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!