The Subprime Crisis is a broken promise to Joe “Sixpack”.
One Day in early 2006, Joe was feeling pretty darned good about himself. He was making $65,000 a year at a job he held for over 6 years. He had $30,000 saved up in the bank. He had no credit card debt. He owned his car free and clear. He looked at his pregnant wife and his 2 year old son about to outgrow the two bedroom apartment they were renting and said, heck…time for us to buy a house.
He didn’t need no granite counters or stainless steel appliances. He just wanted a decent neighborhood and decent schools for his kids. He needed a small yard for a dog and to throw a ball back & forth in with his son and to have a barbecue and a beer in with his buds once in a while. His American Dream seemed within reach. He read everywhere that mortgages were pretty easy to get, and interest rates were near all time lows at 5.5%.
Mrs. Joe picked the School District she wanted to live in, and Mr. and Mrs. Joe walked into a real estate office and said, “We’d like to buy a house in this School District”. Ms. Realtor pulled out a big questionnaire asking them to fill in all the things they wanted, while she left to figure out what they could afford. She did a quick qualification in the back room of the office. $65,000 a year divided by twelve times 33% equals a payment of $1,787.50 a month and at 5.5% interest rate that equaled a loan of $315,000. She added the $30,000 they had saved, and came to $345,000. She wondered if that was a little high, but it was certainly the lowest price she could hope to find, so she found them a little old rambler in Kenmore asking $350,000. They all went out to see it. It had an old kitchen and needed some work but the couple hugged and said, “We can make this ‘home’ with a little hard work and some paint and curtains”. Everyone smiled and went back to the real estate office to make an offer of $345,000, with the seller paying the closings costs.
The real estate agent called her favorite lender and put Joe on the phone with the lender while she typed the offer. The lender faxed over a pre-approval letter for a purchase price of $345,000 to submit with the offer. Joe’s agent called the Listing Agent of the little rambler who said, “We already have 3 offers, and we’re presenting offers at 7 o’clock tonight”. It was 4:30 p.m.
Joe’s agent called the lender who shot over a new pre-approval letter for $375,000. Joe’s agent added an Escalation Clause for $1,000 more than any one else’s offer up to $375,000. She took out the seller paying the Closing Costs explaining that with multiple offers, that wasn’t going to fly. She took out the home inspection clause explaining that would strenghten the offer. She told them to up their Earnest Money Deposit from $5,000 to $10,000 to make the offer really solid. Mr. and Mrs. Joe signed it, and the agent faxed the offer to the Listing Agent. That night Joe’s family got the call that they got the house for ONLY $364,000! WOO-HOOS and High Fives all around. They WON!
Joe went to the lender’s office a couple of days later and made a full loan application. He got a Good Faith Estimate saying his payment was going to be $2,646.47 a month. $1,937.36 on the first mortgage of $291,200 at 7% +$459.11 on the 15% second mortgage of $54,600 at 9.5% + $200 a month for real estate taxes and $50 a month for homeowner’s insurance. Total payment $2,646.47 a month. Joe started sweating profusely. He called his agent and said, can we cancel this? She said not without losing your $10,000 Earnest Money. There was no home inspection contingency and the Finance Contingency didn’t have a little blank space to put in a rate cap. There was no “legal out” for “OMG the payment is $1,000 more than I thought it was going to be”.
The agent called the lender and he switched the loan to an interest only on the first with a fully amortized 40 year second and added a two year pre-payment penalty. That brought the payment on the first mortgage down from $1,937.36 to $1,698.67. The fully amortized 2nd at 40 years vs. 30 years dropped that payment from $459.11 to $442.29. Total payment $1,698.67 + $442.29 + $200 + $50 is $2,390.96.
Joe scratched his head and asked, “Where’s the 5.5% lowest interest rate in years?”. The lender explained that rate was only for people with credit scores of 660 or better, and Joe’s score was 640. Also, that rate was for people whose ratios were 33/40 and Joe’s payment, even at the reduced rate of $2,390.96, was just over 44% of his gross income of $5,416.67 a month. His ratios were “out” which made him SUB-PRIME. BUT, here’s the good news! IF you can stick this out for 12 months…24 tops…and make your mortgage payment on time, you can RE-FI at the lower rates! The value of your house will grow so that the 5% you put down will be 20%, and you will have ONE mortgage at the low rate instead of TWO mortgages at SUB-PRIME rates.
Joe went home. He was feeling a little sick in the stomach and he had a massive headache. He looked at his pregnant wife. She was packing and making yellow curtains for her new kitchen. He kissed her on the forehead and went to the corner store and bought a sixpack. Two weeks later they closed escrow, moved into the house and he and his son went out and bought a new puppy.
Joe worked hard for a year. He put in overtime and drew down on the little savings he had left. He was able to make his mortgage payment on time for 12 months. He called the lender to get that RE-FI he was promised. The lender said…oh, well…you really should wait another year because of that 2 year pre-payment penalty. Joe said, I really can’t do this for another year. The lender said OK, but I’m going to have to add the costs of the re-fi and the pre-payment penalty to the principal of the mortgage. Joe asked how much the pre-payment penalty was and nearly fell off his chair. He said, OK…I’ll stick it out for another year. He went out in the yard where his son was playing with the dog and drank a couple of sixpacks.
6 months later Joe was told that he couldn’t get any overtime. They were cutting back on expenses. He opened his mail and there were those multiple offers for credit cards at ZERO INTEREST! He got himself three of them. He started charging stuff to make ends meet until he could get to 2 years and RE-FI his mortgage. He went out with one of his new credit cards, bought his wife a box of chocolates, his son a new football, the dog a new collar and a case of beer for himself.
Finally…TWO YEARS had passed. No pre-payment penalty! Time to RE-FI! He called his lender. Well Joe, I’ve got some bad news for you. You did improve your credit score with all those on time payments for two years from 640 to 680, but the best rates are now going to people with scores of 700 or better. The REALLY bad news is that because of your ratios, you were stated income-SUB-Prime…and those loans don’t exist anymore. There is no re-fi for people with your ratio of payment to income. Joe hung up the phone and went out in his yard and drank a couple of six-packs.
At first, Joe was only getting behind in his credit card payments. He opened his statement and the interest rate jumped to 30%! Joe called around and said “Isn’t charging 30% ILLEGAL?” Well Joe…it used to be…we used to have something called “Usury Laws”, but no more. Usury Laws were part of RICO to get rid of Loan Sharks but in 1980 Congress elected to “deregulate” and exempted Banks from Usury Laws for the most part. 30% only seems fair, since you breached your promise to pay on time. Joe wondered why breaching his promise demanded such a penalty, when those who breached their promise to him of getting a RE-FI and reasonable mortgage payments seemed not to matter. He put his head down, grabbed a couple of six packs and headed out to the garage trying hard not to turn the motor on in the car.
Joe started getting behind in his mortgage payments. He had the same job making $65,000 a year…in fact he got a raise to $69,000 a year. Still he was falling further and further behind. He called his real estate agent and said, I can’t do this anymore. I have to sell this place. The agent told him that prices were down, cost of sale was 8% or more, and there were those payments he was behind getting penalties and interest. He was “upside down” and the new distressed property law scared her and she couldn’t help him. Meanwhile the mortgage company was calling him every day, sometimes 4 times in one hour. They had no answers. They just asked if they could post date a check for the $4,000 he owed them to next week. He said “Do you really think if I can’t make my full payment again this month, that I can write you a fkn check for $4,000 today that is going to be good “next week” you fkn moron!” Joe slammed the phone down, turned the ringer off and headed out to the garage with his little TV and a couple of sixpacks.
Joe drank his six-packs and watched all the Presidential Debates and Campaign speeches. He heard someone talking about “Joe Sixpack” and wondered if she knew how “Joe Sixpack” got that nick-name, and what she was going to do about it. He watched as everyone fought over the $700 Billion Bailout and wondered if that would help him…and hoped it would. The Bailout passed, but his phone didn’t stop ringing. The Credit Card Company was still charging him 30%. The Mortgage Company still didn’t seem to have any answers. He called his agent and asked again about selling the house. She agreed to help him do a “short-sale”, but she didn’t quite know how that worked. He went out to see where he might rent if he sold his house “short”, but no one would give him a rental, because his credit was now fckd…
He went back to the garage, popped open another beer and stared at the car with the motor off.