Tuesday, August 7, 2007

Being a prophet isn't easy

About a year ago, with help from some economist and banker friends, as well as from an quasi-government agency that buys mortgages, I did a piece saying that mortgage borrowers, especially those whose credit was not the best, might be in for trouble.

I wish I had the Web address for the piece -- like an idiot, I never saved it -- but it ran in the weeklies of the Norwalk Hour and in the Hour itself in late August or early September 2006. Maybe you could get a copy -- I never succeeded in getting one.

Better yet, e-mail me and I'll send you the copy I filed.

It's nice to be right, but not when you have to watch thousands and thousands of people going down the drain financially by doing just what the experts say not to do. I'm talking about the real experts not those who are trying to sell mortgages.

One of the biggies was not to go into hock to the full value of the house by not only taking a mortgage for most of the house's value but by then taking out an equity note for the rest.

That leaves you with no equity. Equity is the value of the house minus how much is owed on it.

Borrowing against the house sounds great -- buy a car with proceeds from an equity line of credit and the interest is deductible from income tax where interest on a car note isn't. Use the money to take a real vacation to an exotic, not just a few days at the shore.

There really is no such thing as a free lunch. You borrow up to your eyeballs and then get sick, which is ranked as the top reason people get into mortgage trouble. Losing your job is another biggie.

Let's say you get into trouble and can't pay on the note. If you followed the age-old rules and had a 20 percent down payment, chances are the bank sold your note to one of the classic mortgage-buying quasi-governmental organizations, Freddie Mac, Fannie Mae or Ginny Mae, which is owned by the government. These three would probably work with you, lowering payment, extending payment times or whatever made sense to keep you in your house.

If you couldn't put down 20 percent and qualify for backing by one of the big three, you went to a mortgage banker or broker who put you into a mortgage for all or most of the house's value. They probably sold you an adjustable-rate mortgage or one of the litany of mortgage variations that have popped up in the past 20 years.

Who could blame you. Owning your own home is the American dream. Everyone should be able to live up to the dream, or so said the mortgage pushers and real estate salespeople. Never mind if the numbers showed you could not afford a house and your pesky bank cautioned you that you would end up owning your own financial nightmare. Hey, you deserved it.

A few years went by. That pesky Federal Reserve kept on raising interest rates and your teaser adjustable mortgage rate has gone up and up and up. You could sell the house, but you have no equity in it and due to the number of houses on the market, the price of the house has gone down. You can't refinance because your payments equal more than the cost of the house and your friendly mortgage pusher doesn't want to know you.

Even if you were to sell the house, chances are you would still owe thousands of dollars to the company that bought your mortgage from the mortgage pusher before the ink was dry on your closing papers.

A year ago, it was watch out, this can happen. Now it has happened.

One of the most amazing thing is that the mortgage pushers are still advertising, even though other mortgage companies are going belly up.

Oh, you may want to know how the experts knew this downturn was coming if enough people were foolhardy not to listen to good counsel? Because the same thing happened only 20 years ago. The nitty-gritty circumstances were a little different, but the big picture was the same.

All one had to do was look.

Until next time...

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