Harriet,

Yes, it's a well written article. It's also sad. Those brothers were concerned, expressed their concern, & asked to back-out of the deal. Then, they were slick-talked into moving forward. It's very easy to sit back in the comfort our own education, life experiences, being competent in English, and do a postmortem on where these brothers went wrong. In the feeding frenzy of the real estate market though, during the boom, I more than understand how people were smoozed into these loans. Add this house to the growing list of foreclosures across the country...likely two houses. It's sad. I feel badly for them. I don't believe they are bad people. On the contrary actually, they seem like a hard-working family who was just trying to participate in what I'm now dubbing "America's Folly".

/tricia

The last property I sold was to an Hispanic man who had started to become prosperous since immigrating from South America. Long story short, he went through a brokerage that supposedly specializes in getting loans for Hispanic immigrants. This brokerage totally exploited this guy whom they claimed had an 800 FICO score and gave him a 7.9% fixed mortgage with a 5 year 20% prepayment penalty and $14000 in closing costs paid to the broker out of closing. The lender also kicked back another $4500 to the broker for the loan. I almost fell out of my chair at the closing when my lawyer was reading the terms of the loan to the guy. I had to get up and leave the room until the buyer was done closing. And the most amazing thing during the closing was his broker got angry when my lawyer asked for two forms of id, because the lender required it.

The good news is this guy is still in the home and apparently doing very well. But nothing stinks more then when people betray the confidence of the very people they pretend to be helping. Apparently the Rioses in that article used a broker with similar ehtics as my buyers broker.

very unfortunate, but the mistake i see from the start was not selling their previous home..Still it shows that the subprime mess isn't always the fault of the homeowner..

They got greedy.
Big new house, hold the old one for income.

They signed, there problem.
If you do not understand this stuff, DON'T DO IT.

Ethically speaking, its an open-and-closed case of predatory lending if there ever was one. Legally, it raises questions of what new laws are going to come on the books in an attempt to outlaw stupidity and greed, and whether those laws will do more harm than good.

I've said this before, and once again I return to this point: lenders should be held to a fiduciary duty to their lenders. Maybe the law of unintended consequences would arise and make this unfeasible, but it sure seems like a good idea right now.

Well, I flubbed that. It should be "lenders should be held to a fiduciary duty to their borrowers.", of course.

When we bought our first(and only) new house, I was advised we should buy a house in the area of $125,000(this was 1978) minimum. That was on a combined income of around $2,000 net---take home.

The amount we were eligible for was calculated on our gross income---before taxes. That to me was insanity. I remarked to our first real estate agent my concerns and was told '"Oh, don't worry, that is how everyone does it."

We dropped that agent like a hot potato---as we would have no down payment in the first place and our monthly payment on a $125,000 house would have been over $1200---more than half our monthly income.

I am not very savvy about financing ins and outs----but I knew that was insanity.

We bought a house with a $415 monthly payment and had trouble some months making that one---two sons and long commutes to work. In 8 years that monthly had risen to almost $500.

We are now looking at buying early next year----and will buy based on what we can afford---on our retirements and SS. If an agent does not agree---we will draw up a contract whereby the agent pays the difference between what they say we can pay----and what our income allows.

I think it's so easy to get caught up in spending more than you can afford on a house. Maybe people not from this culture think it's some crazy American thing to spend that much, and especially if the company making the loan says they can afford it, they believe it.

Why they kept the first house -- a lot of these financial "experts" advise people to hang onto as many properties as they can.

I agree people should use common sense, but it's very hard to keep your head when you're getting the hard sell for something you want very much to begin with.

Buying a house is an emotional thing. My boyfriend and I just bought our first home in April. It was certainly hard to resist the urge to tell the lender to do whatever it took to get the house. The good thing is that our lender was not the slightest bit pushy. She was confident that we'd get a good interest rate, which actually didn't happen because we were $79 below the maximum income to qualify for it. (Apparently they forecast your income, so that income limit has grey area.)

I also hate seeing people who are not educated in the process, or minorities, being taken advantage of. I live in a Zero Lot Line, which means I have to work with my neighbor on some things, such as roof replacement. My neighbors are Vietnamese, and I really feel that they were taken advantage of when the roof was replaced a couple years ago. Even though I wasn't involved in the roof, I tried to hunt down the people who installed it and ended up filing a BBB complaint. Not because I inherited a below-code roof, but because they paid for half of it. Not cool.

I believe that both lender and borrower are responsible for this mess.

What I find fascinating is that usually I am in the minority pointing out the lender's responsibility but in this thread, the sympathies seem to lie with the borrowers, probably because they aren't faceless.

I actually think that the borrowers in this case are to blame a lot. Those people aren't some naive flowers who were taken advantage of. With their life history, they must have street smarts.
It appears a combination of greed and gotta-have-it-all syndrome, if you buy a $500k+ house on that salary, keep the other house (why sell, I can be a landLORD and bank on future appreciation!) and on top of it buy a brand new vehicle! Can you say debt up to the eyeballs! Sorry, but I don't buy the predatory lending theory in this case. Seems to me they thought they have figured out that real-estate is their get-rich opportunity and it didn't quite work out that way.

I agree with jrldh. The lenders appear to have acted predatorily (is that a word?), but the borrowers made a huge list of mistakes as well. They are not even close to blameless.

Not in any particular order:
1) they bought/built the largest/most expensive house in the neighborhood
2) They didn't listen to the real estate agent
3) They kept the previous house to rent even though they had no equity in the new house and apparently little savings
4) They leveraged the first property to buy the second, risking both if they hit a difficult financial situation
5) They got an adjustable rate mortgage so they could afford the house (not because they knew they wouldn't be in it long)
6) Before they put any money down they were told the monthly payment would be $2800-3000 (rather than $1800), but they proceeded.
7) They signed a contract even though they "didn't get a straight answer" on what the payments would be.
8) They learned at closing the payment would be $4383, and they still proceeded with the closing after being told they would lose their deposit (would they actually? Did they look into this).
9) They didn't hire a real estate attorney.

10. A primary earner did not have supplementary disability insurance to protect the family in case of injury.
11. "[They didn't even try to comprehend [the mortgage documents."
    12)They took cash back of $33k at closing.

There are more, but I'll stop there. I feel bad for them, but if you are not familiar with this type of transaction then you hire a lawyer. I am amazed at the number of people that won't do that when they are probably buying the most expensive thing they will ever purchase.

"The amount we were eligible for was calculated on our gross income---before taxes. That to me was insanity. I remarked to our first real estate agent my concerns and was told 'Oh, don't worry, that is how everyone does it.'"

If they use gross the multiplier is smaller than if you use net.
Either one works fine when applied correctly.

Many folks do not realize that they can increase their exemptions for federal taxes based on the amount of interest they pay on a mortgage.

"Many folks do not realize that they can increase their exemptions for federal taxes based on the amount of interest they pay on a mortgage."

For a while. Once you pay your mortgage down to a certain point (depending on your interest rate) the deduction becomes smaller than the standard deduction and you lose the tax advantage.

And its a silly way to save money anyway - paying a dollar of interest just to save 25 cents on taxes. To each, his own...

"For a while. Once you pay your mortgage down to a certain point (depending on your interest rate) the deduction becomes smaller than the standard deduction and you lose the tax advantage."

One should never speak in absolutes. The standard deduction for a married couple filing jointly is only $10,300. My state and local income taxes alone are more than that, not to mention property taxes, which also are deductible. With the exception of those few states that don't have a state income tax, I'm sure that for a great many people, the combination of income tax + property tax alone will exceed the $10,300 threshold, thus making every dollar of interest deductible.

"And its a silly way to save money anyway - paying a dollar of interest just to save 25 cents on taxes. To each, his own..."

Yes, it is a silly way to obtain a deduction, but at the same time it is available.

Of course you could pay down that 7% mortgage early instead of investing at the 12-13% long term return the stock market has produced...

"With the exception of those few states that don't have a state income tax, I'm sure that for a great many people, the combination of income tax + property tax alone will exceed the $10,300 threshold, thus making every dollar of interest deductible."

Here I am in the second most populous state in the US, with no state income tax, nor local income taxes. My property tax is barely 1/3 of the 10,300 threshold, and I owe only slightly over $100K on my mortgage at a reasonably competitive interest rate. I'm saving only a couple hundred dollars by itemizing, and I might not even get that this year. I concede that I shouldn't speak in absolutes, but I think the point stands - the mortgage interest deduction is for people that have a high cost of living, and that isn't all of us. I guess you'll tell me I don't need the deduction since my cost of living is lower... which means that the taxes that I do pay are being used to subsidize your higher cost of living. Exactly how that's fair... well, I suppose I too could move to a high-cost area.

"Of course you could pay down that 7% mortgage early instead of investing at the 12-13% long term return the stock market has produced..."

Indeed you could, and you'd be denying yourself only a 5% to 6% risk premium. But I'm not advocating paying down mortgages early, I'm just commenting on the folly of buying more house than you need, especially when justifying it with "I need the deduction".

My point was that regardless of how our eligibility was figured---we could NOT afford a house payment of more than half out net income. I consider any attempt by a mortgage company of real estate company/agent to convince any buyer that is good business is criminal. It is little difference from an outright scam attempt.

"...we could NOT afford a house payment of more than half out net income."

Before or after you adjust your exemptions?
It also depends on the actual income level.
If you earn $500,000 a year the percentage of income dedicated to housing is allowed to rise above the 1/3 level.

I really think that below a certain income, the ratio for what is spent on housing costs should be a lower percentage -- whether of net or gross. Because obviously, if you make 200k per year and spend 100k on housing you will probably still be okay, but if you make 100k and spend 50k, you could be in trouble.

I do agree that it is the borrower's responsibility to understand whether he or she can afford the payments, but there's something really wrong with financial institutions (apparently deliberately) making loans to people who can't pay them back. It seems like all parties were counting on housing prices continuing to go up. The location of the house described in the article is, btw, not so good. It's way the heck out from anyplace and traffic is horrible. Every time I have driven toward DC from Manassas on a Sunday afternoon or evening, there is an awful traffic jam on I-66, the only highway that goes out there. I can't imagine what it's like to commute daily on that road. So even if the house was a gold-plated palace, the location makes it a poor investment. The buyers here behaved foolishly, but the institutions involved encouraged the foolishness.

I have a really hard time feeling sympathy for people who feel like they "deserve" a brand new large house and get into trouble when they finally figure out they can't afford it. I don't care where they're from or what they do for a living - there are generations upon generations of hard working immigrants to this country who managed to live within their means even if their jobs involved supporting the lifestyle of people who are more affluent than they were. I actually find the way the article tugs at your heartstrings by talking about how hard working the subjects were and how they worked on building these "dream homes" for other people as if it somehow entitles them to the same to be rather distasteful.

DH and I were very careful to buy something that we could afford, even though it meant a 2 hour commute each way for me until I found a job more locally, even though it meant "settling" for a "small" old house in a "working class" neighborhood. Still we had to work our tail off to find a house that was the best house for what we could afford, and we had to come to grips at the beginning of the process with the fact that we could NOT afford a big new house on our salaries, even though we were prequalified for $100k more than we ended up borrowing. Yeah, it's not easy to have that sense of restraint but it's called being an adult.

Not all buyers are smart enough to understand when they are getting hosed....or, know the best way to counteract such when it does occur..but that should not make it legal for lending institutions to do the hosing with impunity.

When we bought our first home...new construction... that was of course delayed....many of the buyers...all young...used the builders mortgage company...us included. The rates, the terms, etc...all very competitive.
However, when the homes went past a certain date and were not yet finished, the mortgage company tried to impose extra fees...and also tried to raise the rate...despite the fact that nothing in the paperwork allowed for such.

That said, we argued our case...and the extra fees and rate change were negated. We later learned that we were the only buyers that did not pay the excess...and two of the homeowers who did were accountants by profession.

We were glad that we were able to counteract the scam...but we did not belittle our neighbors for not doing so...as it took weeks of phone calls and relentless arguments to get them to back down....and not everyone has the time or the ability to persevere with such.

In the end, the mortgage company was nailed on some sort of unrelated fraud a year or two later (during the last RE bust), and put out of buisness....as was the builder and his partners...however, the homes were very good quality, so in the end, their failure did not impact our pocket.

That said, when the "mob" does it, its called loansharking....and if caught and proven, they get jail time.

When lending institutions do it, and the Wall St. crowd enables and abets their actions, they get bailed out...and their victims are categorized as greedy and deserving of their financial ruin.

Sad. Very sad. However, it does indeed say quite a bit about our society as a whole and our collective ethics...or lack thereof.

"That said, when the "mob" does it, its called loansharking....and if caught and proven, they get jail time.

When lending institutions do it, and the Wall St. crowd enables and abets their actions, they get bailed out...and their victims are categorized as greedy and deserving of their financial ruin."

So true.

My cousin sent me this story from the Cleveland Plain Dealer today.

"Renters evicted when landlords don't pay mortgage".

Tenants losing their homes because lenders foreclose on their landlords are the newest victims of the nation's subprime lending shakeup.

Cleveland Housing Court similarly reports a surge in eviction cases filed by lenders against tenants of foreclosed properties. So many lenders are trying to remove renters from newly foreclosed homes, Housing Court Judge Ray Pianka said, he's had to create a separate docket for those cases. "Now every Friday," he said, "the courtroom's filled."

I think it stinks that a tenant is forced to move because the slum landlord didn't make the mortgage payment. I think if you are a landlord, you should be required to show proof that you are making your mortgage obligation, especially if others are relying on you for housing.

A link that might be useful:
Renters evicted when landlords don't pay mortgage
cleveland.com/business/plaindealer/sheryl_harris/