Joe Sixpack and the Subprime Crisis

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.

156 thoughts on “Joe Sixpack and the Subprime Crisis

  1. Great post Ardell,
    It is unfortuante how true this is and in looking back at it how stupid Of Joe Sixpack to do such a thing. However, in the heat of the moment it is difficult to stop when your heart is set on something. I guess that’s why laws are there.To protect ourselves from ourselves!!!
    I cringe when I think about how some people can sell others things they simply can’t afford and have NO CONSCIENCE of their own. It’s all about What’s In It For Me WIIFM.
    Thanks for making this story interesting. I hope every person who works in the finance industry reads it and it makes them think twice before leading people down a path which is simply not right for them.

  2. Nice Post Ardell.

    Memory lane…….across the escrow table sits mr. and mrs. buyer with their LO and sometimes agent if its a sale. LO states:

    “Don’t worry, you can refi again when your PPP expires”

    “You qualified, but you’ll need to budget for your real estate taxes which are not part of your payment”

    “Your appreciation will offset your PPP if you refi again prior to your PPP expiring.”

    This is the stuff that was going down in every community, in every town, in every county, in every state across our country.

    Fast forward to last week:

    We get a payoff on a client. $9,000 PPP shows up which does not expire until mid 2009. Call the LO. “Do you know Mr. X has a PPP?” LO: nope, they didn’t tell me they had one. Lender will not waive it. Transaction for the most part is dead in the water.

    How many of these homeowners are out there in the Seattle metro market? Quite a few. Lots.

  3. With all the mortgage moderations taking place, it would be great if Congress forced banks to reduce rates on credit cards. There should be a limit on how much is charged…if someone is such a risk they have a 30% rate, they shouldn’t have a card…and banks shouldn’t be able to jack the rate that high. It’s rotten.

  4. This is the best example I’ve read so far – great job of putting things into such an easy-to-follow story!

    Not everyone out there who got into (or is getting into) trouble used a liar’s loan to obviously buy more house than they could afford. People are ultimately responsible for their own actions, true. But people also rely upon the opinions of “professionals” to help make their decisions. Too many professionals (Realtors, lenders, mortgage brokers, appraisers, etc.) were drinking the koolaid.

    Most times we can make a bad decision, and then either correct it or live with the results. In this case, unfortunately, there isn’t a way to fix it – you can’t go back in time & walk away from your $10k earnest deposit…

    Joe Sixpack (from your example) tried his hardest. He worked his butt off trying to keep the wheels on the bus. But eventually he simply cannot pay what he doesn’t have. Joe’s going to declare bankruptcy, let the banks write off all that debt, and spend the next few years renting, licking his wounds, and rebuilding his credit. You can bet Joe won’t make the same mistake again.

    I’m sort of glad to see the banks getting into financial trouble – they’re reaping what they sew. I’m sad to see Joe Sixpack get anhiliated, but he’s ultimately paying for making a bad decision. I’m very upset that the rest of the population – the majority of America who did NOT buy a house in 2004-2006 – is suffering right along with them. But I can’t do anything to change the facts.

    All I can do is offer my best advice to one client at a time…

  5. 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.

  6. I overheard some rumors, perhaps some one can confirm.

    As part of the Patriot Bailout Act, it seems on Monday, the government plans to announce that it is changing the national symbol to a condom because it more accurately reflects the government stance.

    The new national symbol will allow for inflation, halt production, destroy the next generation, and protect a bunch of pricks. At the same time, it will give the citizenry a sense of security while they are actually being screwed.

    Since the Congress is in recess, perhaps it will be issued via an Executive Order ?

  7. I must admit I am somewhat dumfounded by the comments suggesting Joe did something wrong or Joe should have lost his $10,000 Earnest Money. Et tu Jillayne?

    The Public Trust…be it the agent or the lender…failed Joe by not giving him the payment amount prior to his getting involved with the offer in the first place.

    Used to be, the pre-approval letter had the estimated monthly payment in it…but no more. How could Joe possibly have known that the payment was going to be $1,000 more than he anticipated? Why should he lose his Earnest Money if he had 5.5% in his head, and never new the rate on the 1st was going to be 7% and the rate on the 2nd was going to be 9.5%, until after he was in contract.

    Joe was bound to a contract before knowing that his loan was going to be “exotic” and wasn’t given a legal out at the point where “exotic” become the only way to proceed. No one seems to see that part of this story where the system in place failed Joe and his family. And the answer shouldn’t be using the Home Inspection Contingency to get out on Financing Issues. The Finance Contingency and pre-approval process should illuminate and protect in its own right.

    In addition to the estimated monthly payment including taxes and insurance being in the pre-approval letter from the lender, there should have been a rate cap in the Finance Contingency. Joe obviously had 5.5% in his head, and yet the rate on his 2nd was 9.5% and on the first 7%. If the Finance Contingency had a rate cape of 6% or even a 1 point spread from what Joe was thinking to 6.5%, Joe would have had an out on the Finance Contingency when the loan moved to “exotic”, and rightly so.

    That is how Sub-Prime thrived in this Country. The rate caps were removed from the Finance Contingencies, and/or in States that still had rate cap blanks, agents were writing in “prevailing rates”.

    Clearly if Joe had a pre-approval letter saying his payment was going to be over $2,500 when he was asked to sign the offer, he may not have proceeded. Clearly if on day two there was a rate cap in the Finance Contingency, Joe would not have had to face the decision of getting in over his head or losing his Earnest Money.

    Has the public trust gotten so out of whack that ALL of the professionals reading this story see Joe as to blame for this? I am just dumbfounded.

  8. I think people miss the point, and have over and over, that people buying a home understand much less about this process than we do. Okay maybe a percentage of buyers know it, but most don’t. When an agent and a lender work to get someone a home that trust you are talking about is in us. Now I’m not saying he shouldn’t have asked what the payments would be but most of this could have been avoided if, in hindsight, the agent and the lender had said ‘you know what, you really need to wait a year, save up more money, increase your credit score, and then let’s talk again.’

    There is enough blame to go around. Mostly it’s cultural. Our self worth is not tied into whether or not we have a house, a Lexus, a flat screen tv and every electronic gizmo that comes down the pike. But I know this has been ingrained into us, as a society, since I was a kid. And that was way before 1980.

    I agree with Ardell about one main point. Even though everyone played a part in this, the lender and the agent should have made sure, once the payments were going to be anymore than originally planned, which were already too high for his salary, that he knew what they would be each step of the way.

    The question is, would it have made a difference? Maybe, maybe not, but at least he and his family could have made that decision with more knowledge under his belt.

  9. The sad thing Carole is that I made this story out of the slightest of stretches to a 44% back end. Truth be told, that was a nominal stretch given what transpired over the last few years.

    People relied on professionals to qualify them, and they were handed a letter saying “you qualify at this price”, with no explanation of whether that was pushing them into sub-prime and exotic loans.

    Back in the day, Banks and reputable institutions only handled A paper. Consumers had a big red flag that said “B of A said NO, but I can get you a loan through “”.

    Part of the “problem” is that people never expect a B of A to charge 30% on a credit card. People rely on Brand Names as Stop and Yield signs. When all lenders do all things from A to Z paper, people lose the benefit of the warning signs.

    People don’t expect to get day old bread from the best bakery in town. They expect that bakery to sell their day old bread to the “outlet” store. Reputable banks were selling things that people would not expect to get there, and people could no longer rely on the good name of an institution.

    Along with people losing the ability to trust their local bank’s “good name”, the local bank lost their good name by jumping on the sub-prime and 30% Credit Card interest bandwagon.

    It’s time for more regulation…much more.

  10. “I think people miss the point, and have over and over, that people buying a home understand much less about this process than we do. Okay maybe a percentage of buyers know it, but most don’t.”


    1) The buyers who “get it” are those who don’t need to get it, meaning the ones that likely weren’t sub-prime. The ones that needed to be protected were the ones less likely to get “it” and more likely to get “exotics and subprimes”.

    2) “…that people buying a home understand much less about this process than we do” “WE” became “THEM”. When the rank and file of professionals became inundated with consumers turned licensees, there was no “we” who knew better en masse. That’s where “The blind leading the blind” comes from.

  11. It’s pretty hard for a guy like Joe to see this coming when every “trusted professional” out there was saying it was the right thing to do. I can’t count the number of times I was told you should stretch and get absolutely the most house you could afford. I have well educated friends who gave up making 401K contributions to “invest” in a house. Some professionals are still saying you are practically guaranteed to make money in a few years. And notice how every broker site has a little box on the side that calculates mortgage payments for the house you are looking at, at around 5%, without taxes, insurance, or PMI?

    Who took the rate cap out of the finance contingency and the payments out of the GFE? (BECU gives you estimated payments) It doesn’t seem like they had the buyer’s interest at heart.

    It’s also worth noting that up until a few weeks ago the solution for most “trusted professionals” was to get a new wave of Joe Sixpacks to take up even bigger mortgages (that is part of higher prices) and buy out the Joe Sixpacks from 2 years ago for at least 8% more (transaction costs). Many still think we can get out of this if we can just make prices go up again. (who’s going to buy? J6P does not have more $ than in 2006) I for one am not going to put myself in that situation.

  12. Buyer’s ability to pay has nothing to do with the value of the asset.

    Joe signed a Promissary Note secured by a Deed of Trust held with the lender. If the lender was stupid enough, or greedy enough, they lent over the value.

    The lender is in the business of lending money. There is a risk formula. The lender’s recourse is the asset.

    From the moment the lender refuses to waive the PPP they are saying they want the asset, give it to them.

    The way we have done business and the fact we pay any attention to lenders at this point is ridiculous.

    The housing units exsist today, the lender has very little ability to take them back, or control them.

    As people borrowed more and more to make house payments the entire fabric got stretched. It’s done.

    The lenders need to come back into loans and make them right.

  13. “(BECU gives you estimated payments)”

    Cautious Buyer,

    Often these scenarios took place on Sunday during or after Open Houses in a hot market. “All offers being considered after first Open House on Sunday”. Someone wandering into the Open House at 3 p.m., as example, could not make an offer without a pre-qual letter that was often erroneously called a pre-approval letter. BECU was not an option for an immediate letter on a Sunday Afternoon.

    I’m not positive, but I don’t think RESPA requires a GFE at time of application vs. pre-approval, and most of these quickie letters did not come with Good Faith Estimates in the circumstances as outlined in this story.

    Perhaps one of the lenders can tell us what RESPA requires at time of a pre-qual letter if there was no formal loan application at that point.

  14. The problem was exacerbated by the FICO scoring that penalized buyers for checking with different lenders over time. The inquiries into the credit report caused the FICO score to go DOWN and scared the heck out of buyers and agents. Being responsible and cautious by consulting various lenders, and often, became a penalty zone.

    Some said these credit inquiries would not harm credit score. But when the credit score all of a sudden went down from 680 to 640, no one could tell why or guarantee it wasn’t because the buyer consulted 4 lenders over 3 months that all ran his credit score.

    The entire system failed the consumer in one way or another, and it all started with Credit Scores and Risk Based Pricing. Prior to that there was no penalty for 5 lenders running the credit report and “A” Paper instutions were YAY or NAY. In those days the buyer had to walk over to “alternative loans” at a different lending institution…hence knowing what they were getting themselves into during the long walk from “the Bank to the Finance Company.”

    One stop shopping from A to Z left the buyer with no frame of reference, no STOP sign…no YIELD sign…like an 8 way intersection inviting a crash, lenders did all things, both good and bad.

    If you go to Nordstroms to buy a dress, you expect something different than if you buy it at Target. Just is. No longer so in the lending arena. The best institution participated in the most exotic products, leaving a buyer with no valid visual signs.

  15. Come to think of it Joe is in possession of the property. He owes a certain amount of money he agreed to, or not, because the value is less than the price he paid.

    Is that Joe’s fault? The lender determined the value by apparaisal. The lender made the loan, the lender is in the business to determine value.

    Joe signed some papers. Joe is in the house.

    Now what? The lender comes in takes the house? Then what? Who’s going to buy it at that value?

    The only thing lenders have is the FICO score. So the lender is making Joe homeless? How’s that going to play out?

    No, the lenders have lost the priviledge of being in the driver’s seat.

    There are millions of housing units not worth what is owed. They will need to rent them out. The economy needs to move on.

  16. David,

    Joe doesn’t really give a RA about the value, and would be happy to stay on less exotic terms.

    Isn’t everyone better served if they

    give Joe 5.5% rate on his first and 7% and on his second retroactively?

    Wouldn’t that keep Joe in his house, eradicate the shortfall between what Joe owes and what he’s paid in AND leave the lender in better shape, all at the same time?

  17. The hot market you refer to seems like quite a toxic environment.

    I agree the lender and the agent failed Joe. And I don’t think this was a rare or unrealistic scenario.

    PS I can’t think of an instance when a commercial bank seemed to have a better product than any credit union and I honestly don’t know why anyone is still with a bank. What I read in the papers the last few weeks just reaffirms that.

    BECU has a loan consultant online that will estimate payments, but it is not a approval and I don’t think they ever did subprime. They are still an institution I trust, which is rare.

  18. The self-fulfilling prophecy of “risk-based pricing” is that it CREATED risk where there otherwise would not have been risk.

    Had Joe got a yes at the going rate of 5.5% on the first, with pricing on the 2nd being higher in lieu of PMI only, all would have been OK.

    Risk based pricing not only created the risk that the bank feared…it also didn’t compensate via that higher rate for the risk they created.

    The risk in this story was because of ratios, which Joe would not have been expected to “get”.

  19. Cautious Buyer,

    I think you can include most credit unions in that scenario.

    The problem with some credit union approvals at that time (the timeline of this story) was that their approval letters did not get you the house. They were not known for closing quickly and on time. Their processing time was known to be long, and without regard to closing date in contract…things were done “in due course” at their own speed. So the buyer with the Credit Union approval was in some instances at a disadvantage in multiple offer situtations. That was true of some large banks as well. Don’t know if that is true now, or even if it was true then, but that was the word on the street. Maybe that rumor was spread by someone who gained by that rumor…who knows.

    Get it done and on time and fast and faster became the order of the day, and all pre-approval letters where not considered equal by sellers and seller’s agents during mulitple offers. Who can get it done…and who can get it done on time no matter what, often made the difference between who the seller picked to get his house and who the seller didn’t get to pick his house.

  20. I recently attended a roundtable luncheon , sponsored by the Federal Reserve, and the main players at the table were the “big” lender loss mit departments and the non-profits. (read non-profits as one of the last remaining trust holders for people)

    The whole upshot of the day was that the loss mit departments want to “partner” with the non-profits to reach the beleagured borrowers with “help”.

    The borrowers (beaten up first by the big lender collection departments don’t trust the lender.

    Now that’s irony.

  21. Wanna hear something funny? At my last job in Seattle, I made $25 an hour. With overtime, I made ~ 72K a year. I took a job in Iraq, where I made 138K a year. I came back in August and currently make $475 a week on unemployment…from Colorado. It’s higher because it’s based on having worked out of their state. I just got a job offer from a local telecom company for $18 bucks an hour. My wife is a home maker. You can do the math.

    I got 38K in the bank, had 14K in a Roth (Now about 9 K in a Roth…YEOWCH, but hey..I’m 36…I can ride it, no sweat.

    My rent/utilities is $1460, and with all said and done, I probably ouput about $1900 a month on “living.” I live in Issaquah, because I get great schools + awesome living at a decent rental price. As I told my wife, “We could live somewhere crummy and send the kids to private school -or- we could live in an awesome place, pay a higher rent and have all the benefits.” Admittedly, renting always sucks…but being “house poor” sucks worse.

    I have no credit related bills…at all. So, conceivably I can make it on $18 bucks. I won’t be able to retire on $18 bucks, but since I got back in August…it’s not just my strongest offer…it’s my ONLY offer. I have 14 years experience as a “Jack of all trades telecom guy, blah blah blah.” Oh, well. Sometimes you have to take what you can get.

    I find that interesting, because when I moved to Seattle in 2006, I had many offers in a very short amount of time. Economy and all that, you know. The point I’m at now is that, at the end of the year…who really hires? Should I take $18 bucks? I think so. I think it’s a start. The company is strong, and maybe I can rise up into management. I have a feeling that in the next few months, jobs will be few and far between.

    Now think about this. At this venture, I can’t afford a home in Seattle.

    In 2006, I couldn’t afford a home in Seattle.

    In 2007 I could easily afford something in Seattle.

    Needless to say, I’m not an idiot…and I didn’t over extend myself. And I’m happy about that. The fact is that I may never be able to afford a home here, and like Ardell offered as an alternative, in another post to me…I’m not going to send my wife out on her back. What a horrible thing to say about a woman I have loved for 14 years. Oh well, it’s a blog. Let the snide remarks flow.

    There you go. There’s the story of someone who wants to buy a house here, but just can’t, right now at least.


  22. Ahh…but are they ipso facto “The Last Remaining Trustholders for People” simply because they are “non-profit”.

    The first time I saw a subprime pushed into play via ratios…purposely…because “subprimes were easier to process” was by a non-profit organization’s default lender. When I confronted that non-profit organization’s lending source, she said “that’s not my problem, I’m not her mother”.

  23. And now I’m reading the Seattle Times article on congresspeople trading DOD money for campaign contributions. The banks, the bailout, the congress, it all makes me a little ill.

  24. 70Ford,

    I admit that I thought you were an agent saying that agents should put eating before their fiduciary duty in that previous comment thread. My point is that you draw the line somewhere…even if it means you can’t eat.

    To me your suggestion that an agent should ignore their charge to their client in favor of making money anyway, anyhow, including enticing a client to close escrow when they shouldn’t…was just as offensive to me as what I said to you.

    People have to eat is no excuse for letting go of one’s values…was my point.

  25. Cautious Buyer,

    In the political arena, two things stand out for me:

    1) Both candidates in the most recent debate saying that we have to bolster and shore up property values. Why? If people can only buy them with exotic loans that no longer exist, that caused them to get that high in the first place, then why do we want to keep them that high?

    2) Someone owning one house deserves a different answer than someone who owns 2-7 of them.

  26. Well, these are all HUD approved non-profits and I’m just telling you what they said:

    People are calling them in droves, people who are in the midst of losing their homes, people who lost their homes and people who are about to lose their homes. They are sinking under the weight of people who need help.

    Meanwhile, word from the big lenders is that borrowers don’t open their mail, answer their e-mails or pick up the phone when they call.

    On top of that the employees of the non-profits told story after story of being put on hold for hours, not having calls returned, being transferred numerous times only to be disconnected.

    And, the kicker is the lenders stated that they can only negotiate IF the investor is willing to deal. I believe these are the same investors who we are bailing out, no?

  27. In comment 30, its like you’re reading my mind. But I would add
    3) It’s pretty well documented in today’s and other papers that defense contractors who contribute money to congress get money in the defense appropriations bill. Do the NAR and builders associations contribute to congress? Do the banks contribute to congress? Can we trust our government to do the right and ethical thing?

  28. Another thought about the bailout. How about a life insurance policy that replenishes the face value at least.

    Say Seller “A” is selling short by $50,000 to Buyer “B”. The Country is served well buy Buyer “B” being able to afford the house he is buying.

    Why not have a $50,000 life insurance policy put into place at Seller “A”s death, so that whomever forgave the $50,000 shortfall gets their money back at some eventual point in the future?

    It’s a little more complex than that, but a remedy often used for small businesses back in my old field where “life insurance trusts” also called “dry trusts” were formed to replace a deceased major participant’s value in the business.

    A “dry trust” could be put into place that is the beneficiary of the life insurance policy in the amount of the “write off”.

  29. Everyone makes good points; but is not also true that Joe Sixpack is like so many people in this country; The Dream overrides the little voice on their shoulders, that part that no one listens to, the part that says if you are in control of your own fiscal issues, you wind up being much happier than if you had the Lexus or the house at the top of your budget.

    Yes, people rely on doctors and don’t ask enough questions; people inherently want to trust professionals. Here in NE Ohio we have tons of foreclosures and some of the buyers were told straight out the wrong ‘expected payments’ be they in the future after ARMS came due or currently; but the truth is, there were never enough questions asked.

    Even now, when foreclosure is looming, not a large enough percentage of those homeowneres call their lenders or a non profit for that matter, for help.

    Until everyone of us is willing to accept ownership of our individual financial life, this will continue to happen. It’s been forty years in the making, this culture, and it won’t change overnight; but it also won’t change if all that happens is blame. Because ultimately, Joe got screwed because he wanted to believe the lender and the agent who most certainly were not doing him the best service; but he did not ask questions! Like, ‘what will my monthly payments be at every step along the way’

  30. This is a great thread – lots of valid points all the way around!

    @ Ardell – I’ve had RCG in my feedreader for awhile, but today I’m becoming a huge fan! I’m loving your ability to be passionate & cool-headed at the same time. Bravo!

    @ 70Ford – Kudos to you. I wish more people could resist temptation AND take control/responsibility of their financial lives.

    @ Carole – I agree completely. Most the Joe Six-packs out there were lead down a faulty path, and every professional who played the game should be ashamed of themself. On the other hand, I’ve grown tired of the blame-game; why must people always find somebody else to blame when things go wrong. Ultimately we’re all responsible for our own actions.

    As much as Joe got bad advice, he could have looked at the payment, felt the shock, and made a decision to abort the process. Even better, he (and his agent) should not have given away all of their contractual “outs”. You’ve gotta believe that if you’re waiving your inspection, appraisal, and financing contingencies, you’re not giving yourself due diligence. And that’s regardless of the market conditions.

    And practicing what I preach – in 2005 (in Phoenix – super hot market), I stopped referring clients to a loan officer who recommended other mortgage products over a 30-year fixed mortgage. I also never allowed my buyers to waive their rights without DETAILED discussions of possible ramifications. After such discussions, I only had one client who still wanted to waive his contingencies – but at least he had a thorough understanding of what he was getting into…

  31. Ardell, you can sling some good ink 🙂
    After funding close to 2,000 loans in my career, I got to chime in on this. I realize that if every one of my borrowers followed my advice, they would be WAYY better off. But guess what? Not everyone takes my advice. They are going to do what THEY WANT to do, not what I WANT them to do. All advice is, is advice. The ultimate decision is not mine, it is theirs. There are some borrowers who, the best advice they could get would be “are you an idiot or what?” Now if I give that sage piece of wisdom to the borrower who REALLY needs to hear it, they most likely will not use my mortgage services. So damned if I do, damned if I don’t.
    Here are some prime eaxamples of this. This guy was a E7 in the Air Force and I did a refi on his 175,000 house previously. He asked if I did them 80-20 stated income loans. I said yes and he said he was looking at this new construction house that was approx $430k. This guy made about 55k per year, had 4 kids, and his wife didn’t work. His fico was about 780 and he was a total rate shopper, so he was VERY aware of what rates and payments were. So I’m hearing this and the “are you an idiot or what?” bell start chiming BIG TIME in my head. I didnt do the loan for him as he was one of those call-you-5-times-per-day-types, but also the fact that his loan was way past ‘stating’ income, it would be an outright lie! He did get the loan done with National City Mortgage.
    Now say this clown gets foreclosed on–I can see it now: The picture of him in his Air Force Uniform with his wife and kids. The headline would read “American Dream of National Hero and Family Crushed by Greedy Mortgage Broker”—“All I wanted was to provide a home for my family”—says Hero. Yeah, he’s a real victim—-NOT!!!!

    But back to your story. The real turning point is the agent who DID NOT have any buyers protection on the earnest money should have been kicked in the teeth. Way to put your buyer over the barrel!

  32. Chris: you are so right, that seems to be a common practice (giving away your ‘outs’) when there is competition. It all becomes too emotional and way too risky. So then you spend more money than you should have and now you also might have repairs you don’t know about.

  33. Is the lack of “outs” in a sellers market something that could be solved by regulation? As in legally requiring inspection and financing contingencies in a sale for buyer protection. This is an example where the current system failed to protect consumers so how could it be changed to avoid such pitfalls in the future?

  34. This is shocking!

    Please, the mortgage means nothing, absolutely nothing. This is a total non starter.

    It only has to do with the asset.

    The value of the asset is the only variable. Whether Joe can afford or does not want to pay the mortgage is irrelevant.

    The lender lent on an asset. Joe bought an asset. If he paid too much he shouldn’t pay. If he still wants it great, more power to him.

    The purpose of the loan is to pay it off. Owning the asset free and clear is the goal. That’s it.

    It’s only an asset when you own it free and clear. The lender loans full value to be paid off with interest. That’s it.

    When the property goes back to the lender they sell it for value. That’s the recourse they have.

    BECU on the other hand thinks they should sue people they lend money to. They are the lowest form of banking on many levels, stories for another time.

  35. Yes, Cautious Buyer, it could be solved with regulation. Here in Ohio the State requires sigs everywhere if you waive an inspection. But it’s not mandatory.

    It’s a shame it has to be regulated, everyone should do one anyway! But, as we’ve seen with financial institutions when we don’t police ourselves (and that includes buyers and sellers) it winds up having to be a law.

    I threw the idea out of appraisal regulations, limits on how high a house can sell over market value. No one seemed to like that idea. Which is ok but then what is the alternative?

  36. To all…Joe HAD a finance contingency…but he could get a mortgage. The only out of the finance contingency around here is if you couldn’t get a mortgage and anyone who could breathe could get a mortgage.

    When he applied for a mortgage they never said no you can’t get one, they just said you can’t get one at the rate you thought and saw everywhere. Without a rate cap, a finance contingency is useless except for those who could not get financing under any circumstances.

    Today maybe that means something since exotic products are fairly caput. Two years ago it offered Joe no legal out in this scenario.

  37. In this story, no home inspection didn’t matter as Joe isn’t suffering from anything that would have been revealed in a home inspection. The only disadvantage was that he couldn’t use the home inspection to get out on financing issues…but that isn’t what the home inspection contingency is for…is it?

  38. Nick,

    First…WELCOME! I don’t remember seeing you around these parts before. Yes, I’m sure there are many as you describe in your post. Then you know what happened? Agents and lenders started saying “well, if I don’t do it someone else will.”

    That’s when the snowball really started rolling down the hill and picking up steam. People saying NO to the guy didn’t help HIM because he did it anyway…with someone else. So everyone said, well I guess I’ll join in because this IS what the business has become…like it or not.

  39. Well like I’ve always said, the invention of the stated income loan is the number #1 reason why the market is screwed up. That is why the average priced home around here would require about $150k per year income,and from my experience, that is about double the average income. But the governement has been getting fat collecting property taxes based on these falsely inflated values. So that money shoulkd be used for this “bailout”

  40. Ardell, very true…I had times when agents would say “if you can’t then I’m sure so and so can” and times when I would fret because of knowing that odds were, if I didn’t try to help someone, someone else would be more than happy to do so at the borrowers great expense. It was a case by case call with a lot of advice provided. I would provide options, (a) you qualify for this mortgage now (b) you can work on [whatever is causing them to be “subprime”] and qualify for FHA later. It was their choice. Most couldn’t stand waiting because all their friends were buying too…shoot, they were sure their friends were worse off then them…why couldn’t they buy too?

    There is no substitute for people being financially responsible for themselves. I do not condone sleezy actions of LO’s or agents….I’ve seen both during these past “subprime years”. However, if a borrower is signing a loan application with higher income than what they have and agreeing to a mortgage more than they can afford and to a mortgage they do not understand–I feel terrible for them–but there is no gun to their head. Emotions running strong–you bet. The ultimate responsibility rests on the borrower signing and agreeing to the contract.

    Did the Joe Sixpacks seek out the LO who would tell him YES you can buy that home…ignoring the one who would recommend saving for at least FHA?

    Did Joe Sixpack buy a big flat screen tv and new car months after moving in? Sure, credit WAS real easy in America.

    Where do you draw the line? When are you accountable for your financial contracts? Or are only Joe’s neighbors who have been accountable and financially conservative responsible for bailing the Joes’ out?

    We’re talking to our teens constantly about what’s going on. This is American history in the making and we want them to make financially responsible decisions regardlesss of what creditors/lenders offer them. It is a choice.

  41. Very well written and gut wrenching, Ardell. I think the American Dream has changed for the better. Before this correction, it had morphed to something akin to “owning the nicest home that I can qualify for.”

    It is now changing to “owning the nicest home that I can comfortably afford.” The fact that we can no longer fall back on home equity created through rapid appreciation as a way out from over-extending ourselves changes everything.

    Ardell, I am curious what you believe is Joe’s best option now:
    1. keep trying to stay above water by trying to get concessions from his lenders or
    2. cut his losses and stop throwing good money after bad or
    3. what?

  42. Nice post, Ardell,

    I can’t help wonder how many of those other bidders really had no right to be approved for a loan in the first place. In an environment when anyone can get a loan, supply and demand get distorted. Demand skyrockets, supply dwindles, and responsible people take unreasonable risk by waiving contingencies and spending beyond their means. It’s easy to rationalize all this when all around you people are telling you that prices will continue to rise (i.e., “you’ll get your money back in a year.”) and all you want is a good home for your family. It’s system that did little to reward those with good credit or disqualify buyers that had done little to earn the opportunity to own a home.

    I purchased a north seattle home in 1996. At the peak of the Seattle Market in August 2007, my home had appreciated 175 percent. Regardless of how much the market declines, I and my family will be fine. But how do I feel about the last five years? Property taxes have skyrocketed, my children’s teachers can’t afford to live in the communities they teach, the financial markets are collapsing, all around us, families are are going under and children are at risk, 15% of us don’t have healthcare, and somewhere out there, there’s some corporate executive retiring with a $450 million golden parachute that includes dollars originally intended for some kids college fund. Someone should be held accountable.

  43. Pingback: The Putnam Scoop » Blog Archive » | Putnam County, The Entire Kanawha Valley & Me

  44. Pingback: » Blog Archive Carnival of Real Estate #112 » Blog

  45. Ardell you asked what non-profits were there:

    Community Housing Resource Center
    Portland Development Commission
    Neighborhood Economic Development Corporation
    Willamette Neighborhood Housing Services
    Portland Housing Center

  46. Hi Rhonda, “The ultimate responsibility rests on the borrower signing and agreeing to the contract.”

    This is one of those times that I reach back in my memory and remember reading countles times whereas you refer to all LOs as “Mortgage Professionals.”

    Emotion clouds judgement. In the future, more responsibility will need to be taken by all LOs no matter where the work, in order to truly become professionals. Just saying it over and over again doesn’t make it so. 🙂

    In order to become professionals, LOs must take more of the responsibility to make sure the borrower understands what he/she is reading and signing.

    This method is found in medical ethics and legal ethics and it’s called informed consent.

    LOs need to set aside their own personal interests and become that rational agent for the consumer.

  47. Brian #47 – “Ardell, I am curious what you believe is Joe’s best option now:
    1. keep trying to stay above water by trying to get concessions from his lenders or
    2. cut his losses and stop throwing good money after bad or
    3. what?”

    First, I would like to point out for the benefit of those reading this who are not in the area, that a single family home even a townhome, at $350,000 is well below the median price for a single family home in this area. It’s probably a beat up 1,300 sf rambler built in the 50s with 3 bedrooms and 1 bath on a decent sized lot. Joe was not stretching beyond his means in terms of “there were other homes to be had for less.

    Now I will 2nd guess his agent regarding his ability to sell the place. At the moment there are 3 such homes for sale in Kenmore asking $295,000, $310,000 and $399,000.

    The one asking $295,000 is a bank owned property. Someone bought it in 2005 for $255,000 from someone who bought it in 1999 for $169,000 and then someone else bought it in 2006 for $385,000. Now it’s on market as a bank owned property at $295,000.

    Before the Bank took it over, the 2006 buyer tried to sell it as a short sale. He put it on market at $326,000 and someone wanted it and it went into contract, but it fell out on inspection. (This is where Joe not getting an inspection comes back to bite him in the butt.) Then it sat on market for three months until the bank took it over. Surprisingly the mortgage amount on the last sale of $385,000 is showing as a $608,800 first and a $114,150 as a second. Error? Shows a possible short plat. Is it possible someone financed the shortplat and buildout of two homes and then waltz off with the money? It’s amazing what you unearth working in realtime in a blog comment. I’m afraid to look at the other two properties.

    The one asking $310,000 was bought in 2005 for $220,500 from somone who paid $117,000 for it in 1992. It ALSO was sold again in 2006 for $329,950 by someone who put almost 50% down. Between the 2005 and 2006 sale someone put in new windows, hardwood floors, new countertops with old cabinets – looks like a quick flip. It’s 1,000 sf. Now the person who bought it after the flip has it on market at $310,000 after trying to price it AT what they paid for it.

    Before that 2nd real life example I might have told Joe to spruce it up as much as possible and then try to sell it…but seeing that $310,000 on market kind of nixes that option. At least we just saved him the money he would have spent trying to fix it up to improve his chances of selling at a higher price than he paid. That does not appear to be an option. No one wants to pay more than someone else paid in 2005 or 2006 these days.

    There is only one pending sale at a $310,000 asking price with a brand new kitchen with maple cabinets and granite countertops and a huge over 15,000sf lot that is fully fenced and backs to a creek with a new roof, all new appliances.

    OK…let’s all agree right here that Joe can’t sell it for more than he paid for it and move to his other options in another comment.

  48. Jillayne #51

    Sorry…not so. In Joe’s example, which is fairly typical of the time, the “signing” was done before Joe met the lender, so it was the AGENT not the LO who had Joe sign something without knowing what his monthly payment would be. There is no getting around the fact that the agent is the one in the room with Joe for the longest period of time, and the one who is there when someone signs off on an offer.

    The agent should have asked for the Good Faith Estimate that went with the pre-qual letter before Joe signed the contract. If “the agent’s favorite lender” could not produce one on the weekend, then she at least should have gotten the detail. I’ve taken the phone from the buyer at the end and said “What’s the rate on the 1st? What’s the rate on the 2nd? Roughed up the payment with my mortgage calculator and showed it to the buyer before they signed.

    There is no getting around the fact that the person in the room who REPRESENTS the buyer is THE AGENT and not the LO. Changing that is not the answer, as the agent is the one who had Joe sign a stack of papers that equalled an offer.

    What LOs need to help fight for is a rate cap in the Finance Contingency. THAT was the breakdown in Joe’s story. The Finance Contingency was worthless!…and also what forced people into sub-prime with no out. Agents can not pass the responsibility for their client to the LO…not then…not now…not ever. Don’t hire an agent who doesn’t own a mortgage calculator! LOs also have to stop acting like the detail of the loan and payment are not the agent’s business. Two heads are better than one. Don’t get insulted when the agent wants to second guess you. It is the agent’s job to second guess you.

    The LO answers the question CAN the buyer buy it. The AGENT answers the question SHOULD the buyer buy it (AND/OR) Does the buyer have ALL the info needed to give “informed consent”. In Joe’s story he did not have all the info needed to give informed consent at the time he signed the offer.

  49. I love this post!
    I used a story similar to this one to explain the mortgage crisis to my friends abroad… only I used the name “Jack Bauer” (“24” is really popular abroad!) instead of Joe-Six-Pack, because I estimate that a CTU agent probably makes around the same amount 🙂

  50. Jillayne, I don’t think it’s the LO’s responsibility to say whether or not someone should buy a home (comment 56). It’s a LO’s responsibility to qualify the borrower and fully explain available mortgage programs (pros and cons) based on their financial scenario. Hopefully the LO is factoring in the buyers short and long term goals.

    I think Ardell’s description that you’ve quoted is more accurate.

    Maybe we need a 3 day right of rescission for purchase and sale agreements (or their mortgage), similar to what refinances have, to give the 6PJ’s of the world a chance to simmer down and read their documentation.

  51. Jillayne asks: Wouldn’t it be great if someday the LO also had the responsibility to answer the question: “SHOULD the buyer buy it?

    No, not really, other than the products and process being more in the realm of “should”. The LO has products to offer. Those who design the products that they sell, and set the parameters as to ratios and rates are responsible, not the LO.

    It has always been the agent’s job and the agent delegating that responsibility to the LO has had these consequencs. Two people having the same responsibility will equal too many cooks spoiling the broth. The Agent is in the room and needs to know if the lender, home inspector, appraiser and ALL other participants have given the buyer the info they need to proceed. There’s no substitution for that underlying consumer protection.

    Making more than one person responsible only gives more room for finger pointing. In fact it validates the agent delegating this in the first place to the lender. That is not the answer, Jillayne. The LO is not the answer. The answer lies in every real estate brokerage…and they need to stop talking in that office like SALESpeople and more like people who represent people for a living. THAT is the answer. They have to stop having “Sales Meetings” and stop celebrating “DEALS” and start talking about clients in those weekly meetings and stop calling clients “leads” and “fish” and people to be “captured”.

    A couple of states like OK and FL are exempt from my plea. Those states are just SOL. But here in WA all you have to do is read the CURRENT Agency Laws and live up to them…not change them.

    Jillayne also asks: “Question: Could J6P have pulled out of the transaction, lost his 10K EMA, and then have sued the real estate agent for poor representation?”

    I’m not there yet. Seems Joe could have gotten a better deal from FHA at the time. Maybe the agent’s favored lender wasn’t authorized to do FHA and the agent should have switched lenders to one who could. I have to re-calculate the payment to see if it fits FHA guidelines at the time. If I were the agent in the room, even on day 2 when the buyer met with the lender…that would have been my first step. Hmmmm. Nope. Just calculated it. It would have helped in a lot of ways, but not necessarily saved the day.

    Back to day 2, if they cancelled while one of the other buyers was still in play, and the seller got right back into escrow with a different buyer within 72 hours…the seller might have signed off on the Earnest Money. That was the best bet back in the beginning. But too late for those answers now.

    IF everyone wasn’t promising the RE-FI, which Tim confirms was the repeated rationale of the day, the cancel would likely have taken place. It is the disappearance of the RE-FI option that is the crux of the ongoing problem and likely the solution. Seems we have to go to Loan Mod at this point.

    Now I’m singing Cher’s “If I could turn back time…if I could find a way.” Joe needs to stop drinking the sixpack and play that song with me while we figure something out.

  52. Pingback: Joe Sixpack takes a look at the Subprime … | The Hotlist

  53. I’ll bet that 6PJ’s lender was not FHA approved…and if he or she was, they might have been too lazy to consider FHA… Also, some agents would prefer to NOT have an FHA buyer which really seems ironic.

    I believe our new state legislation granting mortgage brokers fiduciary duties does not require a LO to tell a borrower whether or not the lender has a specific program (such as FHA loans)–Jillayne, please correct me if I’m wrong. I think the legislatures blew it w/that.

    Ardell, I just did a quick glance and I don’t know what month 6PJ closed, but one of buyers in March of 2006 had an FHA rate of 6.00% (if that helps you figure out his payments). Upfront mi @ 1.5% and monthly at 0.5%. DPA would be available but it sounds like with the bidding war, it might not have happened or even worse, it would have been stacked to the price.

  54. Back to Joe.

    First and foremost he has to stop going into the garage, stop buying sixpacks, and have a talk with his wife.

    Let’s look at his current reality as I have portrayed it:

    1) He now makes $69,000 a year without overtime
    2) His 2 year old son is now 4 and his other child is 2
    3) Wife doesn’t work at present
    4) He’s $4,000 behind
    5) He has credit cards at 30% interest
    6) He can’t sell his house for what he paid for it

    Let’s look at what we call his “front end” or housing payment ratio. He makes $69,000 divided by 12 times 33% (we’ll give it a max stretch there).

    His housing payment should be $1,900 which answers the question of what Joe should have done in the first place.

    When he couldn’t buy a house without paying over $2,500 a month, he could easily have left the 2 bedroom rental and rented a house for much less than his front end ratio. Had he rented a similar house in that same school district, he probably would have paid $1,100 a month and could have saved $800 a month until he had 20% down. Let’s say he did that for three years until today and bought that bank owned property or the really nice $310,000 property. $800 a month for 3 years equals $28,800.

    Well, at least we answered what Joe should have done. He should have rented a similar house. His wife and kids would be equally as happy right now in the rental. He’d be about ready to buy right now vs. in 2006. Prices are lower, his income and savings are higher and an 80% LTV on $310,000 is a payment of $1,750 or so with taxes and insurance. Fits like a glove.

    I’m going to take a break and be happy for a little while that there was in fact a reasonable and responsible answer to Joe’s situation back in 2006. Had the agent offered this advice back then, we wouldn’t be in this mess today.

    More on what to do about the mess after we revel in right answers for a bit.

  55. Rhonda,

    Thanks for the double check on my FHA calculation. I used 6% and it didn’t work out for Joe, but glad to hear I guestimated the rate correctly.

    $364,000 less $20,000 down (figured he needed $10,000 of his $30,000 savings for his closing costs, reserves and moving costs) at 6% is close to his payment after the lender re-did it. $2062.45 with taxes of 200 and $50 for insurance is still $2,300 without MI considerations.

    So as I said in my comment #50, FHA would not have saved him back in 2006. He should have rented a similar 3 bedroom house until he had 20% down. I haven’t brought up his wife making a bit of money yet. That might be part of the solution at this point.

  56. I know it’s way off topic, but I just gotta give a shout out to Paul Krugman for winning the Nobel Prize for Economics today

    Not only is he a brilliant economist, he is an outstanding popularizer of economic theories and behaviors in his books, columns and internet writings.

    Sometimes, the good guys do get recognized.

  57. Sigh.




    Stupid? On whose part?

    Popblastic (new word)

    Sane? On no terms.

    This has gone on ever a few years ago. People assess their family situation, consider they need a home, go for trusted advice which in theory could work, and end up well, you know.

    Does anyone think this is going to end? Isn’t this going to be business as usual – again – without new regulations?


    By the way Joe Sixpack is about as negative an image as Joe Lunchbox. It’s not flattering, folks and conjures up a ton of broad generalizations.

    This sort of thing happened to Sam Solvent and Gilda Gotsomuchmoney. It didn’t happen only to middleclass Joe, but to lower income and to the wealthy.

    It even happened that people knew how to work the system, never paying a payment throughout the time they resided in the home.

    Sad? Yes. The end of these kinds of loans or transactions? Probably not.

    We’ll see how it all shakes out.

  58. six pack of advice:

    1. Before signing a legal document, every Joe, Tom, Dick & Harry ought to ask an experienced attorney to explain it
    2. Always read the documents– yes, even the fine print– that’s where all the bad stuff is hidden
    3. The more you have to lose, the more opinions you should get
    4. Statements about the future should NEVER be trusted
    5. Always ask “Is this your opinion or is it a fact?” If they answer a fact, have them put it in writing
    6. Beauty lies in the hand of the beerholder (anon)

  59. It is true, it is sad, it is heartbreaking! The government is so full of it and worse than that, we’re allowing it to get away with things like this 700 billion “bail-out” pile of crap! This country can do better than that!
    The government needs to remember the wise ol’ words: “you can fool some of the people some of the time, you can fool all of the people some of the time, but you can’t fool all of the people all of the time… “

  60. from post 64 “Had he rented a similar house in that same school district, he probably would have paid $1,100 a month and could have saved $800 a month until he had 20% down.”

    If he’d done that, his credit score probably would be a bit higher than 640 at the end of the 3 years too.

    I was saving down payment money in 2006, but it was a little disheartening when the prices were going up faster than my savings account. If Joe had 30K, he had 10% of a 300K house. Prices were going up almost 8K/mo for parts of 2006, so $800/mo was around 10% of the increase, so he would have had to endure saving with his down payment not going up much at all, percent wise.

    Of course he would have enjoyed the rental much more than his current situation, plus not needing to do or pay for maintenance and being able to downsize or move at any time.

  61. Well written story and one that is unfortunately sad but true. It seems that many financial institutions actually designed their loans so that their customers would HAVE TO refinance or sell.

  62. Yes, it’s sad, but it’s happened thousands of times. Joe did make some bad decisions–he became caught up in the “I’ve got to win” scenario. He should have made certain of what the final costs would be. But, Joe had accomplices.
    In my mind his agent defaulted in her duty to protect Joe’s interests.

    In the future those Joes who were burned will know what questions to ask.

  63. I actually have a First Franklin rate sheet on my desk from October 2006, Ardell’s rates are right within range of what would have been quoted then. A 30 or 40 year fixed rate with a 640 credit score with stated income at First Franklin (Merrill Lynch) at 95% loan to value would have been just shy of 9%. Having the “security” of a longer term rate would have cost him a lot more per month…but it’s a choice for each borrower to make (including whether or not to buy).

  64. I’ll say I’m breathing a sigh of relief that I am not Joe. But for the grace of God and Seattle Bubble I could have been the 2007 model.

    For the future, I’m not convinced the Joes of tomorrow will be much more wise and less impulsive.

    I’m not sure the RE brokers, whose income depends on the amount of sales and benefits from higher prices, will just happen to never foster a culture of salesmanship as referenced in post 60. I don’t see why NAR and MLS will be less likely to be cheerleaders pushing sales like they have been.

    I’m not sure agents, put into that environment and given a payment whenever the sale is closed, with the same training system and ethics code, will be that much less likely to push the buyers to finish the sale.

    I’m not sure Mortgage Brokers will be that much less likely to put people into a bad mortgage product if there is money to be made. The good ones will still have the problem that if they don’t do it, someone else will (agents too).

    I don’t think the bank executives, if they are still paid 8 digit salaries for short term profits regardless of if it drives the bank into the ground a few years later, will be much less likely to cash out by pushing these toxic mortgage products, or whatever else they come up with.

    I don’t have an inside view of what was going on in these industries, but I just don’t see how we can prevent a recurrence unless changes happen to the system at every level. Human nature isn’t going to change, so we need to change the way things are done to account for what humans will do. It’s easy to point the finger away from your part of the problem, harder to figure out how to fix it.
    Adding a finance rate contingency to the offers sounds like a good idea. What else?

    And yes, what about the Joe who already bought 2 years ago.

  65. Joe’s biggest mistake (which is an easy one to make) is that he did not meet with a lender first (and one that was looking out for him instead of just putting a deal together). He got into a contract after meeting with a RE Agent and THEN got approved. He had the cart before the horse.

    At the very least, had he met with a lender, he would have had time to determine whether or not he liked/trusted the LO and would have time to find another LO if needed. He would also have time to review and digest all the proposed mortgage scenarios and payments. When you put the house before the loan and enter into a contract, you lose control and time.

  66. Rhonda #75 “Ardell’s rates are right within range of what would have been quoted then. A 30 or 40 year fixed rate with a 640 credit score with stated income at First Franklin (Merrill Lynch) at 95% loan to value would have been just shy of 9%.”

    I have a good memory 🙂 And I have always perceived it to be my duty to be able to rough up a payment without an LO in the room. It’s one of the reasons I ask you to post rates every Friday…and I thank you.

    To keep Joe’s story in line though, I’m not sure he was “stated income” nor is Joe. We only know he had a front AND back end of 44% of his gross income with no debt payments. He had verifiable income of $65,000.

    Rhonda, are you saying that they would have put him through as stated because of that ratio? That would be news to Joe right now.

  67. “Joe’s biggest mistake (which is an easy one to make) is that he did not meet with a lender first (and one that was looking out for him instead of just putting a deal together). He got into a contract after meeting with a RE Agent and THEN got approved. He had the cart before the horse.”

    Rhonda, I am very sad to report that the last person I spoke with who is planning to buy at some point in the next year, refused to speak with a lender. Until someone can absolutely guarantee that the LO running the credit report is NOT going to reduce their credit score, people will be afraid to talk to a few LOs who all want to run their credit report and damage their score in the process.

    So to all the Powers That Be…STOP REDUCING PEOPLE’S CREDIT SCORES…for inquiries! It’s hurting people to be afraid to shop lenders and ruin their credit score in the process!

    In fact…stop the whole FICO scoring thing…it didn’t WORK and “Fair Isaac” is not fair at all! Many people who know how to juggle between credit cards keeping the balances under 30% on each card are gaming the credit score system.

    Clearly anything that hinders a homebuyer from meeting with a few lenders over a 6 month period prior to buying a house is NOT a good thing. Stop reducing people’s credit scores for doing their due diligence and meeting with more than one lender before beginning the home buying process.

  68. Cautious Buyer asks: “And yes, what about the Joe who already bought 2 years ago?”

    Well, Joe and I had a little chat. He’s out having a nice quiet dinner with his wife, while I watch the two kids for a couple of hours. They are going to talk about The American Dream and their dreams that they’ve lost sight of while chasing The American Dream.

    We’re not going to go any further with advising Joe until he and his family decide what THEY really want. We, agents, help them do what THEY are trying to do. So first they need to do a little soul searching about what they really want.

    Do they want to stay or do they want to go? They are going to sleep on it. No sixpacks or garages tonight…just a glass of wine and a lot of talking.

    Tune in tomorrow.

  69. I don’t think that consumers should allow several LOs to run their credit report even if it there is little to no impact on their credit score. It’s a lot of personal information that’s being trusted to a stranger.

    Borrowers should invest a little time getting to know the person who may be handling their mortgage. You cannot select them by rate alone. There is so much more to the picture–especially now.

    If Joe would have talked to three LO’s prior to getting into the offer, I bet that at least one of them would have stood out above the others.

  70. Ardell, all I can say is that this is one of the best posts that I’ve read recently.

    I’m glad to see someone telling it like it is. How many Joes are there? Plenty…

    My heart goes out to all of them.

  71. I hope things turn out OK for Joe!

    I am reading over my last comment and I feel bad it seems a little harsh. I think there are a lot of good people in the real estate industry including customers, agents, buyers, brokers, and even bank executives. I think (and hope) that the readership of this blog tend to be the best of their professions, since they take the time to come here.

    I was trying to push for those who are the best of their professions to try and change things for the better for the inside, even if I put it in a tactless way. I was thinking that you could find ways to make your profession better for the country, and maybe push for permanent changes to keep those who are not the best of the profession from doing damage like that done in the last few years.

    In my opinion, the best thing that could have happened for Joe (fantasy world) would be for there never to have been a real estate frenzy fueled by easy credit and greed. Maybe prices would have risen at a reasonable 3-4%/yr, which would have been OK for current owners, Joe’s agent would have shown him a number of nice starter homes for maybe 260,000-340,000, and he would have had a few days to check lenders and think before making an offer.

  72. With the 1 year LIBOR currently at 4.060%, many home owners with regular fixed ARMS (5/1, 7/1 etc) that are adjusting now…are going to be in for a payment shock. Factor in the margin of 2.25-2.75 (or higher if the ARM was subprime) and rates are going to be mid-high 6’s (depending on what their CAPs are). If the mortgage holder has an interest only feature that is ending with the fixed period, the payment shock will be even higher.

  73. Rhonda,

    Re: #84


    Never mind the fact that most mortgage holders in our area have had property taxes increase quite substantially. In other words, mortgages have adjusted up without even their note rate influencing the situation.

    LIBOR will have to get under control or there is going to be yet another problem to deal with. On the other hand, maybe not. Perhaps Hank and the gang will reach out with another program to keep over encumbered and financially tapped out households in their homes.

  74. Pingback: Joe Sixpack at

  75. Mr. and Mrs. Joe would like to know what are their options for staying AND their options for leaving, before deciding which they should do at this point.

    Reality is that they likely have to plan for either scenario simultaneously, since HAVING to leave could at some point become beyond their control.

    Their prospects for staying are better than their prospects for leaving, because they can’t get an owner to rent to them with their current credit history (unlike back in 2006).

    Leaving equals selling short and living with relatives. They have no family nearby and no one wants them with 2 children for more than a few weeks or a few months. Leaving looks pretty bleak unless they can stay in the house for quite a while paying nothing (which offends their sense of decency) so they can stockpile money to pay a landlord many months rent in advance to compensate for their poor credit history.

    Lease Purchase is actually an option…moreso than straight out renting…and we are going to pursue that option. Since home prices are lower than when they purchased, and FHA will do a credit score as low as 580 without risk based pricing at ratios of 31/43 for by hand underwriting and 60 backend for automated system approvals (GASP! Say it ain’t so, Joe).

    OK, I’m gagging on that 60% backend automated FHA…so let’s get some lenders in here to confirm or deny that before I continue.

  76. Rhonda said, “for subprime borrowers”

    Most people didn’t know they were “subprime borrowers”. The word “subprime” was not on their pre-approval letter.

    Joe didn’t know he was “subprime” until the Bailout.

  77. Ardell, FHA does not charge additional for credit scores…lenders do.

    Typically 620-600 = 0.25% price hit
    580-599 = 1.00% price hit.

    Some lenders are now refusing “alternative credit”.

  78. Rhonda,

    I heard something scary today that while manual underwriting for FHA was 31/43 ratios, there was still an automated pre-approval system “like” Fannie Mae that pre-approved up to 60% backend. As long as that pre-approved loan didn’t kick into manual underwriting for any reason, an FHA could go through at a 60% backend today.

    Is that true? The scarier part is it was being “sold” as “a good thing” to help “sell houses” to people who didn’t qualify at 31/43 which is stretched enough.

  79. Manual underwriting is used when a transaction does not meet AUS (automated) approval. Automated is used first, manual second. There must be a valid reason for going “manual” for underwriting–the transaction will have to be very strong.

    Expanded debt to income ratios are possible…so, if a borrower can be apprpoved with a 60% back end ratio, does that mean it’s the lender’s fault they’ve strapped themselves if the opt to take the mortgage?
    I know you realize this Ardell, but readers should know that when we talk about debt to income ratios, this is based on gross income (before your taxes are taken out).

    If 60% of your gross income is used towards your current debts and total mortgage payment, you better have loads of savings and hope nothing ever happens to you…as you only have 10-20% remaining income after taxes to plan for your retirement, college, food, gas, etc.

    Americans need to be more responsible with what they spend out of pocket and with what they rack up in debt. Just because you can do something, doesn’t mean you have to or should.

  80. PS: when an expanded back end ratio might make sense (before you all blow your tops over comments 93/94) is when some of the income is not allowed to be factored in.

    For example, a married couple where one spouse has received a promotion and now their compensation structure has changed (base reduced/commission added) or a parent is living with them and will be contributing towards the mortgage payment/living expenses. Perhaps they’re receiving rent on another property that can’t be used…or child support, alimony…etc.

  81. David said “It only has to do with the asset. The value of the asset is the only variable. Whether Joe can afford or does not want to pay the mortgage is irrelevant.”

    This got me to thinking, people have it all wrong when they think housing works as asset price -> loan payments; in reality, ability to pay -> loan payments -> asset prices. My comment got really long so I’ve cross posted it over at my old blog:

    An asset has no value absent three things: what people are willing to pay for it, what people can pay for it, and it’s fundamental value (i.e. an NPV of all present and future dividends and costs)

    With housing “ability to pay” is the only factor that matters – it either drives the rent price or the sales price. Rent is a fairly liquid market, so it is a good indicator of long term “ability to pay.”

    Here is how you can calculate the fundamental value of housing:
    Start with income * percent allocated to housing = housing budget

    Take housing budget, factor it by interest rates, percent loan and term and you have the maximum loan you can support.

    Maximum loan + down payment = house price.

    (in excel, use this formula to get maximum loan =pv(rate,years,yearly housing budget) )

    Some notes:
    – percent allocated to housing is complicated as it varies from person to person, but there are hard caps on what people will spend on housing – it is physically impossible to spend more than 100%, lenders usually won’t allow you above 40%.
    – down payment is complicated as well, since you have to assume the down payment was either saved or borrowed
    – housing budget has two parts: investment + lost payments. Rent is 100% lost payments, mortgages start out mostly lost payments then switch over time to mostly investment. This helps explain why mortgages should be more expensive than rent for the same size place.
    – since inflation increases salaries it should pass through to houses, so over the long term absent any increases in salary or other changes, housing prices will track inflation.
    – amount you can afford doesn’t respond to changes in supply and demand.
    – what responds to supply and demand is the size of the space you can afford (so in NYC you pay more for square foot, and in places where there is lots of available land you get as much space as you can afford to build)

    The only long term drivers of house prices are 1) inflation 2) increased wages and 3) increased demand without corresponding increases in supply.

    Short term fluctuations can be caused by:
    – Required down payments (or the converse, amount you can finance)
    – Interest Rates
    – Expectations and other noise

    You said that his ability to pay doesn’t matter. You are wrong. His ability to pay is the ONLY thing that matters.

    Based on median income (I assume $63,856, and growth of 4% per year), long term average interest rates (7% for the past 15 or so years), and current house prices (~440 median price) – don’t be surprised to see another 10 to 30% drop in Seattle prices — no appreciation for 5 to 10 years — or worse.

  82. Rhonda #94 asks: “Expanded debt to income ratios are possible…so, if a borrower can be approved with a 60% back end ratio, does that mean it’s the lender’s fault they’ve strapped themselves if the opt to take the mortgage?”

    Yes, yes and double yes!!! That is sadder than Joe’s 44% backend! And AUTOMATED SYSTEM APPROVAL with a 60% backend leaving 40% for taxes and to live on… and that is a GOVERNMENT INSURED LOAN!?!?

    I hope the Presidential Candidates are reading this!

    What people don’t realize about my Joe Sixpack story is that his situation is MILD and worse is still possible within our current automated processes sanctioned by our government!


    Who has your back in this freakin’ Country!!! Bring back the Mafia.

    We have learned nothing…we have fixed nothing…

  83. Rhonda #95,

    Well that would make sense for MANUAL underwriting as in too important to push through an automated system.

    Seems 31/43 should be AUTOMATED and beyond that should be Manual instead of vice versa.

  84. Ardell said “I hope the Presidential Candidates are reading this!”

    They aren’t. The best you can do is to write or call your representatives in government, and maybe try to get in and see your congresspeople. It probably won’t work but I’d suggest you try it anyhow.

  85. TT, isn’t it possible that some people could choose not to spend the most they could possibly afford? Look at Warren Buffet. Lots more assumptions in there too.

    It seems like I’ve become some sort of walking blue Christmas tree with elephant tusks. Don’t know how that happened.

  86. Your story is made more personal when you give the players names. What I can’t decide is if this is the fault of the borrower for going beyond their limits or the lender for not being more selective. Both sides thought the worst case scenario would be selling the house in 6 months and making a healthy profit. When that perception reached epidemic proportions that effected everyone’s buying decisions. Now we’re all feeling Joe’s hangover.

  87. The reality, Cautious Buyer, is a lot of people go to a lender or a real estate agent and ask “what CAN I buy?”. They expect the answer to be “within reason”. They expect those professionals to give them a relatively realistic response. They DEPEND on that response being reasonably conservative.

    The general, run of the mill options, should be “worthy of that public trust”.

    FHA is a federally insured housing program designed to “help people” own homes. No one would expect the answer to be 60% of your gross income, nor do they check it.

    For years the answer to housing payment was 28% of gross income and housing plus debt was 38% of gross income. Automated approvals used that standard and when the “pre-approval” system kicked you out…you knew you were beyond reasonable limits, and that red flag caused you to question the sanity of what you were doing.

    When an automated approval spits out YES you CAN with a 60% back end…it’s time to smash the computer.

  88. “It seems like I’ve become some sort of walking blue Christmas tree with elephant tusks. Don’t know how that happened.”

    Thanks for the laugh. I needed it. Anonymous posters without actual Gravatars are being assigned cute little monsters. I like them. It makes it easier to go back and find previous comments by a certain poster.

  89. What is not mentioned here is the part the real estate agents played in SixPack’s story. RE agents did cheer lead the housing party and encouraged buyer to take on unaffordable loans and projected unrealistic expectations such as “Real estate in Seattle always goes up”, “Seattle is special” etc.

  90. Ardell, there are so many situations where people don’t fit into the guidelines. If they’re qualifed at an expanded debt ratio, they typically have a larger savings to compensate with higher credit scores.

    There are many self employed people who going “full doc” are going to have pushed back end ratios.

    I always believe that the it’s the responsibility of the consumer to be responsible with their credit/assets/finances.

    Let me ask you this, do you feel that a consumer should take advantage of every credit card offer they receive in the mail? (I hate them–I’m not saying they’re right…I am saying we need to be accountable for our own finances).

  91. Another scenario to run by you, Ardell (I mentioned this on another post, but I don’t think it was yours)…

    I had a person in a long p&s contract (new construction condo) who went to the builders lender (not me)…who of course approved them and, like Joe, via stated income. This person didn’t know it was wondered how they could be approved. They called me for an opinion…it really gets messy from here and could be a post on its own…but after much conversation with this person, I asked them if they saw the mortgage payment (which was pretty much their net income) and they said “yes” they understood how much the mortgage payment was.

    I asked how they thought they were going to afford it…they said they didn’t know…they were young (I guess signing that p&s put some years on them, I’m sure it stressed them out) and just wanted to condo and were willing to sign or say anything.

    Now in this case, I’d say there’s enough finger pointing to go around a few times as to who is to blame for this scenario (which I’m not making up–it’s an actual conversation)… but I have to say a finger points back to not only the lender and builder (which make me sick for the practice of forcing buyers to the lender to only have them shoe-horned into a mortgage at any cost) …but what about the buyer? They knew they couldn’t afford it…how on earth did they think it would work out ever?

    Don’t get me wrong, my heart breaks for people who bought subprime, who did not (knowingly) overstate their income, who are stuck in a home worth less than their mortgages. I was afraid of this well over a year ago.

    I don’t want the government to tell me how to run my finances or to control what I can buy. Especially if you take a look at our elected officials in Congress and how little they know about mortgages and real estate.

  92. Justin: “Both sides thought the worst case scenario would be selling the house in 6 months and making a healthy profit.”

    No, I don’t thinks so Justin. I don’t know ANY agents (and I know a lot) who would sell a home to a family with small children thinking they would push them into a situtation where they could come back in 6 months and sell it out from under them.

    I know a LOT of agents, and I don’t know a one who would ever think like that.

    I did however meet many lenders who thought the prices would go up to the point where at time of RE-FI the original loan amounts would equal 80% of the future value in two years, after the pre-payment penalty went away. Then the borrower could have one low rate first mortgage. And yes,the LO would make a second fee at time of RE-FI. Escrow personnel confirm this.

  93. Ardell, I’m sure LO’s are out there who would say that (bottom paragraph of 108)… I don’t know of any personally. 95% LTV = 80% LTV in 2 years w/closing costs or a low enough rate to “absorb” closing costs is a steep promise.

    Most LO’s who would make such promises obviously had no intentions or ability to keep them.

    I would love to hear from home owners in this situation to learn HOW they selected that LO.

  94. To Justin and Mary, yes, I have met many agents who have been in the business a short time who truly believed that home prices could only ever go up. I don’t know where they got that idea. It certainly isn’t historically true for the time I’ve been in the business. Maybe people use personal reference too much.

    But when I questioned them, there was no doubt that they believed it.

  95. Lots of finger pointing here. I think Rhonda(and LO’s in general) was doing what she thought was best at the time. She didn’t design the crazy mortgage products or force anybody to take them. She probably didn’t even push them. Ardell (and other Agents) was doing the best she could at the time as well. Joe was just trying to do the best for his family.

    Here’s my dirty little secret. I am the guy in comment 64 who postponed buying and saved for a while longer. I thought I was doing the more responsible thing. Every time I hear about how we should redo Joe’s mortgage, I am thinking “why does he deserve it more than me?” Why redo current mortgages rather than offer the same amount of money in free rate reductions to current first time buyers? Both would have the same effect of keeping prices inflated and put the same number of people into homes. That is selfish and egotistical and I am more than a little ashamed, but I am also trying to do the best for my family. Our biological clock is running out while prices remain high.

  96. Pingback: Today’s Ma.gnolia Links : Slobokan’s Site O’ Schtuff

  97. Sorry for the finger pointing. It is not the LOs fault that there are currently 60% backend automatic approvals happening as we speak. Neither was it their fault that the lending guidelines were so loose in the past.

  98. Cautious Buyer, I’m not a LO who’s done “crazy mortgages”. I am here today because as Ardell mentions in comment 111, my business was not based on subprime mortgages or stated income. I probably lost more business during those years than I closed. I never closed an option ARM.

    I’ve always felt (before it was legislated) that it’s my duty to make sure borrowers understand their mortgage and what all of their options are. It’s their choice and they should make an educated one.

  99. Rhonda,

    It’s the “automated approval” that bothers me most. I’m from the days when automated meant you readily passed muster, and hand underwriting was for the stretch and on the fence situtations. I would expect a 31/43 to pass automated and anything beyond that needing an underwriter to review.

  100. Rhonda,
    Sorry if I implied that you did. That wasn’t my intention and I do value your input. I am trying to understand the 60% back end. Does it mean 60% of net income be debt payments and still be automatically approved?

  101. Back to Joe. The first line of this post read: “The subprime crisis is a broken promise to Joe Sixpack. All Joe wants is for the lender to go back to the day he made his payments on time for two years, and give him what they promised him back when he bought the house. One loan at going rates.

    He doesn’t care about the current value.

    He doesn’t want the taxpayers to bail him out.

    He just wants the lender to give him what they promised him when he made the “informed decision” to proceed with buying the house, that being ONE fully amortized loan at going rates.

    And he wants it retroactively to the day they promised it, when his loan was paid on time for two years. He worked hard to do that and they should have made good on their promise.

    Let’s call “the going rate 5.875% going back to when Joe reached his two year anniversary.

    Let’s go back to the original face amount of the first loan of $291,200 which he paid on time for two years at a 7% interest rate with no principal reduction (10 year interest only). Let’s add the 2nd at original face value of $54,600 and change the rate to 5.875% from the 9.5% they have been charging.

    He does want the bank to forgive any interest and penalties from when he started getting behind AFTER they broke their promise to him. That only seems fair.

    He wants a loan mod of $291,200 plus $54,600 which is $345,800 at 5.875% over 30 years is $2045.54. Plus taxes and insurance of $250 is $2,295.54. It’s not much lower, but at least it’s fully amortized and the principal will diminish over time.

    That is 40% of his gross, and he now has credit card debt. Mrs. Joe is going to work at the local bookstore, part time, and pay off the credit cards.

    That’s all Joe wants…turn back the clock to where he had paid on time for two years…and give him what you promised him in the first place.

  102. Cautious Buyer, in comment 113, you do mention me specifically…no sweat. You don’t know anything about me or how I manage my business. 🙂

    See comment 94 (I believe)….it’s literally gross income, not net. Your question from 119 is answered there.

  103. Ardell, Fannie and Freddie’s AUS is not as loose as it was once. They’re issuing more “expanded approvals” with the upgrade to DU 7.0. This is one reason why FHA has become more popular. Even if you have a larger debt to income (back end) ratio, with an FHA loan, the borrowers are going to be fully scutinized underneath a magnifying glass. Everything is documented. Just because a 60% back ratio is possible, does not mean that this happens all the time–it’s rare. As I’ve mentioned before, other factors typically must be present (including an alignment of the plantes) for this to happen). 🙂

  104. Thanks Rhonda, you deserve a lot of credit for not going that direction when many others were. Were you in the minority, or were most of the subprime people new to the business?

    Joe’s requested terms sound familiar. Was something like that brought up by one of the presidential candidates?

    Is the loan modification possible today?

    Would it be correct to say Joe wants to make it as if he had gotten the planned refi after 2 years?

  105. Cautious Buyer:

    1) Ratios are always based on GROSS income

    2) Front End is your housing payment including RE taxes and Homeowner’s Insurance (for a condo add condo fee instead of Homeowner’s Insurance)

    3) Back End is a combination of DEBT payments plus housing payment (PITI Principal + Interest + RE taxes + Homeonwner’s insurance = PITI)

    Someone told me yesterday that I’m “old fashioned” for saying Front End and Back End, but they are very important as lenders WILL push your housing payment if you have no debt. But then if you buy a car while you have a mortgage (and who doesn’t) you will be overwhelmed by the combination of payments.

    Simple Example:

    You make $65,000 a year which is $5,416 a month

    FHA 31/43 would mean 31% front end and 43% back end. The difference is allowable debt.

    31% of Gross Income is $1,680 a month of PITI (or Rent payment)

    43% is $2,328 less $1,680 equals $648 for debt payments (credit card, student loans, car payments NOT utilities or gas or cell phone)

    A higher Back End Reduces your Front End as in if your monthly debt payments are $950 for two cars, then you have to subtract $950 from your 43% back end to get your and reduced PITI or rent. $2328 less $950 is now $1,378 vs. $1,680 a month.

    Some loans, like VA, had no Front and Back End and allowed you to spend the full back end ratio on housing payment if you had no debt at time of application. But how realistic is that over 30 years?

    A 60% “back end” for someone with a gross monthly income of $5,416 would have housing and debt payments of $3,249.60 leaving only $2,166.64 to pay their taxes and live on outside of debt payments.

  106. Cautious Buyer asks: “Would it be correct to say Joe wants to make it as if he had gotten the planned refi after 2 years?”

    That’s all he wants…he wants what they promised and he worked hard for, for two years. Truth is Joe started drinking the sixpacks because he felt shafted, not because he couldn’t figure out a way to meet his obligations.

    He didn’t want to keep paying 7% on the first with none if it going to principal. He didn’t want to keep paying 9.5% on the 2nd over 40 years. It wasn’t the payment that was killing him as much as the broken promise. No one wants to work their butt off to meet an obligation that was based on deceit.

  107. Ardell, as I said before several times, a 60% DTI is going to be an exception…it’s nowhere near the rule. It is the planets aligning….possible…whoever told you that is correct. It’s possible. I’m surprised when I receive an approval over 45% FHA and equally so when I receive a decline with a less than 41% back end ratio.

    I’m not a fan of automated underwriting. It really works for some and it unfair for others. It’s no different than credit scoring (and that’s a whole separate rant).

  108. Pingback: Eastside - A look at “affordable” housing | Rain City Guide

  109. Ardell:

    The Gravatars are fun!

    One LO dilemna needs to be further explored.

    If a borrower qualifies for a program, (whether we think the program is prudent or not) we are obligated to tell the borrower the truth. We can offer an opinion as to what we think is the wisest course of action, but in a free society, the consumer gets to make the decision. Sometimes, my customers choose a course different than I advise, and I believe I am professionally obligated to assist them in a carefully considered choice, even if it differs from my opinion.

    Of course, we also enact laws to make certain unwise choices illegal. Often those laws are enacted after the fact.

    Veering a bit off course, I came across a marvelous left/right exchange regarding the unregulated credit default swap issue, that includes the discussion of whether the current global credit and financial distress is caused by CDS or by defaulting subprime US mortgages.


  110. Rhonda Wrote:

    “So is Joe a plumber?”

    I read on MSN that “Joe the plumber” is worried that Obama will tax him 3% more if the business he wants to buy brings in more than $250K a year.

    Some folks have it so rough.

  111. “Of course, we also enact laws to make certain unwise choices illegal. Often those laws are enacted after the fact.”

    That is why I’m wailing and railing against FHA automated approval system allowing a 60% backend. We ARE “after the fact” and yet…there it is.

    Clearly that is unconscionable for a government insured program. I don’t care how few qualify on this AUS…it is wrong! I’m not blaming LOs for using it…I’m asking who gets rid of it?

  112. Then bottom line is that Joe stops paying the game. Joe was swindled. He along with millions of other people were swindled by everybody, lot’s of finger pointing.

    Joe may not give a RA about the asset, the lender certainly didn’t, but Joe is paying twice the price of the asset value for the privledge of what?


    Joe needs to man up and walk away. Just walk away. The asset isn’t worth what he paid for it.

    The asset is worth what it will rent for, sell for, or an intrinsic worth determined by the buyer.

    Nothing personal it’s just business.

    As for the FICO, that is the system that needs to be adjusted.

  113. David,

    I totally understand that you work primarily with investment property, but
    families do not just walk away from their homes because “The asset isn’t worth what he paid for it.”

    TT explained it to you better than I ever could when he said, “You said that his ability to pay doesn’t matter. You are wrong. His ability to pay is the ONLY thing that matters.”

    Joe is worried about his wife and his children…not his asset.

  114. Luckily, my husband has a good paying job (big tech co. in Redmond). We are one of those rare Single Income Families — especially in a Bellevue zip code.

    When we were preparing to buy our condo in February 2006 (first home and all we could afford in the area), our Realtor did a lot of fudging.

    She asked for our pre-qual letter that B of A gave us for $170k, whited out the ammount, and faxed a higher ammount to the seller.

    She told us that she wasn’t going to include one of the apartments we lived in during college because it made our rental history look bad.

    She was our broker and said that we were welcome to find someone else to do that for us, but no one else would be able to get the loans by the time the seller wanted to close (less than 3 weeks).

    During her “explaning” the fees to us, she turned beet-red when telling us that there was a charge of $500 for brokering fees (Her, remember?).

    I asked her to explain the different options with getting loans. She repeated what she had just told us (hmm…still unintelligable) and then –as I recall– said something about having my lending institution explain it.

    Are all agents this horrible? We have a large assessment to pay soon on our condo. We will be selling to pay the cost (we’d be selling anyhow) and we hope to be able to break even now. There is no way I am going to hand over 6-8% of the SELLING PRICE (?!?!?) to realtors. We’ll be selling on our own and use a lawyer.

  115. Sounds like Eastside Mom is saying that her agent (she’s calling a broker) controlled the transaction and the lender?

    Not all agents are horrible, not all loan originators are horrible and not all lawyers are horrible. Sadly it just takes a few rotten apples to spoil the bunch (or atleast make the bunch seem bad).

    Eastside Mom, how did you select your selling agent for the condo?

  116. Yes, we only spoke to her and then signed papers.

    We haven’t sold yet. We’ll be putting on the market next summer/fall.

  117. Eastside Mom,

    Are you suggesting that you really didn’t want to buy the condo you are living in? Sorry that I’m confused, but it appears that you wanted to buy it and you did buy it. Did you not want it?

    Most of what you are saying there sounds like you are mixing up the lending process with the agent process. It was appropriate for the agent to tell you to have your loan explained to you by your lender. That is not “horrible”. Agents generally don’t explain your lending options, your lender does that.

    I’m pretty sure you didn’t pay your agent a $500 broker fee. A $500 fee sounds more like an underwriting fee. The agent has nothing to do with putting your rental on any papers. None of the papers an agent submits and helps you with has anything to do with rental info from your past history.

    It sounds more like you were confused with the process, than that you had a bad agent. I suspect she was “beet red” for a different reason than you suspect.

    Were you unhappy the week after you bought it? Did you feel coerced into buying it?

  118. Quite honestly: If my comments are unwanted or unwarranted, that’s fine. Just ignore me and I will stay as a lurker. I was only trying to contribute to a valuable conversation. If you ask me a question, I’ll respond. Otherwise, I’ll leave it as is.

    In case it’s unclear why I commented: I thought that this would be an appropriate place to comment on the underhanded and greedy tactics that are found often in real estate. As you have pointed out, the current “housing crisis” is not solely the fault of lenders and wall street. Realtors have an obligation to their clients. Too often a person in a sales position turns their head when they notice something that might be detrimental to their sale.

    My comments here are only offering other examples of how easy it is to wash over first-time buyers. We were fresh out of college, moving up suddenly in the world from about $15,000/year to $75,000/year plus benefits. We found a huge condo (3bed2bath1350sf) for a great price($224k) 2 blocks from work. We made an offer at the beginning of February and the sellers required that we close by the end of the month. What did that leave us with? About 11 business days. Did we have a responsibility to make sure things were good and favorable for us? Absolutely. Did our agent have an obligation to help us find a home in the affordability range that we asked for? Yes. It’s there, but it sure is tight. Did our agent have a responsibility to be honest and objective throughout the transaction? Yes. I feel that ours failed.

    Realtors are hired experts. Virgin homebuyers get caught up in the dream of buying a home. They expect their hired expert to help them make good decisions — not push them through two weeks of panic telling them that they will lose the deal if this, this and this isn’t done. This dying market is an *excellent* correction. I feel horrible that so many people are losing their homes. But the drop in value? That is a wonderful thing and needs to continue.

    Many agents do not deserve the kind of cut that they walk away with from a real estate deal. In the past bubble market I would definitely bump that up to Most. Too many agents acted for their *own* interests and not their client’s.

    To answer your questions, yes, we did want to buy the condo and we are relatively pleased with it. It’s the transaction that I have contention with.

    Our agent was picking out a loan for us. She showed us a couple things quickly in a hand drawing, said, “This is what you guys can do.” and we asked her to explain. She referred us to our lender. Problem being, she was handling all of the loan stuff. She was our BROKER. That is what she called herself. In fact, she brokers most of the loans that her buyers get. She says that it’s because she’s faster and can get a better deal for the clients. We didn’t have *time* to speak to our lender. Whenever we talked about looking at other loan possibilities she told us that we were welcome to, but no one would be able to get it done fast enough and that we would lose the condo. When she was going over fees she said, “…and $500 for brokering fee because that is what I charge for that service.” Mind you, this is when we were in the middle of her running all of the numbers by us as to what was in the closing costs that we would be signing on in a couple of days. I don’t know if that’s what it was called on paper, but that’s what she told us.

    No, we had a bad agent. I have spoken to other friends who used her for selling their last home and they had similar shady experiences.

    The paperwork that she filled out asked our housing history for the past 2 years. It included 3 apartments. She dropped one to make it look better (part of the loan application, I believe.)

    I would be quite curious to see the all of the paperwork that she filled out for our loans. Is that somewhere in my pile of paper from closing?

    Thank you, Ardell. I have found your blog to be quite educational.

  119. Eastside Mom,

    Sounds like your agent was also your loan officer? Find your closing Settlement Statement from your purchase which was provided to you by the title/escrow company that closed your transaction. Also, find your loan application (HUD Form 1003) and look at the bottom of the page or so to see who the loan officer was. It should be there.

    The Settlement Statement is an accounting of all monies, charges and credits in connection with your transaction. Essentially, it is a fingerprint or blueprint of the receipt of money and where money was distributed at closing.

    If your real estate agent was your loan officer, I would look at your transaction with eagle eyes to make sure all compliance and disclosures and re-disclosures to you were made properly, timely, including agency relationships and potential conflicts of interest. Naturally, you may want to contact someone versed in identifying whether or not compliance issues were correctly enacted.

    The short window of time you discuss is not uncommon, but it is also not uncommon for this time frame to open up opportunity for you to get….fleeced.

    Best wishes.

  120. Eastside Mom,

    I will be the first to say if your agent appeared to be doing something wrong, but the process as you describe it does not point in that direction. Still, you can feel that you wished you had a different agent. But it appears to me that you expected one person to fill the role of more than one person, and your understanding of the process and expectations of that agent were not correct I’m sure you would want to know if the agent were doing things correctly and the shortfall was on your part, so that you do not make the same mistake in the future.

    “Our agent was picking out a loan for us. She showed us a couple things quickly in a hand drawing, said, “This is what you guys can do.

  121. “If my comments are unwanted or unwarranted, that’s fine. Just ignore me and I will stay as a lurker.”

    I am grateful for your comments as many people lurk and read and learn from them. Again I will be the first to scream from the mountaintop when something was done incorrectly. But I do not see that here.

    The ONLY thing I see was the white out of the price on the pre-approval letter. But it is very possible that was correct. The lender may not have been available to up the number in writing and may have told the agent that you were OK up to that number by phone and authorized her to change it. It’s not the best of scenarios, but could have been the only way for you to get the condo.

    Come to think of it, you already had a letter from B of A. So likely you did speak with lenders about loan options before yo made the offer. B of A was not likely the lender you ended up using from what I can see. Who is your lender? I’m sure it’s not the agent.

  122. The white out on the letter is concerning to me. I once had an agent ask me to provide her a preapproval letter in Word so she could modify it if needed. I politely refused. 😉 I send them via PDF and I’ll provide as many as needed (if the buyer and agent are submitting an offer asking for less or closing costs to be paid and not wanting to disclose exactly how much the buyer is approved for).

    What seller would accept a preapproval letter with white out?

  123. Isn’t it the agent’s job to guide the buyer through the process, which would include making sure they talked to a lender? Every agent I have talked to has asked if I was preapproved.

    Over the weekend when the agent is saying you have to submit an offer NOW or lose the only decent house you will ever find doesn’t seem like the right time.

  124. “What seller would accept a preapproval letter with white out?”


    Once it’s faxed it really doesn’t show. It’s technically incorrect, but some lenders will say the buyer qualifies up to $200,000 and you can modify the letter as needed up to that point. Often the lender was not available in the 15 minutes the price changed in multiple offers or even in counter offers and the buyer would lose the condo without an approval letter with the eventual contract price on it.

    Personally i don’t have a problem with an offer of $175,000 and a pre-approval up to $250,000. I don’t like matching the offer to the loan approval, as it sometimes gives the seller the impression that they are barely qualified.

  125. Cautious Buyer,

    I wrote a post eons ago about the three stages of “talking with a lender”.

    1) before you look at houses
    2) when you are making an offer
    3) within a day or so of being in contract to select the type of loan and officially apply for that loan.

    It is part of the agent’s job, in my opinion, to be involved in step 1 and 2, but not so much the last phase. The agent needs to help with the part that has to do with the offer and the contract. But once someone qualifies for a 30 year loan, the “options” of ARMS and interest only and the like are not part of what the agent does. The buyer can talk to a lender and ask the agent what they think. But generally it is not the agent’s job or area of expertise to advise a buyer to get an ARM vs. a 30 year fixed.

    In Eastside Mom’s situation she did get help with step one and step two, as she had both of those covered and I think by two different lenders. It was step three that she didn’t have time to do, and that part is not part of the agent’s expertise or responsibility.

  126. I agree that the agent doesn’t choose the loan type. I had to reread Eastside Mom’s post to see that she had done stage 1.

    If Joe had done stage 1, he would have found out early that the loan would be subprime, correct? I know they ran my credit when I did so (and probably lowered the score a bit by doing it).

  127. “If Joe had done stage 1, he would have found out early that the loan would be subprime, correct?”

    Not really. Lenders produced a letter that said “you are pre-approved for a sale price of $350,000”. Buyer says YAY!

    I have met many buyers who had such a letter in their hand who had no idea that they were “subprime” which was for the most part an internal word. Even many agents didn’t know the word “subprime” when it all started. The lender just told the agent the buyer was qualified to buy.

    Back when I started, subprime was a completely different lending institution than a “normal” loan, so it was obvious. But if Nordstroms starts selling dollar store items for $5, who would know they weren’t “Nortstrom’s Quality”.

    That’s why Joe’s agent quickly qualified him at NON subprime, but he ended up with subprime. The lender never told the agent either and the pre-approval letter didn’t say it.

    When pre-approvals moved from “you are qualified for a payment of $1,700” to “you are qualified for a sale price of $350,000”, everyone was left in the dark as to rate and payment. Buyers may have felt the sale price was more “transparent” then a payment amount…but it wasn’t.

    Everything went sideways with “risk based pricing” and Credit Scoring. Before that everyone knew what they were getting into. When processes became automated mills…even the lenders become order takers. Before that everything was done by hand and the professionals and consumers knew what was happening. When you streamline a process to automation…the personal understanding of all that is happening is lost.

  128. My wife and I had a different experience. We had an hour or so visit with the lender going over the different options relative to our particular situation. I left with a strong impression that I knew exactly where we stood and the options available. It is unfortunate that others didn’t have the same experience.

  129. Pingback: Informed Consent Process : National Association of Mortgage Fiduciaries

  130. Cautious Buyer,

    Often people having the same meeting with the lender as you did leave feeling more confused. It isn’t always what the lender has to say as much as what the buyer heard and understood.

    Given the letter in question came of B of A, it’s not likely it was a slick subprime salesperson. B of A has always been fairly professional, in my experience.

  131. Pingback: Joe Six Pack – Jake Planton

Leave a Reply