In yesterday’s issue of The New York Times Magazine, Edmund Andrews, an economic reporter, chronicled his personal experience with the housing bubble and how his involvement with alternative mortgage products and lenders wrecked his financial well-being.
The article nicely encapsulates many of the problems that fueled both the 2000s boom and the current bust: a speculative housing bubble, abusive lending practices, lax government regulation, individual mistakes, debt traps and unexpected job losses. What makes the piece especially telling is how even someone who knows better and is well-off could become enmeshed in a disastrous financial situation.
Writes Andrews on how he and his new wife purchased their dream house:
The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777, barely enough to make ends meet in a one-bedroom rental apartment. Patty [who had just relocated] had yet to even look for a job. At any other time in history, the idea of someone like me borrowing more than $400,000 would have seemed insane.
But this was unlike any other time in history. My real estate agent gave me the number of Bob Andrews, a loan officer at American Home Mortgage Corporation. Bob wasn’t related to me, and I had never heard of his company. “Bob can be very helpful,” my agent explained. “He specializes in unusual situations.”
As I quickly found out, American Home Mortgage had become one of the fastest-growing mortgage lenders in the country. One of its specialties was serving people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what our incomes could justify. In industry jargon, we were “Alt-A” customers, and we usually paid slightly higher rates for the privilege of concealing our financial weaknesses.
What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.
“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine.”
“Don’t worry,” Bob reassured me, saying what almost everybody else in real estate was saying at that moment. “The value of your house will be higher in five years. You’ll be able to refinance.”