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« The New Republic's Ostrich Strategy | Main | Zero-Sum War »

Subprime Subpar

The Wall Street Journal carried a page-1 case study of a family with a subprime problem (subscription required). The whole thing is terribly sad. People possibly losing their home and businessmen losing their investments. Commenters at the site, on other stories, who've casually thrown out that people who default probably shouldn't have been in their homes in the first place are right, but miss the point. These people could have continued to rent and build savings. Instead, they're liable to lose both their homes and everything they've paid into them. You don't have to advocate some sort of massive bailout in order to feel sorry for them.

This, though, caught my eye:

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.


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.

A family of four qualified for a $550,000 mortgage on a $90,000 income? Good freaking grief. Now, read that second paragraph again: "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."

Someone put these people into a loan they knew they wouldn't be able to afford. This is the kind of behavior that leads people to think that the whole system is crooked. People who behave this way deserve to lose their investment.

But they told them they wouldn't be able to afford it. And the couple were rightly nervous about it. This was no starry-eyed couple trying to make ends meet with help from Mom and Dad. This was a couple who had been around long enough to know that things change.

I was nervous about paying for a $215,000 FHA mortgage on that much income seven years ago. Yes, it was 30-yr fixed (since refinanced down a couple of times), but it was predictable, and since the government was co-signing, the interest rate was pretty good. I was told that, since the rule of thumb was House = 3 x Salary, there was plenty of room. I also consoled myself with the knowledge that they wouldn't lend me the money if I couldn't pay it back. There was a reason for every flaming hoop I had to jump through. Look, nothing's guaranteed, and I've made my share of bad investments. But there's also investment and then there's roulette.

Now, for worse for now, for better eventually, there is no such comfort. People are perfectly willing to loan you money they know you can't pay back, and to tell you that, and to count on your signing, anyway. They we willing to do this because nobody in that room, except the buyer, was going to have to live with that loan for very long. The seller gets paid, the real estate agents gets his commission, and the loan company sells the loan to someone else. The reason mortgage rates are higher now is that there aren't any buyers, which means that the mortgage brokers are either charging higher interest or playing with (gasp) their own money. And the reason so many of them went under is because they suddenly found themselves with a bunch of loans they couldn't re-sell, which put a serious crimp into their cash flow.

You need to walk in with a calculator and CFP and a budget. You need to know what your tax bracket is and how much of that mortgage interest you'll be seeing come back each April. And for God's sake don't take a mortgage that you need to escape to be able to afford. Because at the end of the day, you are still signing a piece of paper, and it's your responsibility to know what the hell you're signing up for.

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