Why I Bought A House I Couldn't Afford

I have a request. Please, will all of you that read this little blog do something for me? Will you all stop talking about this recession being caused by "people buying houses they couldn't afford"? Then, will you ask all of your friends to stop using that phrase and then ask them to ask their friends... and so on. I think everyone pretty much realizes by now that there are a lot of problems/reasons/causes for the current economic climate and they weren't all caused by people upgrading their homes. Remember the skyrocketing costs of food, particularly rice and corn? (Tortilla Wars, anyone, anyone?) Food costs are still continuing to rise and that isn't because of people buying homes. How about that huge 550 BILLION dollar bill our country's been paying? (Iraq war anyone? Remember that? Yeah, still going on - dollars still being spent.) Or how about the soaring cost of gas? ($4.00+ gallons of gas - last summer? Anyone? Anyone? ...Bueller?)

Can we all just agree that there are all sorts of things going on now or that happened in the last few years that have contributed to this crises? If we could do that, then vow to eliminate the whole "people buying houses they couldn't afford" phrase then maybe, just maybe it will go away and I won't have to grind my teeth and clench my fists every time I hear it to prevent screaming. Really, it isn't good on my teeth and I don't have the money just now for dental work.

Why do I hate this phrase so, so much?

Well, isn't it obvious? I am one of those people.

That's right, me. And I have to tell you, I am getting a bit tired of hearing how me, and all the other people out there who thought they were making very sound financial decisions for their families, have caused the downfall of American civilization. Even one of my closest friends said this to me the other day. In return, he was treated with a half hour tirade from me (complete with wild gestures and raised voices) which was probably better than the roundhouse to the jaw that I was contemplating.

First of all, let's take a look at that phrase "people buying houses they couldn't afford." Let me ask you something, who do you know who has bought a house they could afford? I personally don't know one person who has bought their home with cash. I know there are people who have owned homes without mortgages, but they are in the tiny minority. Most folks (even ones saying this phrase) have a home loan (or two.) And why do they have home loans?? Because they cannot afford to buy their homes outright. That's not all - I have a car loan too. Why? Because I didn't have $19,000 when I bought my car. Anyone who has ever gotten a car or a student loan, used a credit card, borrowed from a friend, or had a mortgage has bought something they couldn't afford. So frankly, the whole phrase is pretty moot. The author of Life As I Know it has a nice post about it called People in Glass Houses.

Now, let's look at what really happened, from someone who was there, from someone who has not only 1 home they can't afford - but has 2! Me. So, let's take a little trip down memory lane, shall we? Let's go back to 2004 and talk about what was really happening then and why so many people are losing their homes.

This American Life recently did a wonderful show on why the financial crises really happened. It had a lot to do with international finance and only a little to do with your neighbor buying a new house. I really recommend checking it out - they make sense of the whole mess in a way that no one else can. I'm not going to explain it, because they do a far better job of doing it than I ever could and you can download the transcript or listen to the audio show on your own, but for reasons they go through on the show, at that point in time there was a pretty big housing bubble going on and a lot of money changing hands. So what did that mean for the average consumer, aka "those people" we hear about? Well, I'll tell you...

The banking industry went about creating a whole lot of different loan types. Remember ARMS? Or the NINA (aka Liar's) Loan? Yep, I had them both!

Now, I hope that if you've been reading this blog for awhile you've gotten to know me a bit. I'm not a dumb person. I research, I pay attention, I make budgets, I plan. I also make mistakes... but buying my houses was not one of them. Here's what happened:

During this time my soon-to-be husband and I were living in a home he had recently purchased. He had bought it with an 80/20 loan. If you bought a house during this period, you know what this is. Instead of putting a down payment on the home, you got two loans. One is (usually) a traditional mortgage for 80% of the home value. The other loan is (usually) a home equity line of credit for the other 20%. In fact, you could sometimes get the home equity line of credit for a little more than the 20% and use this surplus to pay off or consolidate your credit card debt. Don't you roll your eyes at me blog reader! Though I wasn't blogging back then, I was reading plenty of articles written personal finance gurus and in 2004 there was a whole lot of advice out there about using home equity lines of credit to pay off credit cards. I didn't do this then, but there were a lot of people who did.

So anyway, he had bought his house that way. This house was broken into 3 rental units (one each floor) and we were living in the first floor apartment. Around about that time he and I started talking about having a little place away - each of us had always had dreams about owning a bit of waterfront property. It just so happened that before meeting him, I had been saving up for a house of my own. Now that we were living together in his house I could, instead of buying a house in town, buy a little place out in the country. So, we began the search and over the course of a summer we looked at all sorts of property. I ended up falling in love with and buying a little cabin in the woods for $72,000. (A mighty low price for waterfront property, I might add.) He and I weren't married yet, so I bought the house on my own. I had some money for a down payment, but by doing the 80/20 loan, I could save that ready cash and use it for some repairs the place would need. Everything went through like a dream. My 20% home equity was an interest only ARM at 4%.

Wait, was I an idiot? An interest only ARM?!? Heh. Just wait. It gets better...

So, we've been living together for awhile and soon realized that the whole apartment thing just wasn't working out. Looking back now (ah, gotta love hindsight) it was actually some mighty big signs of future relationship woes to come, but at the time it didn't feel that way, it felt like we were cranky because we didn't have enough space. My office was in a nook in the hallway, my closet was so deep I couldn't see the back of it, but so narrow the hangers brushed the sides. His closet was so small he had to crouch to get in it, and his dresser was shoved under the stairs. I had my stuff scattered between a storage unit and the cabin and I never felt like I was "home." There was no room for anything. There was, however, a whole lot of houses in our neighborhood for sale and a whole lot of talk about what a great bargain and good investment real estate (especially rental real estate) could be.

We made a list of the things that were important to us. We also figured out a budget and how much we could afford. It was mostly idle wishful thinking, that is until he found the "perfect" home. It was everything on the list, and considering it was a pretty fanciful list - that was a tall order to fill. For example, I ideally wanted to live in a particular area of town - he wanted a three stall garage. Most homes in this area don't have any garages let alone one with three stalls. My house? It has a three stall garage and is in the heart of that neighborhood. We had gone to a few open houses and looked at other homes in the area and this one was about $24,000 less than similar homes for sale. In fact, it was such a good deal that by the time we put an offer in, there were two other offers already in.

So, you know what happened, right? We got the house and once again we went for the good old 80/20. We figured it would be no problem - I have a good steady job, my soon-to-be husband and cosigner owned his own business, which had been successful for over 30 years. It turned out there was a hitch though - he had been married before and it turned out that after his divorce his ex had done some mighty shifty things on a loan that he was still on. That left him with less than perfect credit. My mortgage broker (same one who had helped out before) said there was a new loan out that I could qualify for - alone. It was a NINA loan. NINA is No Income, No Asset verification - it means that the bank didn't want to see things like tax records or pay stubs, they just wanted to know what I did for a living. Well, my credit is good and my job title is very impressive (for all that is worth) so, my husband and I couldn't get the loan together, but I could get it on my own. That's what we did. The house was funded on a NINA 80/Interest Only ARM 20 loan. That's right - all the big whammys in one big fat basket!

Now again, what was I thinking?

It wasn't that I didn't do my research. I asked about the rates. I was told that the 4% on the ARMs (Adjustable Rate Mortgage) would change. Historically they would go up by 1% to 1.5% a year. My mortgage broker even recommend that if I had extra money, these were the loans to pay down first. However, the rates were locked in for a year. I think one of them (if I remember right) was an ARM for the first 5 years and then had a lovely big fat balloon payment. However, I was assured, don't worry: "we can always refinance." Now that I had the loans, all I had to do was keep my credit score up and whenever I felt uncomfortable with the rates or if I saw them going up too fast, all I had to do was call and we could refinance them into more traditional fixed rated mortgages. Easy-peasy.

Yes, I knew what I was getting into was slightly dangerous, but I had been reassured by an expert that there simple options out and lots of plans I could fall back on. Was I irresponsible for believing my mortgage broker? Well let me ask you, the last time you had surgery, did you read the physicians manual first? When you went to your attorney, did you read all the law books and double check every one of his facts? At some time you have to take an expert that you have hired on faith. Let me say too that at this point I was not the only one with NINAs and ARMs. I was not the housing bubble. These loans were everywhere. It was common knowledge and commonly accepted and not one of the professionals I worked with, from the various loan originators to the realtors, raised an eyebrow. In fact, at this very moment I have a copy of "This Old House" magazine from 2004 sitting on my dining room table. I was looking for an article I had read on installing crown molding, and ran across an article on the different loan types. Included in it were ARMs and they dicussed the risks, but even there they made it sound slightly risky, but not insane - similar to the difference between investing in Goverment Bonds vs. a Mutal Fund. A traditional mortgage gave you a guaranteed rate, the ARM "adjusted" so you got a much better rate, but it wasn't guaranteed. Reading it today I have to chuckle - no one expected what would happen.

Plus, don't forget, I wasn't going into this blind - I had a budget. The husband would rent out the apartment we had been living in. The income from that plus the other two units in his house would pay for that house and contribute a bit more. That "bit more" would go to the house. Then we would also rent out the one bedroom apartment in the new house. That money would also go to the mortgage. What was remaining we split about 70/30. He paid 70 and I paid 30 - plus all the expenses for the cabin. (It worked out to about equal). We looked at all the payments and they were no problem. Even if they went up a couple of percentage points, we could still manage it with room to spare. Of course, if they went up too much, then we just refinance. What possibly could go wrong?

What went wrong was that interest rates started to skyrocket. It was no 1-2%! I was lucky, when my ARMs started climbing I managed to get in and get them refinanced... just months before the whole bubble burst and you couldn't get a loan to save your life.

There were other unforseeable problems as well - the company I worked for lost a major customer (to no fault of our own) which effectivively killed my monthly profit sharing checks from my job. That was about 20% of my income - cut. Heating costs went up, which killed the profit on the rental house. Plus there were months where we didn't have every unit rented. Following all that was my divorce, and we all know what happened there.

Here's the point... many of those "people buying homes they couldn't afford" weren't. They were making what they thought were smart choices. They looked at their budgets and could make the payments. Then interest rates started skyrocketing, home values started plunging, the old "just refinance" trick wouldn't work - the homes weren't worth the orginial buying price anymore, or even if they were, the banks stopped lending money! A family member loses a job, has high medical bills, goes through a divorce, has a paycut, or a thousand other unforseen things and suddenly you can't make the house payments anymore. I know people who have been out of work for months - they've gone through their emergency funds and are getting past unemployment. When one cog in the machine of your life gets stuck, it sometimes can take a long, long time to get that machine going again. When many cogs all across the country go belly up at once, you have a disaster.

I won't deny that there are people out there who made bad choices, but I will say that there are a lot of people who were doing what they thought was the right thing - before it all went wrong. I was almost one of them. Frankly, I still could be. That is why this blog is called "Fighting Foreclosure." There but for the grace of God go I. It was a "perfect storm" of events that swamped many folks, and continuing to blame them - or me - isn't going to get any of us to smooth sailing again.


Photo by: nz lawyer