In Granada Hills, Calif., Natalie Brandon is fighting to keep the three-bedroom ranch house she bought in 1985 for $105,000. Mrs. Brandon, 51, does medical billing for doctors; her husband is a dispatcher for a local gas utility. Last year, she got a $625,500 mortgage from Argent, now owned by Citigroup. Her 7.99% interest rate isn’t set to rise until next June, but she already is behind on payments.
Over the past five years, she has refinanced her home five times, each time taking out cash and paying prepayment penalties. Last year, all she had to do to refinance was state that she and her husband earned a combined $100,000. She says she used the proceeds to pay off $30,000 owed on her white Lexus.
This year, she says, their income fell after she suffered a short-term disability. Mrs. Brandon figures if she sold her home today, she wouldn’t get more than $450,000 — what a nearby home sold for in foreclosure.
She has tried for months to get her loan modified, and missed her June and September payments. Last month, Damien Gutierrez, a Citi Residential home-retention manager, offered to fix her interest rate at 6% for 40 years, she says. One week later, she says, he said he was authorized only to offer her a five-year fixed rate. Earlier this month, Citigroup offered her a six-month trial at 6%, saying it would extend the modification to three years if she keeps up with her payments, she says. Mr. Gutierrez didn’t return calls seeking comment.
Not meaning to sound harsh, but I’m supposed to feel sorry for someone that kept cashing out home equity to the point of having a $625,500 mortgage?? How could they even afford to pay that amount based on a combined salary of $100K??? And using some of the money to buy a Lexus?? Sounds like both sides have blame here: the couple for cashing out equity when they probably couldn’t afford the payments, and the mortgage company not caring if they could pay or not.
Let’s do the math – this individual bought a home for $105K and now owes $625K. That’s over half a million dollars in equity that have been extracted… and though the article doesn’t say, it sounds like big chunks of that “wealth” went to pay for luxury items that were out of scale for either necessity or common sense. Stories like this are tragic, because these folks are likely to lose their home and spend their pre-retirement years getting head above water financially – but these folks are also adults who have made some very bad decisions for which they bear responsibility. I wonder if there is a ministry opportunity in helping people make prudent financial decisions.
“The ultimate result of sheilding men from the effects of folly is to populate the world with fools.” – Herbert Spencer
I’d have to agree, the $650K sounds a bit odd, especially if the husband works for a utility (most are unionized and have good benefits – thus medical bill should have been paid by insurance), she got a “no document loan (termed a ‘lair loan’)” and now the interest rates are rising. I refinance in ’03 and had the same teeth pulling experience it has always been and locked in a 6% (rats missed the 5.35% rock bottom, I was too slow). I’m having real trouble believing the medical bill story, my gut instincts say that money went somewhere else and there is a reason they went with a “no document” loan.
Paraphrasing Prov 19:3 only slightly:
[blockquote][i]By their own folly a couple ruins their life, yet their heart rages against the lender.[/i][/blockquote]
Bailing out such people, directly or indirectly, subsidises folly and greed at the expense of prudence and humility. Bad idea all around … which is why it will probably happen.
I was thinking of a different proverb (6:11): “Your poverty will come in like a vagabond, and your need like an armed man.” KAR, I don’t think securing loans with minimal documentation has been all that uncommon recently. During my most recent foray into the mortgage market, I was approved for a substantial mortgage by a major lender on the basis of a credit score, what I reported as income and assets, and a <2/3 loan to value ratio. Instead of being flattered, the financial manager in me was mildly horrified.
You are so correct TWilson!
Last August, I was with my parish on a service project, I overheard a commission-paid mortgage broker get the whole speech, about how little documentation was necessary, if the couple was only going to live in the area a short while then they did not want a thirty year conventional but an ARM that they could be interest only and the couple would make equity by inflation. I was getting so mad, I had to step away — a year ago I may have taken this guy to task, for I’m in a related industry and the we were already a year into the down turn. Now, I figured the couple was protected because the leaders would pull the product (they did beginning the next week to month) and this broker would be looking for other employment soon enough.
This crisis seem to be each looking for a quick dollar from the other. The lender giving teasers looking for an inflated interest rate in the end and the borrower looking to no interest today, I’ll refinance later before the balloon hits, but quick easy money now.
Thankfully, the press always seems to lag behind reality, my unofficial finger in the air (Yahoo! Real Estate Foreclosures on a few local zip codes) actually is showing some improvement – ~40% fewer listing than in September and ‘in the past 15 days’ listed. However as it was in ’93-’94 if you want a house in the very high rent district now is the time, I’ll bet it may even be better than 75¢ on the dollar.
KAR – I hope you are correct. I think places like California still have father to fall, and the Charlotte market is just starting to slow. The DC metro area where I live has slowed, but some geographical pockets never really slow that much.
One bit that shocked me from the story: a 51 year old even considering a 40-year loan! Maybe Hank Paulson’s negotiation with the core mortgage lenders will end up letting her lock-in a lower fixed rate?
TWilson, we took out a 30-year fixed loan at age 50, but we’re paying it down rapidly so we’ll be out before retirement. The reason was to lock in a smaller monthly payment requirement in case disaster hit.
I’ve long thought that the mansions going up in our area were being bought by people who had no intention of ever paying for them. We bought a house that we should be able to sell even in a down market (location, size) at a fixed rate with a payment we could sustain for quite some time without much income. Why don’t people THINK before they sign papers?
Well, I should explain my logic, just because things may stabilize, I don’t think they’ll get better very soon. Things hopefully will reach a level where those in the industry can plan and budget again instead of being reactive. The DC market has the nice benefit of being supported via government expenditures, CA may not have hit bottom, but I thinking equilibrium in next few quarters (remembering that inside the industry we’ve watch this for at least two years so our prospective is more wide-angle). The more average foreclosures have gone by without much notice, people who can purchase a Lexus generally have a little more resources to survive until the latter stages of this part of the corrective market.
Katherine – That’s a fair point, but your approach seems prudent while that of the folks in the article seems desperate.
Your point on thinking is key, but unfortunately the house-buying process gets irrational very quickly. For those getting into first homes, there can be a huge aspirational component. Otherwise hard-nosed people fall in love with a house for flimsy reasons: I’m a business strategist, analytical to the core, yet I had a hard time walking away from a particular home that had a great wrap-around porch, a granite and hardwood kitchen, and a stone fireplace in the living room (things I’d cared about not all before we started looking). The house was nice but otherwise not suited to how our family lives, but those amenities! My wife wanted something different, and my realtor was smart enough to understand what was happening and keep us moving. And while the non-rational is dangerous, straight-up wrong thinking is even more dangerous, particularly when doing the “what can I afford” math: assuming stable income, assuming flat expenses, assuming huge returns on equity, etc. The home-flipping television shows reinforce sloppy thinking. Like the one where they’ll say, “John spent $300K on this house five years ago, put-in $100K in upgrades, and our realtor agreed to list it for $500K. That’s a $100K profit.” Not really: if John actually gets $500K, he pays $30K in commissions (varies by location), plus he paid interest, insurance, and taxes for five years, plus the interest on however he financed the $100K in improvements. Did he make money? Probably, but less than one would think. And, of course, now John has to find a new place to live, with comes with its own set of transactions costs.
#2 —
I am aware of Crown Ministries, which is an evangelical organization
(http://www.crown.org/)
I am sure there are others.