House of cards

[T]he lower payments afforded by an interest-only loan helped us buy a house in an expensive county -- Montgomery -- where we wanted to live and eventually send our children to school. Our payments were significantly lower than what they would have been with a 30-year fixed-rate mortgage, meaning we could buy a nicer, larger home. Also, with the real estate market then booming, we planned to sell the house within five years anyway -- for a big profit, just like the previous owners got from us -- so why pay principal on what was essentially a starter home?

Could we have lived farther from the District for less money, perhaps allowing us to get a less risky mortgage? Yes. Could we have continued to rent, waiting, perhaps, for the market to even out and our salaries to increase? Yes. But we already make nice livings. We pay taxes in the highest bracket. Our parents bought homes at our age. It may sound crass, but we deserved a nice home. We did what we had to do to get one.

-- "Was the Mortgage a Mistake?" WaPo, Aug 19, 07

On the one hand, kudos to the author for his honesty. On the other hand ... we closed on our house at around the same time (give or take a week), and it is like we moved in Bizarroworld compared to this guy. Surely we are not the only people left in America who figured out what we could afford, then went house-hunting based on that, instead of finding the house and worrying about financing later?

Comments

[molly]

(new design is lovely!)

When we were apartment shopping, I'd say that 80% of the people giving us assvice were telling us to "buy the most house you can afford." And, in normal circumstances, the most house you can afford would = about the same size mortgage you'd be able to get, but the amount that banks are willing to loan and the amount that people can actually afford are wildly different numbers. Honestly I think what is preserving the NYC market is the co-op (and to some extent, condo) boards -- buildings don't care what your lender is prepared to loan you, they want 20% down and will conduct a financial enema to make sure you can actually afford the apartment and then some. And as much as I hated the process, there is something to be said for forcing homebuyers to PROVE they can afford their home, now as well as five years from now.

[ginger]

Hm. On the one hand, I think, "Well, if a physician and a reporter couldn't figure out what the likely drawbacks of a balloon mortgage were, what hope does poor Joe Public have?"

Then again, even I knew to skip the interest-only mortgage, though it was proposed to us by several lenders (and my main desire with money is to do whatever it takes to get people to stop talking to me about it, so I did have to repress the urge to say, "God, whatever, just give me something to sign and leave me alone," so I am pretty much worse than Joe Public.) Although we might well have "deserved" a nicer house than we got, we got what we knew we could afford even if the market reversed on us and I didn't get a dream job right out of grad school.

One also shouldn't think of one's house as a "starter home" unless one is willing to plan for one's financial future - and how can anyone expect to build equity without paying principal? TANSTAAFL.

[Tracy]

(Sorry, Lisa, I'm veering into GYOB territory, I know)

These are the bits from the article that gall me:

"My wife, who is a physician, asked a question that thousands of other people in the region must be asking now, too." (Translated: "Look, we are Really Smart People, and even we don't understand what happened." As in, clearly, it must be just a wacky, out-of-control thing if even the intelligentsia have been touched.)

"The world is a tricky place, and nobody teaches you this in school." (Yet, apparently, the dream of cavalierly buying a home out of your price range in the affluent area where you deserve to live because you have been convinced by advertising that you can flip the house and profit... is all the homebuying education one really needs?)

"This week, I did what I probably should have done before signing the loan. I called some financial planners." (Staggering. Why do people treat home ownership as anything less than the most important financial decision you can make? I don't mean to be all dramatic about it, but it is what it is.)

Anyone who has the ability to acquire a mortgage and a down payment, no matter how provincial that Joe Public might be, has access to the Internet -- and therefore can do enough research to educate himself on what such a major acquisition means... in best and worst case scenarios.

I'll confess that I don't really understand a whole lot about home-buying and mortgages. But I wouldn't sign my name to a $40,000 house -- much less a $450,000 one -- until I had exhaustively, obsessively done my research and used all the resources available out there to understand what I was entering.

It's the tone of the article, the coquettish little "whoopsie!" vibe that annoys me so badly: "The sizzling home market almost immediately began to cool off, which my wife and I sort of ignored. Interest rates started to creep up, and we sort of blew that off, too. We have time. This too shall pass. No worries. Life is good! We bought a flat-panel television, took a nice vacation, bought a dog, hired him a daily dog-walker, and then we got pregnant. We have time. This too shall pass."

I would be mortified to admit in public that my brilliant physician wife and I were incapable of paying attention to our finances, despite repeated warning signs. I'm embarrassed for this guy who clearly doesn't have the sense to be embarrassed for himself. I'm worried about our generation, in fact -- that "hahahaha whoopsie!" is an acceptable attitude for this family to have.

"It may sound crass, but we deserved a nice home. We did what we had to do to get one."

Yes, Michael Rosenwald, it does sound crass. You got exactly what you deserved -- and I don't mean the house.

[Polly]

I'm always kind of amazed when people over the age of 16 talk about buying what they "deserve" rather than what they can afford. Who doesn't "deserve" every wonderful thing? Hell, I certainly "deserve" an estate in Tahiti, clothing made of sinfully soft cashmere, and a gaggle of devoted, hunky massage therapists.

And a pony. I also "deserve" a pony.

[Liz]

I bought my first house 11 years ago; my most recent one 2 years ago. I've had 9 residential closings - some were refi's. I don't know if I'm an expert yet, but I can almost guarantee that the ratios (house pmt/income and total debt/income) that were acceptable to you and your bank 2 years ago would never have flown in 1996. That was before we got used to really low interest rates.

Yeah, the good old days. When 20% down was required, and having student debt could easily nix the possibility of buying a house altogether.

The BANKS are getting what they deserve, I think, not the borrowers. I am so so so tired of everyone blaming the least sophisticated party in the transaction. Many of us are "smart people", but we don't do these transactions all day long every day. If he should have known better, what do we think of the bank that pushed the loan? WIth their battalions of MBAs, shouldn't THEY have known better?

[Dickens]

ARM mortgages aren't necessarily bad - it's how people treat them. When I bought my house 3 years ago, I went with an 'Option ARM' - the bank gave you 4 options of what to pay: minimum payment - ridiculously low, guaranteeing negative equity in your house; interest-only; the equivalent of a 30 year/fixed; and the equivalent of a 15 year/fixed.

I bought a house that I could actually afford (it's under 700 square feet) rather than what the lenders claimed I could and got a really good interest rate that was locked in for 3 years. I've only ever paid the 30 year/fixed amount, and kept an eye on where interest rates were going (I re-financed last year to lock in a good rate for another 5 years).

I'm certainly no financial genius, but how smart do you need to be to figure out that you can (should) pay more than just the interest? Oh right, they didn't want to figure that out because that might have dampened their ability to take fabulous vacations and watch expensive giant TVs.

[drunken monkey]

Don't worry, it's fixed!

[drunken monkey]

People are always telling me to buy a condo that is too small for me and my fiance to live in without murdering each other.

"You don't need a downpayment!"

"It's okay if your credit isn't great, someone will give you money!"

"Don't worry about your student loans. Just roll them into the mortgage!"

Um, no.

[Lisa S.]

Liz, I agree with you that the banks certainly deserve a lion's share of the blame: they got greedy and that made them stupid, and their crying now does not make me more sympathetic to the consequences.

And I think a lot of commenters are right: finance IS an intimidating topic. It can be hard to wend your way through the options and assess which ones are right for you. It is equally hard to have enough confidence in your own decisions, especially when the so-called pros are second-guessing you. We are not all born skeptics and cynics!

That said: it still boggles that so-called educated people think they can buy what they deserve, not what they can afford. I have some sympathy for our less-sophisticated consumers. But for people who fact-check and synthesize data for a living? Not so much.

[Polly]

The BANKS are getting what they deserve, I think, not the borrowers.

Liz, the thing is, the banks aren't going to be facing the same kinds of problems as the borrowers--the banks will have a bad year and then bounce right back. The people who lose their homes and destroy their credit are not going to come back from that any time soon, if ever. It's rough, and it's certainly not fair, but it's simply a fact of life that if you are sitting on a big pile of money, other people will come along and try to take it away from you. You have to be on your guard, because you have the most to lose.

I know a lot about this because my dad's a physician, and in the town where I grew up, large groups of doctors used to get ripped off every other year--they never learned. I think doctors get targeted because they have a lot of money, but they're not finance people, and they often don't actually know much about money and don't want to go to the trouble of learning. It was funky investment vehicles, or new buildings for their offices (which were snapped up after they went under for a song by the finance people), or shares of expensive medical equipment--some of it was actual fraud, and some of it was perfectly legal, but all of it resulted in the doctors losing their shirts. (Plus there was plenty of plain old over-borrowing to support a lifestyle they could not afford.) The pitch was always, Trust me, you don't to read the contract, this will be an easy way to make lots of money, you deserve this. And it worked every fricking time.

[Kerry]

You can play the ingenue if you're actually young, cute and naive. In an adult professional, it's just sickening.

[Liz]

Actually, Polly, you're right. That's more what I meant to say. The banks started this, and the consumers will get screwed. Somehow the banks will come out fine - whether it's a bailout or some other rescue. (And good lord but I hear you about the doctors. Smart folks, but they're always the target of the investment scams, aren't they?)

It's not just that finance is intimidating and complicated. It's that the process is non-transparent and outright predatory. Credit scores themselves, upon which interest rates are based, are calculated in a black box. Mortgage brokers are driven by incentives they don't tell you about. You can know a lot, but still not know enough.

What can you afford? Well, for my first condo - I had to fight the bank to convince them that I could afford a mortgage payment that was HALF my current rent. I think I deserved that.

[Mary-Lynn]

To me it doesn't seem like you actually need to know much about banking at all. It boils down to common sense: if something seems too good to be true, IT IS. Start from there, at very least. If you're low-income and your parents couldn't afford a house what makes you think you can? Do people really think that the banks and mortgage lenders are just, suddenly and completely without precedent, Nice Guys now when they weren't a few years ago? Has the entire lending system just bent the laws of physics to come up with a way to manufacture money so that everyone wins? I can't believe none of these people - educated or not - could smell a rat.

[marion]

Agree with Mary-Lynn. Also, could the WaPo not find someone to write this piece who wouldn't break out the "deserved" bit? Maybe someone who really couldn't have bought a house with any room for his/her family without taking on a risky mortgage, but was living and breathing the American dream/mantra of owning a home? Whenever I see a piece like this, I think, "Okay, the situation can't really be all THAT bad if one of the nation's major newspapers has to resort to upper-middle-class types who felt they 'deserved' the good life in order to find someone seriously worried about his/her situation." The WSJ did a much better job, IMHO, in finding a family to serve as a face on the subprime issue. I can't feel any connection to the WaPo guy.

[Lisa S.]

I wonder if the WaPo picked their guy precisely because he IS a different face and voice in this mess. The WSJ profile -- the family in SoCal, right? -- was heart-rending, and the SF Chron's dug up a lot of folks in similar situations, but this one stuck in my head because it's the first one where someone flat-out admitted that they were greedy and blithe and now they're worried.

[marion]

Lisa, I readily admit that's quite possible, but...does anyone really feel sorry for the greedy and blithe when they take a fall? Really and truly? Because I'm a big softie, and I don't. The turning of the economic/business cycle punishes the greedy and blithe all of the time - in fact, I'd argue that it does so more often than not. (At least no one's babbling about a "new paradigm" this time.) I'm more interested in my perception that the proliferation of mortgage options played a key role in the insanity of the housing market in certain areas of the country that made owning a home out of reach of a "normal" family using "prudent" mortgages. But maybe that's just me.

I'm just still astounded by the...carelessness of the people in this article. They never thought of visiting a financial planner BEFORE buying a house? They failed to realize that their mortgage broker and real estate agent both had a vested interest in ensuring that the two of them bought a house, and a big house, too? They bought a house they thought they "deserved"? Well, at least when their kid is a toddler and in the "Want it NOW!" stage they'll be able to relate.

[Shotrock]

In the town where I grew up, large groups of doctors used to get ripped off every other year--they never learned. I think doctors get targeted because they have a lot of money, but they're not finance people, and they often don't actually know much about money and don't want to go to the trouble of learning.

Y'know, Polly, insert "lawyer" and it's the same thing. Unless an attorney handles transactions to begin with (like hedge funds and M&A stuff) they are just as idiotic. That's why bar associations have courses like "Basic Finance for Attorneys" and "Accounting 101 for Lawyers." Because when newly-minted law school grads end up in transaction instead of litigation, they have a HUGE learning curve. (A partner told me about an associate who wrote "revenue" in a contract whens she meant "profit" - when he corrected her, she said, 'But they're the same thing, what does it matter?' I kid you not.).

I think it's the "I'm brilliant at X, and therefore understand Y" syndrome. You and I don't have the ego to think we could go through a complicated financial transaction without advice from a sage and objective third party, but lawyers and doctors? I work with the former, and the most difficult thing to get an attorney to say - any attorney, whether a 25 YO associate or a 50 YO partner - is "I don't know" or "I don't understand this." Doctors and lawyers are the professions that are supposed to be brilliantly smarter than the rest of us schmoes, and it prevents them from doing the most basic sort of due diligence that we would conduct as a matter of course.