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Tuesday, August 12, 2008

The MSM Teaches the Wrong Mortgage Lesson

(H/T to Michelle Malkin) The San Francisco Chronicle has this piece in today's edition.

Foreclosed family’s last goodbye to home

Joann Gardner sat forlornly on her living room floor, waiting for the final step in her home’s foreclosure process. The lender’s representative was due any moment to give her “cash for keys,” a transaction in which she would deliver her family home vacant in exchange for an incentive payment.

“I’m glad it’s done,” Gardner said wearily. “I just want to sit down and have some Hennessy.”Only days earlier, the house had been jammed with boxes and bags holding the worldly goods her family had accumulated during 54 years in the cramped Oakland bungalow.

Now it was entirely empty, the possessions in storage or donated to the Salvation Army. Gardner’s elderly parents, both suffering from dementia and other ailments, had moved a week earlier to a local board-and-care home whose cost would be covered by their Social Security and pension checks. Gardner, who has been her parents’ full-time care provider for the past 18 months, planned to move in with her boyfriend in Vallejo and look for a job, perhaps something at Costco.


The piece reads like a typical sob story and it is intended to pull at the heart strings of the reader. The reader is ultimately supposed to side and sympathisize with the borrowers, the Gardners. This is too bad because buried way at the end of the piece is what should have been the focus of the piece.

Joann’s parents, Johnnie Gardner, 87, and Estelle, 88, bought the two-bedroom in the Sobrante Park neighborhood in 1954 for $11,500. His salary as an electrician at the Oakland naval shipyard allowed them to make the payments.

But in recent years, Joann and her brother refinanced it several times for increasingly larger amounts.The final refinance at the end of 2006 left the family owing $454,000. The monthly payments of $3,362 exceeded the household income of $3,144.

What happened to the money from all the refinances?Gardner can’t quite say. Some went to paying off credit cards; some was eaten up in huge loan fees. What is clear is that the family has not made a mortgage payment since December 2006.

What happened to the Gardners is typical of what became systemic in mortgages. It is in large part responsible for the mess we are in. Much like many Americans the Gardners used their home as a personal piggy bank. In order to maintain a lifestyle that was likely already unaffordable, they went through a series of cash out refinances. In other words, every so often, they would use the equity in their home to pull out more cash. For the Gardners this became chronic.

I know this because they inherited this home from their parents and their parents only owed $11,500 on it. The final loan amount was just over $450,000. The Gardners went through a sophisticated game of robbing Peter to pay Paul. This could be done as long as property value was going up. The problem is that they began with a lifestyle that was likely unaffordable. By taking out bigger and bigger loans to maintain their lifestyle they were ultimately doing nothing more than playing a ponzi scheme on themselves.

The bigger the loans got the less affordable it became. In order to make it affordable they took out an even bigger loan and used the cash to pay off bills and their new loan. Of course, this new loan wasn't ever affordable in their budget. Once the cash ran out they went for a new loan. That's how an $11,500 loan ballooned to $450,000.

This was an unfortunately common occurrence as many folks used the equity in their homes to sustain an unaffordable lifestyle. That of course is the ultimate lesson here. I have nothing against the Gardners and there are few things worse in life than foreclosure. Still, this article had an opportunity to focus on the right lesson of good budgeting, and instead it continued with the standard MSM victimization and sympathy for the poor borrowers. The simple fact is that the Gardners were irresponsible and the right lesson is to point out how they were. The Chronicle missed a perfect opportunity to point out the dangers of irresponsible borrowing, and that is a shame.

3 comments:

Anonymous said...

I'm pleased to report that even on the ultra-lib SF Chronicle, the comments on this story run about 10 to 1 or better "these people are morons and/or crooks and screw 'em."

mike volpe said...

Maybe, though, most people don't read the comments. I agree that most people are smart enough to figure this out for themselves, but the simple fact is that the MSM refuses to ever focus on the irresponsible behavior that borrowers had, and instead, insists on treating all of them as victims.

Anonymous said...

I could be sympathetic if they had to constantly cash out equity to pay for the medical care of their parents. But that doesn't seem to be the case and they used to the equity in the home to pay off credit card debt and the daughter seems to have been using the money as her income. The impression I get from the story is that for 18 months she wasn't working and just looking after her parents.

While what these people did was financial suicide, lets not forget the role of the lenders and brokers.

During the bubble, brokers were constantly contacting their clients trying to flip them into a different loan product on a regular basis. Having problems paying your debt, here's some more debt to help you out.

With each new loan, the broker gets another commission and the lender gets more fees. It didn't matter to the lender if the house went into foreclosure because for years they had been artificially inflating prices of repossessed homes through collusion with appraisers. It became so bad that in 2001 the FHA started working on rules to prevent the lenders from flipping homes in this manner. The lenders only cared about writing new loans and it didn't matter to who they gave them to.

You couldn't watch TV for more than 15 minutes without seeing a number of commercials on how stupid you are to let your money sit idle in your house.

These people seem to got caught up in the banking industry's greed. The should have used better financial judgment to steer clear of the bait.

They really should have either bought the home from their parents or gotten a reverse mortgage for them so that they could be assured of good care in their conditions. Instead it looks like they ate up their parents equity on themselves.