Friday, December 4, 2009

When It Hits Close to Home

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.


Hannah said...

This really sums things up, doesn't it. I hope everything will go well for them.

Anonymous said...

I also hope everything turns out well for them. Oh, Not just thousands. Try a couple of million or more.

Wendy said...

I've been in a similar situation as your cousin - without the house, though. I feel for him and his wife, and I hope that they'll be able to refi with a more reasonable loan once they have a bit of equity in their home and don't need a downpayment.

Unknown said...

There's a reason for the old saying 'caveat emptor' translated "Let the buyer beware". We've all been snagged a time or two and eventually we become a little wiser. Unfortunately, this one may be costly for them. A lot can happen between now and that balloon payment, and while I wouldn't advise going into it with that "hope", perhaps now that they are in it, a solution will arise. I pray it works out.

We are on the west coast and have decided it is time to downsize (we don't want to leave CA if we can stay). River Rock Cottage is going on the market Monday. I thought I'd be really sad, but it is actually reassuring knowing that we are making a wise and responsible choice. I'm excited to see what God has in store for us! Whatever it is, it certainly won't be a boring journey!!!

Joel said...

Contract law is a very interesting subject.

It pre-dates the English legal system we use here in America, and, rather than having a foundation in statutes and scholarly reasoning, the bedrock of contract law is the reasonable expectations of normal people.

I am not a lawyer, but as I understand it, any written contract is merely a record of shared understanding between the two parties. If one party did not understand, the contract never existed.

If so-called "contracts" have begun to run contrary to a normal person's expectations, they have the same status as un-constitutional laws.

Anonymous said...

I am currently in Escrow so I understand somewhat how this happens. The whole process is scary and overwhelming and even if you do read the small print it's hard to understand what it all means. I think the very human response is to trust the "professional" be they mortgage broker or realtor. If they tell you something is standard practice, it's hard to argue with them even if you've done the research.

Annodear said...

Sounds like an unscrupulous mortgage broker, just looking for their percentage. Sad, too, that your cousin didn't 'get' what a balloon payment meant ~or~ chose to gloss it over, rationalizing that it was so far in the future that something would just *happen* to make the money appear.

Not everyone makes good choices or manages their money well. My husband is terrible at it ~ but luckily he's got me. And I don't think it's even necessarily a lack of brainpower, but more that everyone is smart in their own ways, and attitudes toward money vary greatly. I had friends who won 1/4 million $US on the lottery, and instead of buying a house outright, they did a mortgage with a balloon payment and lost the house when it came due. Idiotic from my point of view, but I understand the realtor/money person 'sold' it as a tax advantage being able to write-off the interest. So who knows?

I hope your cousin understands that they need to put away enough money starting NOW to be able to cover the balloon payment. However much the balloon payment is, divided by how many months they've got before they've got to pay it.

One other idea... my brother dipped into his 401K ~ borrowing money from himself ~ to pay his balloon payment. Maybe that's an option for them.

Sorry so long!
Wishing them the best.

ThiftedBliss said...

I hope things work out for your cousin and his family. We just re-financed for 10 yrs at 4.50% and are still on target for early payoff. It is possible to get really good rates these days, perhaps they have some equity that could help them qualify for a re-fi? We re-financed with our current mortgage company and had no trouble even though I am working only 10 hours a week down from 40. There is money available and a great time to shop for it is before they get in to trouble. I'm sure you did a great job in helping them understand their situation.Again-best wishes to them.

Janet said...

I feel for anyone just scrimping by. I have not had a mortgage for over 15 years now and on a very fixed and limited income, this has been the saving of me from real homelessness. Granted, none but the most pressing repairs have been done to my home and my furniture is of the most basic type, but I will be completely debtfree by the end of March 2010. Nothing can describe the joy it gives me to see my debt disappearing month by month.

Kate said...

Thanks for the good wishes, everyone.

Wendy, yeah, I read your post along similar lines just after I finished the first draft of this post. A lot of people get themselves into these sorts of binds.

Amy, that's a big decision! Glad to hear you're at peace with the decision to sell. I look forward to hearing how your journey progresses.

Joel, interesting points. Somehow I would bet that those who draw up the contracts have covered their bases pretty well as far as protecting their interests against those who would come back and claim they didn't understand when they signed.

Anon, I agree that professionals can project an air of competence. But as my cousin's example shows, that competence is often to no one's benefit but their own.

Annodear, I think he does get it in the sense that he knows they need to be very conservative with their money. As I said, I didn't want to pry, but I would guess they're putting a good bit into savings. I hope it's enough, between their savings, and the chance for a refi, to make things work out for them.

Joel said...

>Somehow I would bet that those who draw up the contracts have covered their bases pretty well

Could be.

Although in many cases, the entity that currently holds the mortgage did not bother to obtain the original loan document, which has allowed many homeowners to delay foreclosure proceedings for quite a while.

If you know someone who has been served with a foreclosure notice, you might mention to them the possibility of demanding the original document in court: for "securitized" mortgages, this is often quite difficult.

Anonymous said...

It is incredible that you could blame this on the mortgage broker. While you are correct they should have waited until they had 20% down that doesn't translate this into the mortgage broker doing something shady. Your cousin needs to take this problem on before the balloon is due. If as you imply the balloon is only for the other 10% of the mortgage then this problem can be solved. They need to scrimp, sell, and save so they have the full balloon payment when it falls due. It is unlikley that their home has gone up in value and therefore a refinance is out of the question. Seriously! This is a big deal. They should sell one of their cars, take a second job, sell unwanted items, have a garage sale, do whatever it takes to scrape up that 10% before the balloon comes due. Once they get past that, assuming the underlying mortgage is a standard 20-30 year contract, they will be allright. But if they fail to meet this challenge they will lose the house.