Tuesday, May 26, 2009

No One Knows Nothing. Personal Finance Edition Part 2

Exhibit 3: New York Times Economics Reporter, Edmund Andrews, buys a house he clearly can't afford using a "Don’t Ask, Don’t Tell" loan. This is a guy who should have known better who was paying "over $4,000 a month in alimony and child-support payments" which left him with a "take-home pay of $2,777" and he was still able to buy a house for $460,000, financing $414,000 of it. Would it surprise you that his mortgage company was American Home Mortgage Corporation? In the past, this would be the time where a loan officer says that they are sorry, you just can't afford this house. Instead, The mortgage broker "simply move[d] down another step on the ladder of credibility."

Let's let Edmund tell us how this works:
"Instead of “stating” my income without documenting it, I would take out a “no ratio” mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasn’t stating my income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t have too much debt. I could have had four other mortgages, and it wouldn’t have mattered. American Home was practically begging me to take the money.

"Despite the obvious red flag of applying for a Don’t Ask, Don’t Tell loan, I wasn’t paying that much for the money. The rate on my primary mortgage of $333,700 was a remarkably low 5.625 percent for the first five years, though my monthly payments would probably jump substantially after the fifth year. On top of that, I was paying a much higher rate of 8.5 percent on my “piggyback” loan for $80,300. Even so, I would be paying slightly more than $2,500 a month for the first five years. It would get expensive eventually, but I could worry about that later."

Bubbles do that to people. Bubbles make smart people do stupid things.

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