overall poor money management. As one of the bloggers above points out, this couple ignored job instability, they ignored the fact that Detroit was about the only housing market in the US that was declining even when other markets were rising, and they ignored the terms of their loan.
    Loan disclosures, at least at the time of signing, are pretty clear, and the HUD 1 shows exactly what fees a lender/broker are charging (including, in most cases, the yield spread brokers get from lenders). Shame on people for not taking the time to read and ask questions about loans that are for hundreds of thousands of dollars. In the case above, the loan was for a refinance, which meant the borrowers had three postal days to change their mind and rescind the loan. Plenty of time to read the documents and ask questions if they did not understand something.
    Do I think there should be more regulations, more forms? Not necessarily. I think there should be more education of people in all aspects of money management, including debt and investing, as early as junior high and through high school and available in the community to those out of school. And I think people should start taking more accountability for their own actions and decisions, but that’s a whole other story!

  50. Re: reading closing documents. As a Realtor, I advise my clients that they should never sign anything unless they first read and understand it I also let my clients know that they will not have time at closing to read all the paperwork they are requred to sign to get their loan and therefore close on their home. I implore them to let their lender and the closing attorney know at least 2 weeks in advance of closing that they would like to read the closing documents – prior to the actual closing. Most of the same forms are used for all closings and those forms can be prepared ahead of time for buyers to read and understand. The advise about reading all documents completely before signing is in the package I give to all clients during our first meeting & then I remind my clients several times during the home buying process. I also remind them several times after we go under contract to let their lender know that they would like to read closing documents prior to closing. In my 20+ years in business, I’ve only had a few clients take me up on reading their closing documents completely – piror to closing. I had one client who requested the closing documents early. She read them completely and then used post its to note the paragraphs about which she had questions. At closing, she quizzed the closing attorney on what varous paragraphs in the documents really meant. It was very educational for all of us sitting at the table.

    I think part of the problem with subprime mortgages is that some of the folks who have used them are not educated enough to understand the long term ramifications of the interest rate and terms they are being offered. They just see it as a way for them to get the house they so desperately want. I’m not trying to excuse them, but I have seen this happen in my own family. A member of my family is now into his second foreclosure, having taken advantage of these subprime loans several times when purchasing & then using these same mortgages to refinance over and over. What amazes me is that this family member had a foreclosure, then a bankruptcy, then still managed to buy another house a year later which he has subsequently lost to foreclosure as well. After his first foreclosure/bankruptcy, we were all sure he would never get another mortgage, but we were all wrong – it was surprisingly easy, although his interest rate was astronomical. Many in the family tried to explain to him the folly of getting yet another high interest rate, no down payment mortgage, but all he could see was that he wanted out of his inexpensive apartment and into his own home again. His pride had been damaged and he saw home ownership as the way to heal his pride.

  51. Hey JoelKTon – According to the census’ American Factfinder, the 2005 median family income for portland was a little over $55,000. You have to look at specific regions because a country-wide number distorts places like West Virginia with NYC or San Fran. Where are you getting your numbers from?

  52. MDR – No one held a gun to their head and said they had to take the loan (from what I understand this was a refinance). And if they didn’t understand the possibility of the payments going up, they shouldn’t have done it.

    I understand I am more educated than most, but this culture of blame and lack of personal responsibility has got to stop. I agree with Tim – if there was no demand for this ridiculousness, there would be no suppliers. Unfortunately, this culture of greed, irresponsibility, and lack of financial education means that someone will end up holding the bill eventually.

    Again, no sympathy.

  53. joelkton says

    John, I got the 45k from the post of Johnathan’s quoted post above. I’m surprised to hear Portland’s is closer to 55k, but I suppose you’re right about lower income parts of the country driving the mean down. I’m guessing some very high paying jobs in the Portland high-tech secctor are driving the average there up.

    My search for the first use of “family income” has yeilded nothing, I’m afraid…

  54. If you go to then click on “American Factfinder” on the left, you can get great information on cities, zip codes, states, etc. It pulls the most useful highlights from the census…

  55. Hey Joel, here’s the average income numbers as pulled from Wikipedia:

    They’re rehashing numbers from the US Census bureau. I found the actual PDF from the census bureau, but the Wikipedia article was better presented.

    It’s worth noting that median incomes and median home prices can vary pretty drastically by region. Any reasonably affluent neighborhood or major metro area will likely have a higher median income. Of course, income tends to go with hand in hand with housing prices.

    Here in Canada, the Vancouver and Toronto regions both have very high housing prices, but incomes were pulled up as a result. Of course, both regions hit the skids about 18 months ago and housing prices will be dropping, b/c nobody wants to move there, it’s just too expensive. Right now I’m living in Edmonton, Alberta which is booming on the back of oil being extracted from the oil sands. Just south of here Calgary is also booming, so housing prices hit a big high in February, where “standard” homes were going for 300k+ and rent prices have started soaring.

    Of course, house prices and high rents can’t last forever, Edmonton already has a massive labor shortage, but existing workers can’t find affordable places to stay. With no places to stay people will just leave, to go somewhere more affordable. As people leave the housing demand will drop and so will prices. From the news I’ve heard, that’s already happening.

    In Jonathan’s case, I’m expecting much of the same thing (though on a longer timeline b/c it’s a bigger scale).

  56. Seriously! This just burns me up! Yes, the subprime mortgage industry likely deserves the bad rap they’ve been getting lately, but people need to take RESPONSIBILITY

  57. You should know going in that it will cost you. I knew this when I bought my first (small) house at 24 yrs old. I paid it off when I was 28. I bought two more while still living in the same small house. I paid one of those off when I was 32, the other at 35. At 36 I built a large house on over 30 acres without a mortage. I then quit my job and now work at home at a small business I started. BTW, I always worked in factories, mostly as a pieceworker, lots of OT that I saved along with my pay. I wished I made what they made at Ford. So do not feel sorry for these people. It does not matter if you are a doctor, or a factory rat like I was, you have to manage your money wisely! I would feel bad for them if they lost their house because of medical reasons. They lost theirs out of pure stupidity. People like this need to grow up. They are not in high school anymore.

  58. Cheers, Jerry!

  59. Agree with MVP and Jerry. New kitchen may be a worthwhile improvement, but you need to have money to re-do it. You also need to choose cabinets and appliances based on what you can afford. If people cannot afford houses but want to live in their own home, they could buy a condo or a co-op instead or they can wait and save money. Real estate doesn’t go up indefinitely. There was a boom in the 80s, there was a big drop in the 90s, then there was the recent bubble….

    When I bought my first condo – a one bedroom, I wanted a townhouse. But I couldn’t afford it at that time, so I bought what I could afford. With my first property, my monthly payments were comparable to my rent, less considering the tax deduction (easy to itemize in NY state). When I transferred from my company’s location in Dutchess county to the one in Westchester county in 1989, the prices for even one-bedroom condos in Westchester were too high for me. So instead of moving right away I drove 50 miles one way to work for a couple of years, looked at prices in the condo complex I fell in love with and waited. As the prices came down to more manageable levels and my savings and salary increased, I bought a one bedroom condo in Westchester and sold the one in Dutchess taking a couple of thousand dollars loss. In mid-90s as the prices dropped even further, I bought a two bedroom townhouse condo and rented out the one bedroom. I sold the one bedroom a couple of years ago with enough gain to pay off the mortgage on my new place, wish I had waited a bit longer, but I had expected prices to start coming down earlier. It seemed ridiculous how much people were willing to pay for a one bedroom condo, but then the prices went even higher before they started to drop.

    Jerry is absolutely right in that it doesn’t matter how much one makes, stupid people can get in trouble even on a high income. Here, in Westchester county, NY, even middle-to-upper middle class families cannot afford houses nowadays unless they are selling another property with a gain. The median price was over $635,000 in 2006 down from over 710K in 2005 (don’t know about now). Add to it high real estate taxes, and you’ll get very few professionals who can afford houses. An ex-boyfriend joked some years ago when the prices were less than half of what they are now that we pay for “the privelege of living in Westchester county”. Maybe salaries in NYC area are somewhat higher than in Virginia or Detroit, but they are not that much higher. The company I work for has about 20% variation in pay scale based on location with 10% premium on salaries in California, NYC, Westchester county, and Boston relative to the locations it considers average (e.g. Chicago) and -10% from scale in places it considers below average (not sure what these are). But this premium doesn’t come close to the difference in the cost of living.

    So one choice is to buy a house in Putnam or Dutchess counties and have long commute to work, another choice is to buy a condo (300K – one bedroom, 400K-650K two or three bedroom townhouses in my little town, slightly less for one level) or co-ops (140-150K for one bedroom 200-250K for two bedrooms) or continue to rent and save until prices go down. The prices were less than half the current values in mid-90s, and while they might not go back to those levels, there is still long way to go to the bottom, IMHO. The stupid choice is to get mortgage one cannot afford just because it is possible and then loose one’s home.

    As to the contracts being difficult to understand, all you need to understand are numbers: the fees, the rate, rate increases, payments and how they increase. My parents could do that two years after they immigrated in the US when they barely spoke English.

    The people I do feel sorry for are the neighbors who see the value of their houses plummet because they happen to live near those houses facing foreclosures.

    As for buying right now, I also believe as many posters mentioned that prices will go down more. In the 90s the downturn lasted for much longer, and the prices came down considerably since late 80s, and there haven’t been that many foreclosures if I am not mistaken. Given all the trouble with loans, it’ll probably get worse before it gets better.

  60. I wonder if schools will eventually offer a course in Personal Finance to the secondary school curriculum. I know it is offered at most Community Colleges and Night Schools, It just seems like one of the ways to help with this serious problem in our society is giving every individual at a young age a very basic, Kiyosaki-type education in personal finance. So many kids work in high school too…hmm, I guess I could volunteer or something….

  61. Just following up on my comments about avg auto worker pay:

    Labor cost per hour, wages and benefits for hourly workers, 2006.

    – Ford: $70.51 ($141,020 per year)
    – GM: $73.26 ($146,520 per year)
    – Chrysler: $75.86 ($151,720 per year)
    – Toyota, Honda, Nissan (in U.S.): $48.00 ($96,000 per year)

  62. Attention: Homeowners and renters thinking of becoming homeowners:

    I don’t know how Ms. Williams could miss this very important point- I get it-
    Month to month I am reminded that the house we live in does not belong to us as I pay our mortgage. Every month we own a little more of it, but it belongs to the bank. Each month my husband and I not only spend money doing repairs to it, but we spend money to bring it out of the late 70s into 2007! And the banks don’t mind lending us money to take care of their house either.
    We love our place and making it the way we want to live, but this fact remains: It belongs to the bank. Also Note: Once the house is “yours”, then be sure to pay your monthly property taxes because if you don’t -it’ll belong to the county.

  63. Also, In reply to RICO:

    In Ohio, the Treasurer has put it in motion that all high school students will be required to take a Personal Finance class starting in 2010. This is not directly related to the current home loan issue, but it is related, as US citizens are being asked to be responsible for their retirement funds (and sent prospectuses to read?) it is necessary for us to be better educated. Many of us like Jonathon take a hobby-like interest and seek information, but to make sure everyone gets the basics; it needs to be taught in schools.

  64. Honestly, the people who fell for the whole sub-prime/ARM thing are greedy idiots who tried to buck the system. If you can’t understand the legalese, you can hire a lawyer. If you can’t afford to pay a lawyer for a few hours, you cannot afford a house. But, heck, if you live in a big enough city, there will be a city-run office you can visit where there are people who will explain your mortgage options to you for free.

    You cannot expect to get a six-figure loan that is both cheap and safe. Simple logic tells us that we can’t get something for nothing, especially when the something in question is a HOUSE. These people tried to acquire assets they could not afford and now they have to pay for it. Just because greedy companies “talked them into it” does not absolve them of their responsibility.

  65. I agree, folks need to take responsibility for for the choices they make, I also agree that some type of law that defines one extra sheet of paper that lays it out in black and white in one line not surround by tons of other text buried in tons of other sheets defining:

    *rate asked to be borrowed
    *percentage rate
    *total cost of the loan with the interest rate calculated into it

    I make about 40g a year and I live in Texas. Im about 27 and when I was 20 I made the mistake of buying a mobile home from Green Tree. I borrowed 45g at 16% for 30yrs. My payments with home owners insurance come to about $580 a month and lot fee for the home is $200. about $770 a month for living expenses. I have been paying on this house for about 6yrs for a grand total of 36,000 and owe about 47g.

    Im not gonna go into rants about what a moron I was to decide to buy this home at the time or how I now realize how stupid it was, considering the house is now valued at 27g so even refinancing isn’t an option. My ex wife and I looked a lot of local homes for the 50g range but the ones we found looked to be in need of serious repairs and we were tired of wasting our money on rent (so we thought) So we decided to buy a mobile home. The fast talking sales man did his spill to make my mrs feel fantastic about it, and me to feel like a money grubbing ole mizor for being so wayward about signing into such a deal. Needless to say I didnt fully understand that after it was all said and done my payments would be just enougph to cover interest each month and I would never touch the balance. Maybe I was dumb and sure there are complex laws out there mortgage lenders have to abide by. But what about the simple guy who has a good stable job who just wants to buy a house without having to hire a lawyer or get a google degree in property rights? A little plain jane Text would go a long way in helping the masses make responsible decisions that would help the market.

    I agree the business’s are here to make money but at what expense? Legal exploitation of stupidity needs to be kept in check in order to avoid horrible social and economic disasters. I mean if we let credit companies exploit the stupid then why dont we just let them exploit the old and retarded as well? When do you draw the line on who to protect and when to protect them?

  66. Hey xxMSAxx, the Legal exploitation of stupidity is a really dicey subject, filled with religious AND political implications. It’s like the ultimate “not-at-dinner” subject.

    By their very definition, publicly held companies are basically beholden by law to do every legal thing that they can do to increase profits. That’s a simplified interpretation, but that’s what’s going on. Privately-held companies have a little more leeway in this respect, but they’re usually run by people who have no concept of “enough”, so they’ll often behave the same way.

    Socially, we’re very limited in out ability to protect people from themselves and it’s a giant question as to whether we even should. Sure, most people would agree that we should protect the mentally handicapped and for the most part we already do. But protecting the money of the elderly may be a tough sell (protecting the most experienced members of our society?)

    We could improve our situation by teaching young students about money issues, but that probably won’t “solve the problem”.

    At the end of the day, you can only do so much to protect people from themselves before you simply start making their decisions for them. Interest-only mortgage was a bad deal for you, but it’s a really good deal for some investors in some markets. You can require the “little plain jane Text”, but that’s still not going to make people any better at math. The overarching rule here is to protect yourself first: drive defensively, wear a helmet, use condoms even if she’s on the pill, don’t sign anything you don’t understand.

    Even if we required “plain Jane text”, that text would not be valid in a court of law anyways. So you still have to reasonably understand the rest of the printed contract. If you can’t find a simple version of the contract, find someone who will give you a simple version.

    My $0.02, but there’s lots of room for debate on this one 🙂

  67. Brandon Adams says

    I’m just a guy who works as a logistics manager, I’m about 40 and would really like to buy a house someday. When I did the math against my budget it just didn’t add up. How could I pay all of my monthly bills and long term bills (school loans, car loans, etc.) and still make the mortgage every month. Short answer is I could not. So, I do the right thing and continue renting thinking in the back of my mind if I save enough in the next few years I will have enough for a decent down payment on a house or condo.
    Then all this SH#T happens and it just makes me sick. Homeowners who are as smart as rocks start complaining about their ARM’s adjusting. It’s the first word in the abbreivation. Next Lenders who have known from the start that they were writing bad loans join in, with their litany of “how could we know”.
    Of course this is the new Amercia so all these decision are someone else fault and all I hear is lenders and homeowners complaining about how the FED must lower rates again, and again, and again. NO, you all made the bed now go lie in it.
    If we end up in recession, lots of people lose their homes, and lots of lending companies go under then so be it. I feel bad for the people this effects but only to a point. Lets face it we will get through a recession, you can live in an apartment, and you can find a new job.

    “There was a time in this country when if you skinned your knee you ran for bandaid not a lawyer” -Badams

  68. This market is getting terrible. We have the government to thank for almost forcing lenders to make bad decisions on the loans they make in to create “more affordable housing.” Loaning to people who can’t pay it back has nothing to do with “affordable housing.” Now we are going to bail out Freddie Mac and Fannie Mae thinking it will help! Let the market take care of itself!

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