Friday, October 24, 2008

Remembering History: A Mortgage Story

I would like to give my dad props! He called it and I would like to acknowledge that.

My mom and dad:

Three years ago my husband and I had an opportunity to purchase the condo we'd been renting for five years. We found a mortgage broker and a lawyer in the phone book and conducted the whole transaction by phone and fax. We never even met the guys!

Our view: (one of the reasons we wanted to stay in our condo)

Dell and I had gone through a first-time home buyers class it was a great overview, but we still didn't understand all the details of buying a home. It's like planning a wedding, you are an expert in your big event only after it's over. The mortgage guy vetted us fairly thoroughly I thought, asking us to come up with past tax returns and 2 years of rent check receipts, etc. I don't feel like they threw a mortgage at us willy nilly. But what we ended up with was an interest-only, 5 year ARM (Adjustable Rate Mortgage), meaning after 5 years the rate would start adjusting, up? Down? Who knew?

We could see the inherent danger of an ARM, but we decided this was a good risk. We had bought the condo in a city that was having a renaissance and at under-market value while prices were zooming upwards. We figured we'd move or refinance before the five years was up, we were counting on the instant equity created by rising home prices. And we needed the low monthly payments to make it through. "Cash flow", my broker kept telling me and I agreed.

When I described the loan to my dad over lunch at my parents' house, he looked concerned. "These kinds of tricky loans are how we fell into the great depression!" he said bluntly (as is his style). I countered that we would be fine with the equity building in the condo while we just sat around and the certainty that we could re-fi before 5 years was up. It never occurred to me the condo price could fall. I thought for sure we as a country couldn't make those same mistakes of the 1930's again.

Think about this: My parents already had three kids when they bought their house in the 1960's. The bank sent men to the house to check it out for themselves! The story goes that when the bankers saw the architectural drawing my parents had framed on the wall, they figured my dad (an architect) was a good bet. Can you imagine? First, getting a mortgage from a bank, then, the bankers actually caring about who the loan was going to?

Well, back to today. You know how this story goes for the rest of the country, right? The housing bubble burst big time. As home prices plummeted, people found themselves holding sub-prime loans they could barely afford to begin with that were now worth more than their homes, making refinancing impossible. Adjustable rates were climbing monthly and pushing them out. We would probably be in a world of hurt if we hadn't refinanced into a 30 year, fully amortized loan about two years ago, before the bust.

We didn't do this because I listened to my dad, I wish I could say I did. We did it because we saw our second mortgage (secured to avoid Private Mortgage Insurance [PMI]) which was in the form of a Home Equity Line Of Credit (HELOC) with an adjustable rate, start to rise monthly. It started at 9% and quickly went as high as 11 1/2% with no ceiling in sight. It was like someone handed us a credit card loaded with $14,000 already spent and the interest rate went higher every month, it was pretty scary.

So we were lucky, we had been given a sub-prime loan without knowing what that was or what it meant in the larger picture (ie: mortgage brokers handing out risky loans like candy, then bundling them and selling them to investment banks who inflated their value and then went bust when the loans turned out to be worthless). We bought a home which was within our budget regardless of the market, we weren't lured to spend more than we could afford by pushy mortgage brokers like some were. We were able to re-fi before the market did a nose dive and our home was appraised at more than we paid originally. I can't help feel but for a few different moves, we'd be renting my old bedroom from my parents by now and licking our financial wounds.

Not that I mean to bash mortgage brokers, we had a great one the second time around who came to the condo and explained everything clearly, found us a reasonable loan at a decent percentage. Same with the lawyer who helped us close the re-fi, they wanted to be sure we knew what we were signing.

Without knowing it, we had been in the middle of the mortgage frenzy which led directly to the financial crisis we are witnessing now. I hope this debacle doesn't lead to another great depression, but I know from now on I will pay more attention to my dad's warning signals. He knows what smells fishy and he's a good person to pay attention to!


  1. Great post, Liz. You are indeed one of the lucky ones.

    Part of what the organization that I work for does is work with people facing foreclosure and stories like yours are so common. And a lot of them don't end well. It's heartbreaking to hear the stories of people who are working two, sometimes three jobs and are still struggling to pay a mortgage on a home that is worth far less that it was when they bought it.

    It also drives me crazy that when you hear about these stories on the news or in the paper it is always "THEM" who have gotten "THEMSELVES" into these crazy mortgages - I hate to say that it isn't "THEM" (whoever they are), it's us - people like me, people like you, people like our neighbors. The more stories you hear, the more you realize that the housing crisis is affecting everyone and that a lot of intelligent people who were trying to do the right thing got into mortgages that they didn't fully understand because they are impossible to understand.

    It's sad, the world went crazy and now we're all paying for it.

  2. You have such a beautiful condo, I am so glad you wre able to refinance when you did.

    This blog post is so well written. Again, I just love how you tell a story.

    Love, Mom

  3. Great story - my husband and I have been playing with home buying ideas for the last couple years and we are thrilled to still be renting after the mess that happened this fall. I don't understand anything about mortgages but your story did clear things up a bit! What a beautiful view, by the way - you lucky ducks!

  4. Hi Liz -- I'm glad you're telling your story and so happy that you're able to keep your beautiful place. On a different note, I wore my bird's nest pin the other day and several co-workers asked where it came from. They have since explored your etsy site (on my recommendation) and loved it. The new pincushions are a great idea! Cheers, Robin

  5. Thanks for your insight Marianne, I know! It's not the fault of hapless home buyers who were talked into loans they couldn't afford, this whole debacle had been a head slapper. People in the know warned this was coming and yet, nothing was done to prevent it!

    Thanks mom! We couldn't have done this without your help, we are forever grateful.

    Lauren, you dodged a bullet I would say! It has been a great time to be renting. Hopefully you can save for a big down payment and home prices will fall so you can get a dream house. Email any time if you have mortgage questions, srsly, I found out ALL about them going through this!

    Thanks Robin! I just found it interesting we were involved in this sub-prime mess and we didn't even know it. I'm so glad you get nice comments on your pin, that pleases me no end :) thanks for spreading the word about my shop!!

  6. I kept hoping for the "happy ending" and am so glad that for you there is one. My dad is no longer here, but like yours he was usually right :-). As to the "getting talked into loans they couldn't afford" part ... I do question the ownership of blame there ... takes two, consenting adults and all that ....

  7. Hi! I just happened upon your blog through Flickr and am loving your stories and your products!

    I just wanted to say that as we grow older, don't we all hate to admit that our mothers and fathers are always right?! That is one of those ironies of life!

  8. Thanks for this post. My husband and I were looking to purchase a home in CA in 2004 and when I saw the frenzy that was going on, I told him we should wait. So we did, then moved back to MA and the bubble burst. I worked for a mortgage company that is no longer in business and we had a son. Had we purchased back then, we'd be in a world of hurt, but I'm sure we would have gotten a mortgage.

    Now, we are looking to purchase a home, but we have so much more information and we feel that when we do make a decision it will be far more informed than it would have been then.

    Thanks for sharing. I'm glad you were able to secure your home before things went wild. I'm hoping my hubby and I will be able to be some of the ones that keep the economy going by purchasing smart.

  9. When my husband and I bought our home in 1995 we locked in with a low fixed interest rate on a 30 year loan. It was perfect. I remember, however, the mortgage guy mentioned other options like the variable rate mortgages which at the time were low.
    I worked for a bank so I knew not to go that route.
    Congrats on your happy ending. :)

  10. Thanks for sharing your story lovely Liz, so glad you are secure in your home :D:D:D Here in the UK friends and family kept telling us to get on the housing ladder, but we knew to get any mortgage we'd would get would so over stretching our money and knew it would be a bad risk if the housing market went down.

    We are realy lucky we now have a beautiful home we rent (we could never afford to buy) but I know out there in the UK there are a lot of families that are really struggling what with rising fuel & food bills too. Its a very worring time. The worst of the whole thing is it all down to the greed of others that normal working families suffer.

    I hope there are more happy ending like yours out there,

    Emma xox