The Perennial Borrower

It must be since we’re just a month past the holiday spending, and the credit bills are rolling in, that I start to receive a couple frantic phone calls from clients who say something along the lines of “I know I told you that I would get my act together last time, but.…

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About Rhonda Porter

Rhonda Porter is an NMLS Licensed Mortgage Originator MLO121324 for homes located in Washington state. Her blog, The Mortgage Porter, is nationally recognized for sharing relevant information to consumers about mortgages. She has been originating mortgages since 2000 at Mortgage Master Service Corporation #40445 Consumer NMLS Website: NMLS ID 40445. Equal Housing Opportunity. You can follow Rhonda on @mortgageporter, Facebook and/or Google+

78 thoughts on “The Perennial Borrower

  1. Rhonda, you are really spot on with your assessment. We see a lot of the same thing even though we don’t do the refi’s. I’ve had plenty of people turn to us when they are starting to get underwater with payments they never expected to make and with other debts swallowing them up. I’ve got a post coming soon about a purchase I’m about to make and it hits on some similar issues but from a slightly different angle. Thanks for bringing this out there – we all need to have better fiscal responsibility or it will cause some major damage to our economy in the long term. How can you hold a President responsible for driving up the national debt when we as individual citizens can’t mind our own financial matters? Granted, we don’t start wars but we do start divorces – often a direct result of financial problems.

  2. Reba and ModularManiac, thank you for your comments. It was weighing on my mind and I almost posted this on my other blog instead since it’s a refi scenario…but as you said, Reba, this does become a situation that real estate agents will inherit once the perennial needs to sell their home.

  3. Isn’t debt the American way?

    I think this year will be the year of reckoning for MANY people. they equity will have vanished, the appreciation is stopping, and the ARM is adjusting. Now, more than ever, and experienced originator is needed.

  4. If you don’t mind me asking, what are your upper limits, beyond which you won’t do the loan, for monthly debt payments to income?

  5. Tricky question and I wish I had a simple answer. Some lenders will allow me to go up to 55% debt to income ratio when we are factoring income. There are also many programs, where income is not documented and therefore, there are no ratios to factor for qualifying.

  6. 55%? Wow. Just, wow.

    I don’t know the particulars obviously, but maybe you are blaming the victim? I realize that people should take personal responsibility for their own finances, but sometimes people need a shake to wake themselves from a state of denial.

    Have you thought about counseling your client about selling now and getting out while she still has some equity?

    Do you consider that your responsibility, or do you just go be the lender’s stated standards? If they qualify, they get the loan?

    Running at 55% just doesn’t sound like a situation that will be sustainable, even in the short run.

  7. I would not go stated with this client and I do review all of the my clients options with them, including selling. This particular client has plenty of equity due to our appreciation in recent years. If she were to sell, I’m sure she would spend all of her proceeds. Then what? She’s renting a home with no assets and no retirement.

    I don’t advise going to a 55% ratio, either. It’s technically what is available. There are other factors as well, such as credit score. This person would not qualify for that debt to income ratio.

    I feel a tremendous responsibility towards my clients.

    Biliruben, I’ve seen your comments before on this post. Are you in the biz?

  8. Nope. Not in the biz. Just a bit wonky after buying a house a few years ago, and now passively looking for a bigger place, now that we have a kiddie on the way.

    I appreciate posts like this. It would be interesting to know whether this situation is pervasive, or whether your client is represents a small minority of Seattlites. Incomes only tell you so much. Wealth stats would be useful, but I don’t know where they are available. Any ideas?


  9. I think that it is a good time for realtors to try to convince their former clients to sell their homes. The clients will have to wake up to reality and realize that they could more likely spiral further down over the next couple years into dire financial consequences. From what I have seen…especially with some of the condos downtown is that some of these people are asking a 30-70% increase over the recent closing prices on their presale condos.

    With situations like that…it is no wonder that buyers are sitting happily and patiently on the sidelines.

    If no sales are made…nobody in the RE industry makes any money…be it lenders/realtors/etc. When you look at the general public crying foul with realtors charging 6% commission…with the prices and the money involved currently a couple percent saved translates into quite a large chunk of change.

    Perhaps…it would be in the agents best interest to look at the fact that there may be a new job that is to slap some sense into the seller that is asking for 30-70% more less than a year after closing their original sale.

    When the general public wakes up from their “real estate appreciation” stupor…then the markets will start moving again. Even if the markets were to drop 30% over night…at least 2 of the 3 people win in the transaction…the buyer gets a realistic price…the agent gets a commission…and the seller…well…it’s time to just have to explain to them that the recent run-up was an exception to the “real estate appreciation rule” and that they bought at the top.

    Somebody had to be the bearer of bad news for people that bought gold at $800/oz eventually.

    just my 2c fwiw

  10. EconE,

    I can’t tell you I haven’t thought about it. More last year than this year. The Bubble People started scaring me. But honestly, I love my house and there’s no where else I’d rather be. I really don’t care what it’s worth at the moment and the market is starting out really sttrong this year.

    Builders can’t build those townhomes in Ballard fast enough for the people who want to buy them.

    But even if it weren’t. I love my house. It’s worth it to me. I’m not going anywhere. I’ll think I’ll read “Who Moved My Cheese” again. What would you do if you were NOT afraid. I’d stay here and love every day in my house, just like I’m doing.

  11. Ardell,

    If you love where you are and you can afford the payments then staying put sounds like the best decision to me.

    I am assuming you have seen a lot of appreciation. Would you buy your house today if it were available and you did not already own it?

  12. I haven’t seen a lot of appreciation Alan. I just bought it in September of 2005 and it’s not an easy sell house. It just happens to suit me and my needs just perfectly, but not a very marketable product.

    But I love when I go in and out of much higher priced homes and say, you know what, I wouldn’t trade my house for any one of these.

    It wouldn’t sell today for a lot more than what I paid, after closing costs and paying the buyer’s agent. But seriously. When I was reading Seattle Bubble on a regular basis for awhile, it made me want to go to bed and pull the covers over my head sometimes. That place is wickedly gruesome. It can scare the skin off your bones.

    Luckily I’m out in the market for my does of reality. Hanging in there is worse than five months with no sunshine.

  13. Ardell…

    nowhere in my post did I allude that “You” should consider selling your house. I was talking about the people with the high end condos on the market currently trying to flip them as their units are completed.

    You must have thought I was referring to something else.

    Tell me…how could it be possible that a realtor would state to someone that purchased a new condo for a 1M and then four months later they want a Realtor to represent their sale for 1.7M. Seriously…a 70% gain in a matter of MONTHS.

    so…anyhow…all I can say…If a realtor can’t say “enough is enough” in this market…especially with the above example (and there are more)…don’t you think that realtor is doing a disservice to their client by stroking them into believing their own unrealisitic expectations?

    Shoppers are savvy these days. When I choose my buyers realtor eventually…I can assure you that it won’t be one that told a client “sure…I think we can get you %50 more than you paid last year”…in ANY of their past transactions.

    It makes me wonder what kinds of loans the agents put these “sucker” buyers into after they have already fleeced them with 50% plus appreciation on a condo.

    SO…anyhow…wasn’t referring to your situation…and I know you aren’t a realtor…but hey…lots of realtors read this…and if they would rather feel proud about selling a couple Million$ condos over selling four of the same thing at a 30% discount (2.8 million total now)…then more power to them as they are just shooting themselves in the foot. A lower commission is better than no commission.

    Plus…you may then end up getting to handle the loan.

    The only person who loses is the greedy flipper.

    Too bad so sad…they should have done their due diligence.

  14. EconE,

    Question for you before I handle the rest of that later.

    I am an associate broker who sells real estate, but not “A Realtor” What’s the difference in your mind?

    Does belonging to a Trade Association like “The National Association of Realtors” make a difference to you? Why would you hold someone who sells real estate who is “a Realtor” more accountable in your scenario than one who belongs to a different trade association like “The Independent Broker’s Association”, or none at all.

    Or are you thinking that Realtor equals real estate agent?

  15. I respect the issue that you are addressing and would like to commend you in being a loan provider that is stating your concern that you have with the equity farmers. I try to educate homeowners that they need to monitor their equity with regular communications with real estate brokers and appraisers.

    I also try to encourage homeowners to visit HUD’s web site and others that may assist them in the education process. While as service providers we may not be able to stop the trends of our customers, we should try to provide them the tools and communications so that they can gain awareness. Some tools readily handy for our industries to use are brochures and press releases to the mainstream media. While slow in nature it is a start.

    As members of the real estate and related industries we need to promote long-term business relationships and consulting on a collective front.

    The trick is not to displace our customers in the process with methods that may lead them to become embarrassed or to lose face. An old book that covers human relations is The One Minute Manager while the book is directed at manager’s communication with labor the tactics discussed in the book also work well with customers.

    What is important, that while the problem is frustrating, it is fixable and will take time. With communications such as your posting on the issue among our industries and peers, the process has started. The true test is as an industry to continue to promote long-term business relationships, consulting and awareness.

    In this case you may want to think of shifting this client to a yearly process. If she has enough equity then sure refinance the deal but try to promote the use of her equity in half going into possibly securing a down payment on a rental property and with in two years she may well be on her way to acquiring net worth vise verse short term equity gains. Of course I do not know the full details in this deal, but am only using it as an example for food for thought. The upside is returning business to you on a yearly basis and the referrals that will follow because of your out of the box methods that she may tell her friends and family about.

    In the mean time, I wish you the best of luck and hope that you are successful in your customer education. Thanks for the Great Post!

  16. EconE

    Rhonda is a Lender…Ardell sells real estate. There. We cleared that up! LOL

    I do think the names being next to the photos instead of under them like they used to be is very confusing.

    You know if you google ARDELL under images, you get a picture of Russ and one of Dustin 🙂

  17. Shane, Thanks for your comments. I was “venting” a bit on the post and creating the post actually has helped me with dealing with my client. And we are working together to try to help her stop this cycle. Although I do wonder if some people are capable of doing that. The economic reports today stated that Americans are saving less than they did during the 1930’s in the Great Depression and are relying more on credit cards. The spending habits of today and feeling of “gotta-have-it” or “I-deserve-it” are bringing down many people financially.
    And I do provide Annual Mortgage Reviews for my clients. It’s part of being a CMPS.

  18. Ardell…Rhonda…

    Thanks so much for clearing that up for me….however…does it really make much difference which part of the industry you are in? When RE is sold many different vocations stand to make their income from the transaction. This includes not only agents, but lenders, brokers, inspectors…even the guy that might be a sign spinner for minimum wage. So…the difference is that between brokers/realtors/etc etc is really only that of specific job function that is necessary to keep the whole RE industry running smoothly.

    but thanks for dodging my question anyhow.

  19. I think EconE’s question was about someone buying a new condo presale and then putting it on market for a lot more as soon as it is built or shortly thereafter.

    Clearly that would not happen as often as it does if there are not profits to be made that way. It is not my cup of tea, Econ, to do those kinds of deals, but I will tell you from my experience that people who did that, DID in fact accomplish that objective. Those who bought them at pre-sale value in 2004 or early 2005, did in fact flip them at great proits.

    1) Because the presale value was a discounted value, as the builder offered them more cheaply, especially the first ones, to get his project moving. So sometimes presale is a huge discount and sometimes not…depends on the project and the phase of the project. Presale and foreclosures…sometimes real deals…sometimes hype. Not always great deals…but yes sometimes are.

    2) Those who bought them in early 2005 or late 2005 did flip them at great profit not only because of the presale price, but also because large condo projects take forever. They are selling one now to be completed in 2009. So it depends much on the market of 2009.

    You are looking at the close date and price and comparing it to the on market price. You are not taking into consideration that the close date is not the date the price was set. Someone closing in 2009 on the newer downtown project is buying it at today’s price. When you see it close on 2/2/09, there will have been two year’s or 19 months of appreciation building up while the condo building is being built. The builder doesn’t get to reset the price after completion. That is the value of presale price IF the market goes up during the time the building is being built.

    Let me know if you are following me so far before I continue. I’m not dodging your question, you simply have too many assumptions and negative aspersions mixed in, so it is hard to tell if your question is “rhetorical” as in you’ve already made up your mind that it is all a bunch of crap anyway.

    If you are going to judge before getting the answer, why bother. If you assume there IS in fact a legitimate answer…I’d be more than happy to continue.

    You assume some agent told this guy some pie in the sky story. You leave no room for the fact that the guy may be making his own calls and telling the agent what’s what. Why are you “assuming” some agent goaded this investor into his actions. Investors at that price range rarely listen to anyone. So your attitude is not conducive to the likely reality of this situation. Sounds like you just want to blame some agents for the fun of it.

    You want a question answered, then ask a question, don’t take a pot shot at the industry for the fun of it. More likely in this scenario, the investor was calling the shots and not “the industry”. He’ll probably make a lot of money too. As much as he is asking for? Maybe…maybe not. But I doubt he’ll lose any money.

  20. The market value and price of “an offer” is established the day of the offer, not the day it closes. If that day is a year or more before the project is completed…then the value is already higher if the market appreciated during that time.

    Short version of above.

  21. Ardell…I appreciate your answer and understand better with regards to presales now and the fact that the listed date of sale is in fact the closing date that was years past the original sales date and although there is only a 6 month difference shown per Domania…the statistics actually don’t tell the whole story as the “price” listed for closing in 2006 is actually a sales price from 2 years prior.

    cool…gotcha…appreciate it.

    I’m not here to bash the industry and actually would not have replied to this post had I not seen something that I saw as valuable venting by Rhonda. It is in fact the greed of the typical American consumer that will ultimately create a problem as Rhonda states the “gotta have it now” mentality of people creates the perennial borrower. Too many people try too hard to “keep up with the Jones'”. I empathize with the lenders that have to rescue people from their own stupidity.

    Anyhow…I appreciate the candid replies and hope that my questions/observations aren’t taken personally.

    One thing that I was curious about regarding the original post…I would assume that these compulsive borrower’s/spenders that are on this slippery slope are on less conventional loans. Do these people qualify for 30 year fixed loans…or is that something that is harder to sell to people these days either because of their ability to qualify for the loan or just their plain aversion to the old traditional 20% down 30 year fixed loans of the past.

    I’m not sure exactly what I am asking here…it’s kind of a 2 part question (no…not a loaded one)…1. Do you feel that it is safer for these people to a more conventional loan rather than continue to “chance it” with the more exotic loans.

    the other part…2…is…What do you feel is more of a driving factor that the consumer is choosing when they pick their loan…is it more of a qualifying thing…or more of a psychological thing. For example…if someone can’t qualify for a traditional loan…they take out an ARM…whatever…(pardon my ignorance here)…this loan is taken out of necessity. On the other hand…there is the person that can qualify for the traditional loan…yet chooses not to as they would rather have more disposable income for 7s instead of Levis and a BMW instead of a Toyota.

    Have a nice weekend.

  22. EconE
    I’m glad you like the post. I’m still fairly new to blogging and I’m amazed at which post have interest and which ones seem to slide by without much attention in the form of a comment.

    These people often times do not qualify for traditional financing or favorable interest rates. These types of loans, the rates and terms vary based off of risk factors such as credit scores (and mortgage payment history), loan to value (equity), debt to income ratios and employment. The tougher the situation, the more limited the options are. And I agree, sometimes, the best option may be for these people to sell (before they lose their home via foreclosure). The borrower needs to understand what all of their options are (as explained by a mortgage professional). I worry for this demographic of borrowers as they are very vulnerable and would be easy for an unethical lender to take advantage of. In addition, these types of loans often carry non-negotiable (meaning that I can’t price it into the loan or buy it out) prepayment penalties. It’s insult to injury. With that said, many times these types of programs can be a “band aid

  23. EconE,

    Real Estate Agents and Lenders don’t have “weekends” 🙂 I used to be called “the weekend warrior”. When others are “off” we are ON.

    That said, here’s my value system.

    1) If a person qualifies for traditional loan I sell them the house. If the then choose an exotic loan for their own reasons and not for qualifying purposes, not my business.

    2) If someone has substantial assets, say equivalent to the price of the home. But chooses to take an exotic loan rather than liquidate their other holdings, then it is fully collateralized by the home itself and the other assets of the borrower. So if someone comes to me who owns a ton of stocks and bonds and real estate all over the country, but uses exotic means to purchase property without relying on traditional income sources. Not my business to tell this kind of asset protected person how to do his business.

    My experience with people wanting to do exotic loans just to purchase, is that they don’t understand them. I can only make sure they fully understand the pre-payment penalties and other negative aspects. But in the end I can only choose not to work with them if I feel I am “contributing to the delinquency of the less than rational”. I can’t prevent them from doing it. Usually if I “quit” they see the light and move to lower priced housing more in line with their financial situation. I can only think of once when they did not in 16 years and pushed the envelope with someone else as their agent.

  24. Duh…my mistake…what was I thinking…open houses *usually* are on weekends.

    I appreciate your replies…and understand them completely.

    I have a feeling that just as stated above…is that many people who have used the exotic loans for purchases (not including those who have alternate assets)…are really falling victim to their lack of proficiency at math…It is all too easy to take advantage of someone when fiddling with loans and the numbers. It makes me think back many years when I was younger and bought my first boat while living (ehem…renting) on Lake WA. Being that I was going to finance the boat…the salesman was all too ready to find out what “payment I could live with”…and did the usual calculations. He seemed perplexed when I said that I wanted to go home and think about it…I didn’t tell him that I had a B.S. in Econ with enough finance/marketing /accounting classes under my belt to have a double major…but anyhow…after running the numbers at home on my old HP business calculator…his “affordable” payment was at about a 20% interest rate. I would be willing to bet that 8 out of 10 people would have signed on the line. I ended up with my own loan at an 8% rate at the time.

    I do the same math still when I see those “teaser” payment amounts in the RE section of the paper here (I’m in Los Angeles) and it is easy to see how people get sucked in.

    Props to both of you as you seem to be part of the industry that isn’t just out to make the quick buck. Admittedly…I am a “bubblehead” as the saying goes…what is going to happen?…who really knows…like the old saying in econ…’Ask 10 different economists the same question and you’ll likely get 11 different answers’…it truly is *the* great unknown right now and I doubt that anybody knows nor can predict what can happen. It’s kind of funny…I see both sides of the camp using statistics to support their view of whether it is or isn’t a bubble. It reminds me of another quote…”statistics are good for telling two things…lies…and damn lies”.

    sorry for blabbing

  25. Rhonda…nope…no blog. I’m just kind of an economic information hound…not for any purpose…it’s just one of many interests. I have been asked if I was a writer in other forums but…well…call me unmotivated. So…no…fear not…I’m not out there penning under any other name screaming about people being able to buy houses for 20c on the $. I have read some of the Seattle bubble blog…I have to say that Tim is pretty smart…economic indicators point to a correction ultimately…how much of one and how quickly it all pans out is so multifaceted that it is impossible to know. Hell…how much will the west coast get hit if there is another large earthquake? San Fran is Built on Landfill…Seattle will have the liquefaction problems…(please tell me you don’t live on Perkins Lane ;o)…and L.A….man….I wouldn’t even want to think of what could happen here…it definitely “corrected” here after the Northridge quake.


    I’m in Hancock Park…just south of Hollywierd.

    The bubble is breaking in certain areas here. When the median price in Watts hits 400k you know something is wrong…people can talk all they want about “gentrification” but throwing a Starbucks in the middle of a high crime rat hole doesn’t quite cut it. One thing we have going for us down here vs other parts of the U.S. is the sheer number of immigrants. We Amurikans…are a little too used to our “nuclear family” arrangements where we now cry foul that both Mom and Dad have to work in order to make ends meet. Well…if you go into many neighborhoods in L.A. you will more often than not see houses where there are 3 or more “breadwinners” contributing to living costs…and doing without the frivolous “stuff” that most people consider necessities rather than the luxuries that they actually are.

    Redondo Beach is one of the better priced areas around here in my estimation. Venice, SM, etc have all gone through the roof…although the further west you go now…the more reductions that you see and the longer properties sit on the Market. The only problem with Redondo is that you do get some of the gangbangers there as when you head east…it’s a whole different story.

    They are *trying to gentrify San Pedro with some condominiums…and they suuuuure do look purdy in their ads. (I think they are called Vue)…but I dated a girl that lived there and they are basically throwing up a shiny glass wall condo in a slum. IMO…it’s kind of like building one of the nice Belltown buildings over in Rainier Valley.

    If you want cheap beachfront you have to head out of country now…and even then…I don’t think I could ever settle on just one beach so that’s where I would definitely rent. I have seen some beautiful oceanfront apartments on the Mayan Riviera for $300 a month…and SE Asia is even cheaper from what my Brother has been telling me.

  26. I’m just bumping this to show that Rhonda has been raising this issue for some time.

    The title also reminds me of a neighborhood I saw a couple of years ago in Snohomish county. Seemingly every house in the neighborhood refinanced at least 2x a year! I’d never seen that type of behavior on such a scale before.

  27. Kary, I’m glad you found this post. It’s exactly what I’m talking about in “Buyer Beware”. I may have to add this link (even though my post has been published)…don’t tell. 😉

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