An Open Letter to my Two Mortgage Companies

http://blog.stealthmode.com/2009/02/06/an-open-letter-to-my-two-mortgage-companies/

by rstan251 • 17 years ago

28 29 17 years ago

blog.stealthmode.com

eli• 17 years ago

If you don't need to sell your house, and you're happily living in it, does it really matter how much someone would be willing to pay you for it?

(I know, I know, you can take equity out of the house, but still, am I missing something?)

nostrademons• 17 years ago

It sounds like he's no longer able to pay the mortgage because his business has fallen off a cliff. Customers that were willing to part with their money in good economic times have disappeared in bad economic times.

It'd be really easy to blame him for taking out a mortgage he can't afford, but this is what happens in recessions. While the money supply is being inflated, some investments that are marginal (like his business, apparently) seem pretty attractive. When the money supply starts contracting, they suddenly get squeezed out of existence - which forces them to default on their debts, which further contracts the money supply. Financially, the right thing for this guy to do is to let the bank foreclose, but in the short run that'll make things worse for everyone else.

drsnyder• 17 years ago

I understand the longing to be close to family, but unless her yearly income is somewhere around 200K, she shouldn't have bought the house. I'm basing that on 20% down, and a mortgage of about 3x income ((730 * 0.8) / 3). I'm not sure where it comes from, but this has been the historical guideline for affordability.

zain• 17 years ago

I'm not sure where you're getting your 3x income numbers from, but they're simply ludicrous. With a mortgage of 3x your income, your mortgage will be less than 20% of your salary. For example, with an $85000/yr income, you earn about $5300 post-tax per month, and your mortgage payment is only $1350. If you consider home owning to be important to you, surely you can afford paying more than that for your mortgage.

Furthermore, it is impossible to find a home in the bay area for under $600,000. I'm certain that those starter homes are not being occupied by high net-worth individuals with $200,000/yr salaries.

I have been told that your monthly payments should not be more than 45% of your monthly household post-tax income. That comes out to a mortgage that can be about 5x your income. With those numbers, the lady in the article should've had a household (her + her husband) income of about $150,000/yr.

I'm a recent buyer of a $625,000 home with a $85,000/yr salary and I have no problems keeping up with my payments and establishing an emergency fund.

timr3• 17 years ago

He's right. The traditional guideline is that you should pay about 30% of your net income on housing. You're right that the bay area is "different", but that doesn't mean it's different in a reasonable way. Most people really can't afford to own property here, by traditional standards.

Also, I'd like to point out that this woman took out an interest-only loan for the bulk of her debt, skimped on the deposit, and secured with another loan. Even if we use your standard (45% of net income), there's no way that she could afford the property.

TomOfTTB• 17 years ago

I’m sorry but this woman makes me angry. A lot of it is my background. I grew up living in Government funded housing and eating thanks only to the welfare system. That, combined with working my way up to the point that I now have money as an adult, makes me see financial matters differently than others around here.

I accept that.

But give me a break. Boo Hoo, her house is only worth $700,000 now. She spent nearly $50,000 upgrading it and now its worth less. Oh the Horror.

I get that it hurts when you have to go down a step in your standard of living. I’m not entirely unsympathetic. But there are millions working to have a place to live at all. So I can’t spare much sympathy for this woman.

Short sell the house, find a place you can afford and shut the hell up. Getting kicked out of your $700,000 house is not the end of the world

reitzensteinm• 17 years ago

Not to mention that she should be going out and working like crazy to make another deal instead of complaining about it on her blog. It's like that story of the plumber who went around and introduced himself to his neighbourhood that drummed up a ton of business that was on HN recently. There's always a way out of a mess (of this magnitude, at least), given enough brains, willpower and luck. Don't try to extort your lenders, make enough money that it's not a problem!

I've been at zero financially before (as in no money for food, although without debt or responsibilities), and the thing that kills me in hindsight is all of the things I should have done to pull myself up instead of moping around feeling sorry for myself. When you're an employee making roughly market salary, you can't just go and double your wage, but when you're a business owner with cashflow the possibilities really are endless if you take the time to look for them.

petercooper• 17 years ago

I agree. I don't see how the value of her house has anything to do with the situation.

If she planned to live in it for ten years, then it's a sunk cost. If she could afford to spend a house that cost X and now she can't, that's a problem with her income, not the value of the house.

timr3• 17 years ago

What infuriates me most about this situation is the implicit presumption that she deserves the home because she got there first. She took out the biggest loan, therefore she deserves the property now, and we should forgive her debts so that she can stay.

I'm sure that Half Moon Bay would be a nice place to live. Personally, I'd like a bit of land on the Colorado front range -- maybe something next to a creek, with a view of a beautiful valley. The difference between this woman and myself, is that I know that I can't afford it. So I think of my dream property, and work a little harder, save a little more, and hope that someday I'll be able to buy something that approximates what I desire.

Apparently, this woman missed that memo. She went out, took a series of ridiculous loans, and now she's the "owner" of a bit of property that she never had any reasonable ability to afford. And now that it's all gone pear shaped, she thinks that she should be allowed to stay.

Well, that's nonsense. There are thousands of other people just like me, who have been saving and living responsibly for years to afford the things that these lunatics bid up into the stratosphere by taking out massive debts. Now is the time for irresponsible people to suffer, and for the things that they "purchased" to come down in value to levels that the market of reasonable people can support. We shouldn't rescue this woman simply because she was willing to take out the biggest loan in 2006 -- and right now, that's her only argument.

alecco• 17 years ago

Indeeed. She says right at the beginning:

> I put 10% down and got a 5-year interest-only mortgage for about $576,000 [...]

That's a huge and leveraged to almost the maximum bet. We are all busted now just because of that crowd. And now we have to bail them out? (because it affects all of us, specially the savers as interest rates are practically zero.)

mst• 17 years ago

I'm not exactly sure that's what she's saying. What she's saying is that she is, not to put too fine a point on it, fucked, and that if the banks foreclose they're likely to lose more money than if they try and work with her to render her situations less fucked.

Not so long back, a client of ours ran into major trouble. They were left with two options - pay suppliers a percentage and then sell what was left, or put the company into bankruptcy and let the creditors work out who to pay what.

We decided that a guaranteed percentage now and the continued goodwill of the people we'd worked with was a better deal than an undetermined amount at an undetermined later date - so we dealt (more accurately, our MD did; I don't really get involved in that side of things).

So far as I'm concerned, the interesting question here is not whether or not she's an idiot, it's whether or not she's correct that providing the financing she needs would be a net win for her banks over foreclosing on the mortgage. I don't know enough myself to have any basis to make that call, but what's currently infuriating -me- is the fact most of the comments seem more interested in attacking the OP rather than discussing the financials :)

vaksel• 17 years ago

what does the value of the house and improvements even has to do with this situation anyways? You get a mortgage payment as a fixed cost...it doesn't fluctuate if your house goes up in value or if it falls.

So the whole sob story can be pretty much boiled down to "my income is dwindling", give me free money! Her mortgage company would have given her the 4.2% rate. But it'll be very hard for them to forgive 50K for someone with "excellent" credit.

How about asking her family to help you out? Thats what they are there for. If you are 65 and have a daughter, she must be 40 years old. And if she can afford to live in an area where there are 700K houses, surely she can afford to throw a few bucks to her mother, until she can get through it.

Its not like its a huge amount. Her house only dropped 50K in value, so that means she is looking for about $700/mo. So get a family to scrimp together the $700, or sell your car, or bust out some credit cards, or open an equity line or get a second job(doing consulting or hell working at Walmart).

The situation is far from helpless.

jsdalton• 17 years ago

Actually (someone can correct me if I'm wrong here), I believe in her situation her payments probably will change.

Her main loan was a 5 year, interest only loan, probably at an adjustable rate. What that means is that for the first 5 years, she ONLY paid interest...that is to say, she did not pay down the principal. At the end of the first 5 years, you start paying down the principal and interest, only that's now compressed into 25 years instead of 30. In short, your payments increase.

People took these loans out because they assume that in 5 years there house would be worth much more than it was when they bought it (of course, because housing always goes up, right?). So the idea was, in 5 years, when my house is worth a lot more, I can just refinance it.

If it sounds foolish now...well truthfully it sounded just as foolish at the time (as I recall when I learned about this stuff back in 2003). It sickens me that my tax dollars are bailing people like this out (directly or indirectly).

tc• 17 years ago

If she's waiting for Congress to help her, then she's really in trouble.

gne1963• 17 years ago

What would happen if she stopped paying on the HELOC for now until her personal business conditions improve.

It is in second position, certainly would not help her credit score, but might offer some short term relief without worry of losing the house?

timcederman• 17 years ago

68 and only able to put 10% down on a house and now about to face foreclosure? What have you been doing with your money all your life?

This is ripe to be picked up on burbed.com.

pragmatic• 17 years ago

I, at first, wanted to join in the bashing.

I scrimped and saved and paid off my home mortgage in about 6 years. I do coding/teaching/projects on the side and used it to pay off all my student loans and mortgages.

I think, much like the rest of you, that this person is a fool.

However, I have another angle. I used to work at a large bank. I have many friends who still work at the same large bank. Loans were set to fall below 5% (mostly commercial, mortgages are a different story).

However, this bank will not loan below 5%. Why? Because that what's the bank was forced to take from the government.

Yes, the government forced the 10 largest banks to take money at 5%. This in turn caused the banks (at least the one I have inside info on) to set their lowest rates of 5%. This caused major problems with their computer loan systems b/c their were set to follow prime/LIBOR etc. My friends had to tell a lot of upset customers that their loans would not be falling below 5%.

So the banks will not/cannot loan at below 5%, like this person is asking, b/c the gov't has gotten involved.

Now loans (commercial) and mortgages don't have the some source of funding (yet) but gov't intervention is pending in the mortgage market.

Now the new president/congress has promised to do something about it. How will they screw up the mortgage market? We will find out in the next few months.

SystemOut• 17 years ago

She's looking for a handout. The sense of entitlement of some people in this country is sickening.

"I want to ask you to re-finance my mortgage at the current value of my house at a 4.2% rate, like everyone in Congress is suggesting."

Oh, come on. That's ridiculous. Basically, everyone that didn't go out and upgrade or buy a big house gets shafted because those that bought big houses would get bailed out to the tune of the current market value and at a rate way below market value for their loan? That's just foolish and sends the wrong message.

I bought a house in the San Francisco Bay Area in the east bay for about 450k in 2001. The house is still pretty well above water but I have that thing on a fixed rate loan at 5.5%. I've managed to pay off a decent chunk of the house as well because I stayed conservative. And because I decided to stay put and not upgrade even though money was cheap I would basically be told to piss off because I did the right thing. No, no, no.

Luckily she has it wrong anyways. The law being tossed around would only be for people in bankruptcy if I read it correctly but then again it changes every day.

I really hope none of what she is hoping for comes to pass. And if, for some reason there was a relief bill passed, there should be some sort of payback clause in it where they government would be entitled to a portion of any "profit" on the house when values start to rise again and the person sells it. Think of the way affordable housing works where the buyer can't sell it at "market rate" - they are only entitled to a certain amount of appreciation each year. They can even add in credits for capital improvements so the owner still has incentive to maintain the house vs. letting it go into disrepair.

mattmaroon• 17 years ago

I do hope that in the event that banks start renegotiating mortgages at current market values (i.e. in the event government forces/pays them to) that the borrower does get their credit wiped out. They deserve it.

"I put 10% down and got a 5-year interest-only mortgage for about $576,000 and a HELOC at prime +2 for the remainder, about $154,000."

AKA, I'm a financial moron and don't deserve credit.

brk• 17 years ago

Am I the only one utterly shocked by the fact that this woman is supposed to be some sort of small business mentor?

From the front page of their site: "Companies that are accepted into the Stealthmode Partners portfolio receive coaching, consulting, and connections to the people and resources they need to reach success."

I really don't think this person is in a position to be handing out advice and counseling.

My wife and I have 2 properties, our regular house and a lake house in a nice community on Winnipesaukee. In both cases when we purchased these properties we "qualified" for far larger loans than what we actually took out. We did some "worst case scenario" math to make sure if one of us lost an income we wouldn't end up crying on the Interwebs about the unfairness of the world. We also made sure to put enough down that if we had to we could unload the properties fairly quickly (yeah, it would be a huge loss, but we wouldn't get backed into a financial corner).

Personally, I have no sympathy for this person or the majority of other people in this situation. ESPECIALLY when you consider that, like many of us, she should have lived through the whole .com boom/bust and had some inkling of how things can turn on a dime.

I'd like to ask for the government to magically remortgage my properties for what they're now worth, except that through some logical forethought and planning my properties are worth much more than the loan amount.

andrewhyde• 17 years ago

Francine has spent thousands of hours volunteering and building up the community around her (most likely above some higher paid contracts).

I'm not really talking about the situation (which sucks, and is happening more than we think, and yes, is bringing down major pillars in tech communities) but am thinking about how this impacts us all.

old-gregg• 17 years ago

Hold on a second, are you implying that TARP money, i.e. the cash I had earned and paid in taxes, should be used to rescue "unhappy and frustrated" credit-loving consumers like yourself, who just happen to love his $750K Arizona (!) house so-o-o-o much that I'm supposed to feel sympathetic for you?

Since apparently I am paying for this mess along with millions of other young working professionals, foreclosures is what we want. Yes, foreclosures and 3x reduction in real estate prices, because our economy doesn't pay salaries that let us save up $750K for a house in the middle of nowhere.

Your "investment" should be up for sale for $350K and you should be rebuilding your credit while living in an apartment.

And please leave banks out of it. They only gave you what you asked them for.

HeyLaughingBoy2• 17 years ago

Why are you people being such pricks?

This has nothing to do with how much the house costs, or where it is. Would you feel diffferently if it were a $80k house and she had worked for 10 years for the downpayment? There's nothing special about an 80/20 mortgage except that it's "traditional" and a lot of people get hung up on tradition.

The bottom line is that she could afford the house when she bought it and she had a goal of paying it off completely when her deals went through. Then the bottom dropped out of the economy and now she's screwed. This affects high net work individuals just as it affects those struggling to get by. You can live within your means for decades and still be wiped out in weeks. Short selling it solves nothing since she will still owe the bank the original amount. In her situation, if the bank won't negotiate and she can't come up with the money the only solution that makes sense is foreclosure. The bank would truly be stupid to let this happen: it's basically cutting off their nose to spite their face.

The level of smugness around here is incomprehensible!

dmix• 17 years ago

I'm sure the fact her house is so expensive brought a bias to many of the comments. But the main flaw everyone is pointing out is that she believes she deserves to be helped out, instead of taking personal responsibility in order to solve the problem.

She believes its not her fault she can't afford to maintain her lifestyle, so the banks and government (and ultimately the tax payers) should be helping her. There's nothing smug about attacking her lack of justification of why she deserves to be helped at other peoples expense.

HeyLaughingBoy2• 17 years ago

Notice that she only believes that she deserves to be helped simply because the banks are being helped. I can understand her frustration: if I couldn't pay my mortgage because I lost my job and couldn't find work and at the same time I saw banks being bailed out with my tax dollars, I'd sure expect some help too.

bwd• 17 years ago

In addition to being "traditional" an 80/20 mortgage is a good risk for the bank, which is probably why it is traditional. If it had not been possible to get "no money down" loans and to extract 100% of equity from a property through refinancing, there probably wouldn't have been such a bubble.

Just as the the Federal Reserve was given the responsibility to set margin requirements for stock market investing, which most likely protected the system from bank failures during the internet bubble, it seems like a good reform in mortgage lending would be a regulation that limits the amount that a home buyer or real estate investor is permitted to borrow when purchasing real property.

An Open Letter to my Two Mortgage Companies

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