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Maybe People Should Listen to Their Gut
By JLP | August 16, 2007
This is from one of the cover stories in today’s Wall Street Journal:
Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.
The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. “We agreed we wanted to be homeowners again,” says Mr. Montes, “even if it meant the end of vacations and not eating out as often.”
With a December “reset” on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses’ loan balance may exceed the value of their home.
The Monteses are caught in a trap — one that hundreds of thousands of people could face as the housing market totters and the easy credit of recent years dries up. They in effect bet that the boom in housing prices would continue. It was more important to hop onto the escalator than to wait until they could afford to make the leap according to traditional measures.
Later in the article a few pieces of important information are revealed:
1. The husband and wife together make $90,000 per year.
2. They had spotty credit and therefore had to settle for a 2/28 subprime loan, which is a loan with a low payment in the first two years followed by 28 years of hell.
3. They currently pay $38,400 on their mortgage loans. That number will balloon to $50,000 per year once their mortgage resets in December.
4. They weren’t aware that there was a $12,000 prepayment penalty if they refinanced their loan in the first 3 years.
5. Their broker assured them that they would be able to refinance when the mortgage reset.
I hate to say it but unless this couple can afford their new monthly payment, they are screwed. They have no equity so refinancing is totally out of the question.
The really sad part is that they shouldn’t have bought this house in the first place. I can’t imagine anyone thinking they could afford a house payment that sucked up over 40% of their income. The article did mention that Mr. Montes was feeling edgy about being able to afford the higher costs once the loan reset.
Maybe he should have listened to his gut.
Topics: Housing Market, Mortgages | 21 Comments »
August 16th, 2007 at 10:11 am
In situations like this wouldn’t it be in the best interest of the mortgage company offer a refinance so that the family can continue to make payments instead of losing the customer completely? Isn’t less money better than no money?
August 16th, 2007 at 11:10 am
Ouch, an unpleasant situation. Maybe they should try to find a buyer for the house… $50.000 mortgage loans per year + 2 teenage girls to support – it’s tough.
August 16th, 2007 at 11:38 am
Making $90K and able to buy a house for $567K. Who underwrites these kind of loans. It should have never gone through underwriting!!!!
August 16th, 2007 at 11:54 am
Totally ridiculous. $567K on a 90K salary… Consider the taxes on this place as well. Even if they had a regular 30-year fixed mortgage, taxes could go up at any time. Agreeing on a mortgage with prepayment penalty is totally stupid. Really, if they wanted to be homeowners, they should’ve looked into condos. They have two teenage daughters that’ll go to college soon. Certainly a nice 2-bedroom townhouse condo would have been enough?
I was really surprised a couple of years back when I heard that mortgage companies no longer used the old rules to figure out how much one could afford based on how much one makes. I thought at the time – “this cannot go on forever, I bet there’d be some foreclosures before long…”.
August 16th, 2007 at 12:12 pm
“In situations like this wouldn’t it be in the best interest of the mortgage company offer a refinance so that the family can continue to make payments instead of losing the customer completely? Isn’t less money better than no money?”
The mortgage company will just foreclose on the house and sell it off.
August 16th, 2007 at 12:38 pm
I’m with #1 (Projoe) on this – foreclosure & re-sale are not without expense or risk, either, and refinancing still leaves open the possibility of foreclosure later on. They might be in over their heads, but they’re not poor by any means; unless their FICO is in the 500 range, I don’t see how foreclosure benefits the lender any.
August 16th, 2007 at 2:33 pm
This is EXACTLY what is wrong with the housing market. Since these mortgage companies will finance crap like this, housing prices can keep going up and up and up. And people will keep paying ridiculous prices as long as they can get loans. It’s not smart, but people do stupid things when they really want something. These people should not have even been ALLOWED to take out this mortgage. I’m smelling a government bailout coming in the mortgage lending business.
August 16th, 2007 at 2:55 pm
Moral of the story: Don’t buy more than you can afford.
2nd Moral: Cali is expensive…move to another part of the county that you can better afford. Why does everyone act like CA is the only place to live & everything else sucks?
August 16th, 2007 at 3:02 pm
Independent George, I don’t think foreclosure is the best option. I’m just saying that the mortgage company won’t be left with “no money.” According to this article ( http://themortgageguru.wordpress.com/2007/04/21/what-is-the-avergage-cost-of-foreclosure/ ) it costs about $50,000 for the lender to foreclose. I’d imagine that as long as they are still making some sort of profit they will want to avoid that situation.
August 16th, 2007 at 3:37 pm
Hold on a minute marylandterps! Utah(where I live) has enough equity refugees from California already. Maybe they can go to Maryland. Anyway, most people live where they do because of job or family rather than cost-of-living. But I hear what you are saying about CA being overrated as a place to live.
August 16th, 2007 at 3:42 pm
let’s stop blaming the mortgage companies. sure they took on added risks by selling subprime loans, betting on making money off of interest only loans etc; however, it comes down to the individual responsibility. I have no sympathy for these people, because they did it to themselves. come on, they wanted to be home owners again even if it meant no vacations or eating out as often? i’m not sure what kind of rational leads people to this. sure, companies will do just about anything to make money off of these people, but people need to have common sense. their budget simply didn’t allow for them to be going into a house at that price. did these guys even read their contract before signing on the dotted line? probably not. they are in a pickle for sure, and hindsight is 20/20. the critical thing now is to sell the house and pay off the upside down portion of their mortgage while renting. that’s going to be tough, but so is paying down other debt.
let’s just cool down about the subprime mess anyways. subprime accounts for less than 5% of home loans and even among the 5% subprime loans, not everyone is going to default or foreclose on their loans.
August 16th, 2007 at 7:16 pm
Just went to BankRate. For 90k yearly salary, a 6.5% mortgage with no downpayment, no other expenses, no property taxes, etc would qualify the buyer at about $323K. How does somebody get buy a 576K house with not much of a down payment? I am assuming there wasnt much of a dp because of the lack of equity. What a mess.
August 16th, 2007 at 9:02 pm
“Why does everyone act like CA is the only place to live & everything else sucks?”
Well, I got family in Northern California and we go all the way back to the stealing of the state from Mexico. Doing well in North Carolina but my heart is west of the Sierras.
Agree with Tim, it’s not too late for them if they can sell the house ….fast, and pay off the balance.
August 16th, 2007 at 10:32 pm
I cannot for the life of me figure out why people buy houses they clearly cannot afford…I would rather rent the rest of my life than be in that deep of a hole.
August 17th, 2007 at 10:50 am
In these situations I think sometimes the homeowners are more to blame, but sometimes the mortgage companies are. If you don’t know much about the markets or about how mortgages really work (and many of us don’t), then you naturally trust the “experts” to tell you what you should do and what you can afford.
Yes, you should think for yourself, but it used to be that banks wouldn’t lend you money if you couldn’t afford the payments. A lot of people had that ingrained in them, especially older people. They assume that if they’re approved then they should be OK–especially when these “experts” are assuring them that it’ll be just fine.
Sounds like these folks need to get 2nd or 3rd jobs to support their mortgage. If they can hang on a year or two and pay their mortgage on time, they should have enough equity to refinance and/or sell and start over.
August 17th, 2007 at 11:32 am
“2nd Moral: Cali is expensive…move to another part of the county that you can better afford. Why does everyone act like CA is the only place to live & everything else sucks? ”
One word – jobs. For computer scientists, software engineers, other engineers there are lot more opportunities in California than elsewhere.
I live in Westchester county, NY which is just as expensive than California. The average house price in 2006 – 650K, down from $740K in 2005, not sure about now. I own a two bedroom townhouse-style condo; I bought it for 180K in mid-90s, now people are selling similar places for 400K (down from 460K a couple of years ago). But for people who work in NYC, it is pretty convenient. I don’t work in NYC, but I work in Southern Westchester for a research lab of a Fortune 500 company. I am a software engineer, but while I could find work in many places, it would not be nearly as interesting as the one I have as I can do both development and leading edge research. It is a very nice area as well close to all the cultural attractions of NYC yet quiet and very pretty. New Jersey is cheaper but not nearly as nice. I’d imagine the same holds true for California. There are so many more opportunities in Silicon Valley then in other places. Everything depends on the type of work one does.
But there are better ways around the prices than getting a mortgage one can’t afford. One way is to buy condos or co-ops. Another is to move to places with longer commute but cheaper prices (here in Westchester it would mean moving North to Putnam or Dutchess counties or to New Jersey). Given the cyclical nature of the real estate market, waiting and saving money is a reasonable option as well.
August 17th, 2007 at 12:23 pm
kitty, and the other option is to rent when you can’t afford a house or the commute is too long.
there are plenty of times when renting is financially sound versus getting a mortgage.
August 17th, 2007 at 12:36 pm
MONEYMONK SAID IT ALL, “Making $90K and able to buy a house for $567K. Who underwrites these kind of loans. It should have never gone through underwriting!!!!”
Mikey, Certified Netoworked Advisors (CNA).
August 18th, 2007 at 1:45 am
Part of the problem is the loan originators don’t hold the notes anymore. Mortgages are bundled up into massive “funds” that have collections of various sorts of mortgages (these categories are called “tranches”), from good mortgages made to prime borrowers to liar and ninja loans made to people who couldn’t afford what they’re borrowing. The problem for the funds is they have far more junk loans in them than the rating companies thought – and what was thought to be good loans ended up being more junky than the rating companies imagined.
If it were 20 years ago, there would be a bank that could redo the mortgage into something that could be serviced; it’s cheaper to do this than to spend the major bucks to kick out the guy and try to sell the house into a crashing RE market. But since these are pooled into vast, anonymous “funds”, there’s literally nobody to negotiate with anymore.
August 30th, 2009 at 10:01 pm
[...] JLP says you sometimes might want to listen to your gut. [...]
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