Over the Thanksgiving holiday I saw lots of relatives that I see only a few times per year. One of them is a cousin of whom I've always been very fond. He's just a little younger than me, with a wife and a young daughter. He lives in Ohio, where the economy has been pretty badly damaged over the last 18 months.
My cousin is a good guy - unassuming, hard-working, sweet-natured, and solid. He takes a back seat at lots of family gatherings among the more common strong personality types that make up the bulk of my extended family. For some reason, he always thought of himself as "not college material." I have no idea where this came from as he's far from dim-witted and a college education is pretty universally expected in my clan. But for whatever reason, he never got a degree. Now he's a general handyman, though unlicensed. He's a conscientious worker and skilled at what he does. But he's also self-employed and has hardly been raking in the money, especially since the downturn in the economy. Fortunately, his wife's a schoolteacher, so I assume they have good benefits and a reasonably secure if not lavish income stream. They're getting by better than others in their neighborhood, which has homes in foreclosure.
What shocked me was hearing that my cousin and his wife are carrying a partial balloon mortgage on their home. The thing that left me nearly speechless was to realize in the course of this conversation that my cousin still didn't really understand what a balloon mortgage is or how it works. He and his wife had only a ten percent down payment on their home, and since he was self-employed, they couldn't get a standard 30-year fixed mortgage for the full amount they needed to borrow. A relatively small part of their purchase price, the other 10% that would have made up their 20% down payment, was supplied by the balloon mortgage. He said that when it came time to sign the papers for that loan his questions weren't adequately answered and the loan officer glossed everything over, making it sound like a typical arrangement that "everyone was doing." They signed without clearly understanding what they were committing to.
I simply didn't know what to make of this. I was shocked that he had gotten himself into such a situation. It was hard to fathom my cousin and his college educated wife signing on the dotted line for such a large amount of money without insisting on a clear explanation of the fine print, let alone that he still didn't fully understand it a few years into the loan. I'm no financial expert, but I explained as best I could how balloon mortgages typically work. I'm pretty sure there's some variation even among balloon mortgages, and I didn't want to pry for any more details than he'd already provided, so I could only give him a general sense of what he'd agreed to. He appreciated the explanation, but he also seemed worried.
Understand, my cousin doesn't have an extravagant home. For where he lives, and the time that he bought (mid-2006, just before the peak), he paid the going rate for a middle of the road, middle-class home. It was even a bit of a fixer-upper that looked improvable to them based on his handyman skills. Also understand that while I think he was somewhat taken advantage of by the mortgage broker, I also think the ultimate responsibility was on him and his wife to understand what they were agreeing to. There was no gun to his head when he signed.
I worry for him and his family. They're good, responsible parents raising a beautifully behaved and articulate four-year-old daughter. They're living a typical American family life; they're not greedy, self-indulgent bastards, though perhaps a little foolish or too trusting. They don't run out and buy the newest toys. They dress themselves and their daughter in simple, functional clothes. Now, it seems to me, they're walking a tightrope. If his wife were to somehow lose her job (and she came close not long ago in a school district reorganization), they'd have no health coverage and would (I'm guessing) be unable to make their mortgage payment after a short time. If he were unable to work due to injury or illness, things would probably be incredibly tight. And that balloon mortgage is out there, looming in the distance. I think in many ways they're typical of a lot of American families. I don't know the details of their finances, but I fear it would take very little to tip them off the tightrope and into a downward spiral.
I look at them and think that they could have been more careful, more cautious. But I also look at them and wonder why it is that such ordinary people, with ordinary, run-of-the-mill ambitions should have to look out for their own interests so carefully in this society. Even fifteen years ago, my cousin wouldn't have gotten a balloon mortgage. He might not have gotten any mortgage at all with only 10% down, his self-employed status, and his wife's teaching salary. A conservative, responsible banker would have told them to come back when they had 20% down. And knowing my cousin, he would have been fine with that. They'd have rented a bit longer. Maybe his daughter wouldn't have had a little backyard to play in for a few years. He would have saved that money up and eventually they would have bought a home. But in 2006, not being especially savvy, they did what they were told "everyone was doing." The kicker is, while that mortgage broker wasn't being completely honest, she wasn't lying either. A lot of people were doing it, and that made it seem safe enough.
It just makes me sad that it was so easy for my cousin to make a bad decision that could really come back to haunt him, and to know that there are thousands of families out there in the same situation.