Wednesday, April 22, 2009

A Tale of Two Subprime Mortgages

At least I think they were sub-prime. This is a story of two mortgages which, with income disclosure neither of them would have been granted. The types of mortgage which have in-part have been at the center of the credit crises that brought down our economy. The same mortgages granted by unscrupulous bankers and the like.

In 2002 my wife and I were living in an apartment in Oakland California, we had a little yard in which we planted some food crops and flowers. Our little yard did not get much sun and shared a fence line on the side with some apartments with a Catholic church. The church did not do much in the way of enforcing the rules about who could and could use their lot; it played host to a few noisy parties. One Sunday, after church let out, one such party was going on; that same Sunday we decided to put an offer on a house we were not really thrilled about.

We had decided to look for a house about a month earlier based on the financial advice of a friend. My wife had inherited a little (when I say a little keep in mind that I mean enough to put a down payment on a house and still have some for stocks but not much. Most of it dwindled during the Bush administration) money. The friend suggested that rather than trying to invest the rest we should invest in a house; turns out that this was the best advice; the money which was put into stocks is now next to nothing.

On that Sunday when we became increasingly disenchanted with our apartment we walked past the house we eventually bought and decided to put an offer on it. The next day our Realtor sent my wife to a lender, after looking over my wife's and my incomes she just laughed at her, despite the fairly substantial down payment. We ended up going to someone else who offered us a loan with this great new feature, the loan with no income disclosure, which worked well for us.
Our down payment was large enough that it made the loan significantly less. The payments were high for us but we figured that we would be able to pay as long as my wife's wages went up.
Things did not turn out that way, but it did not matter.

The value of our home went up as the market soared and we sunk more of my wife's savings into needed improvements of the home. Honestly, our first house is in much better shape than when we bought it, the people who own it now got a much better deal than we did. For those years that we owned it we were living on home equity loans, we were living above what we were actually earning. The situation was scary to me because I knew at some point we would have to sell or I would have to start making as much as my wife was. We had to sell before prices started to go down.

We were lucky. We decided in 2005 that we would sell and move to Oregon. Home prices in the S.F. Bay area, even in our little corner of Oakland, were still unreasonably high. In 2006 when we put the house up for sale it was still a sellers market, there were murmurings about prices going down, but places were still selling even with the high prices. We put our place up in July and it sold in August.

This is the place in my story where I come to our second sub-prime mortgage. I don't quite remember what was going on at the time with the mortgage lenders; nothing significant enough to abate the practice of income non-disclosure.

The day we made an offer on our second house our first had not sold; also, we had been in Eugene, renting, for about a month and my wife had not found a job yet. I was not stressed, we had enough money so, that we could rent and being a fairly experienced teacher she would get a job. She would be working by the fall, our house in Oakland would be sold, we could spend a year in Eugene getting to know the place and buy something by the next summer. Even better, by then maybe we would be escaping getting another risky loan; I did not take into account my wife's dream house.

Yes, it is true we found her dream house. (my dream house is actually a VW camper bus; not really enough room for kids.) And we found it before our house sold and before she started her job. The no-income disclosure loan fairly common by this time and our house would be sold by the time we signed the papers. I was still fairly stressed about our situation, mainly that our payments would go up in a couple of years and we would not be able to make them.

We eventually did get into a more secure home loan, one which I hope we will payoff in 30 years.
Our house is worth it and, granted like a lot of people, we are scraping by. It helps that we have the room for a garden which feeds us for most of the year.

I wrote this as a response to all the press about this type of mortgage and the people who have been buying and selling them. Not everyone who offered them were unscrupulous. Not everyone who bought them were trying to hide something.

1 comment:

Kathy said...

We ended up with a no-disclosure loan for our condo. The credit check was done against my credit, but on W's income.

One of the options available to us in 2005 was to go with an "Interest only" loan. That made me exceptionally nervous and unhappy. We'd done something like that in RI, but we were only there for a year, and sold just as the market peaked.

I put my foot down on the interest only loan. We ended up with an ARM, but a sane ARM: cap on interest increases; higher interest rate to start out with, etc, locked in for 3 years at that rate.

We ended up getting lucky. Last July, we got a letter from our mortgage holder that our interest rate was due to reset -- DOWN. Six months later, we got another letter: our interest rate was dropping again.

Now, we're paying less for our condo than we would if we were renting it. I feel like we won the lottery.

You're right. There are those of us who got no-disclosure loans who were NOT trying to hide something. I do think, though, that when we go to sell this place, we may not be able to buy anything else. Perhaps, in the short-term, that's not a bad thing.