Right off the bat I want to say I feel sorry for these people. I mention this because I suspect the rest of what I want to say is going to sound a tad harsh.
One Family’s Journey Into a Subprime Trap
Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.
The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting.
I’m tired of not having a really nice sportscar. Maybe I should just get one. And a vacation house in the Caribbean. I can probably get one for $567,000.
Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then “reset” to a much higher level.
Yeah. I don’t think mortgage debt is bad, but 100% financing, interest only for the first two years, with a reset to something much higher just sounds like a bad idea.
When the Monteses decided to buy the bungalow in 2005, they had only a so-so credit record and little savings. So they settled for a “subprime” loan, with costlier terms than those available in the prime market.
I know renting can suck, been there done that. Had a landlord who lived on the bottom floor of a three family (we had the top floor) skip out in the middle of the night one time. The “heat included” only means “heat included when the landlord pays the oil company”. Lots of people came round looking for him, e.g. his girlfriend, men in suits, men in uniforms, etc.
But if you can’t really afford a house, maybe you should rent for a couple more years while you save up. If your mortgage is $3,200 a month (before the reset) perhaps you should live as if your rent was that much and save the difference between that and rent. Or find out how much it would be after the reset and use that number.
Mr. Montes recalls feeling edgy about whether he would be able to afford the higher costs — about $900 more per month — due to take effect after two years. But he says the broker assured him he could refinance before those costs kicked in.
Mr. Montes preferred not to name the broker publicly because the broker has a business connection with a relative of the Monteses. The broker declined to comment.
This is a huge warning sign to me. You should do the same due-diligence with a friend of a friend (or someone from your church/etc) as anyone you meet on the street. Just because they know your relative does not make them a good person. Just because they go to church/temple/etc does not make them a good person. If you are “edgy” about being able to afford something, perhaps you should get a second opinion. Or trust your gut and wait.
Mrs. Montes says she was apprehensive about the broker’s assurances. “But I blame that on that I don’t understand the lingo they were talking,” she says. “It’s a scary experience…. All I could see was all these numbers flash before me…. I said, ‘Mario, I hope you don’t get into something that is going to hurt us.’”
Er, yeah. You are both signing on the line, you are both responsible. Don’t be an idiot, make sure you understand what you sign. This is not your husband’s fault, this is the fault of both of you.
The Monteses received a letter informing them their property taxes had been reassessed based on the $567,000 sale price instead of its previous $389,000 value. That raised their taxes to $6,000 from $2,900 a year and would have increased their monthly payments (including the mortgages and taxes) to $3,931. “Whoa!” Mr. Montes recalls saying. “I can’t afford this. I went into emergency mode.”
I almost have to give them a pass on this. I expected it when I bought my house, even though none of my friends had yet bought a house. But then I remember the beginning of the article where it says that they had previously owned a house. So yeah, you should expect the taxes to go up the property gets reassessed, and it’s common for that to happen when the house sells. Even if it doesn’t happen then, many communities reassess on a regular schedule (mine is at sale and then every 10 years whether it has sold or not).
Worse for the Monteses, they learned that they faced a $12,000 prepayment penalty if they refinanced within three years of the original mortgages — something that Mr. Montes says wasn’t made clear to him when he took out those loans.
Again, maybe he gets a pass on this. You’d think if the broker was talking about re-fi in 2 years he’d mention the 3 year pre-payment penalty. I’m sure it’s written in the giant stack of documents signed at closing, but it’s hard to take time to read them. Okay, he gets a free pass on this part.
The Monteses now hope for help from the company that services their loan, America’s Servicing Co., a unit of Wells Fargo & Co. Mr. Montes telephoned America’s Servicing Tuesday to ask whether it might consider a modification in the terms of the loans to help him keep the payments affordable beyond the reset date. An employee of the servicing company said that wouldn’t be possible if the family has no home equity, Mr. Montes says.
Unfortunately the Monteses probably don’t understand that the company that services the loan has little or nothing to do with the company that owns the loan. And the company that owns it may or may not be the one that originated it. Many loans are sold, and the servicer can’t do anything about the terms of the loan other than suggest (or even originate) a refinance. I understand that it can be confusing to discover the company where you send your payment has nothing to do with the loan itself.
There is very little wiggle room. Mr. and Mrs. Montes also have two car loans, with payments totaling about $700 a month, and are borrowing more money to help put their elder daughter through college. They recently had to tell their younger daughter they couldn’t afford $70 a month for her to take piano lessons.
Yeah, maybe a slightly cheaper car would help out. If they could sell one of those ~$350/month cars and get a beater for a couple grand they’d be ahead in a few months. The size of the payment makes me think that they bought new and relatively recently (in the past couple years) so there’s probably some resale value there. But maybe they rolled their last loan in and are underwater. Heck, they may have public transport and/or carpool options.
The elder daughter should be doing her own college borrowing, and the younger daughter (described as “teenage”) should get a job to pay for her own piano lessons. This part about cars and college is making me lose some of the sympathy I was begining to feel about the pre-payment penalty and the servicer/originator/owner issue.
The couple now eat out once or twice a month, instead of once or twice a week before they bought the house. They have yet to visit a nearby jazz club they had hoped to frequent. The trips they used to take to Lake Tahoe now are out of the question.
Er, yeah. Eat in. You made some choices, now you have to pay for them. Perhaps if you buy a beater car (say $2k) in a six months you’ll be able to eat out again. And did you do a budget to show how you could afford to “frequent” a jazz club before you bought the house? It’s not hard, just add up everything you bring home in income, and everything you spend. Subtract your current rent out of expenditures and add in the new mortgage payment. Is that number now larger than the income number? Then you shouldn’t buy a house.
To bring in a bit more income, Mr. Montes two weeks ago found a weekend job as a bartender for a catering company. He says he might be able to take on a third job.
Okay, I’m feeling better about this guy now. But the wife and kids have to chip in (by getting their own loans/jobs and driving the bad car, which is a sin in CA).
“Bottom line, it’s our little home,” Mrs. Montes told a visitor one evening in April as tears welled in her eyes. “We’re going to keep it. Hopefully, we won’t go down and if we do, we’re going to go down with a fight.”
Unfortunately the fight is going to be long, slow and painful. Stop eating out, sell the cars and buy junkers, cut the older kid off and make the younger one get a job for any extra-curricular activities she wants. And learn to use a calculator before you buy another house, it will save you some heartache.
