Magical Mortgage Madventure

30 Apr

Come with me, children, and journey into the magical world of mortgage refinancing. Oh, what an epic tale of endless adventure I shall weave for you!

A little background first.

Four years ago, my husband and I bought a house. Now, we are the people who Do Their Stuff Right. We saved and conserved and researched and examined our options. We bought our house for over $180k, but we were there at closing with a check for almost $40k, smacking that down to dip under 80% of the house’s value on the mortgage, thereby cleanly avoiding any required private mortgage insurance.

Now, this was 2007. We both had stable jobs and kept our spending low, and had excellent credit scores. We got a basic sort of loan pre-approval before we even went looking, because that’s a good thing to do. I still remember being amused when the broker told me that, heck, with our financial record, we could get pre-approved for over $300k on a loan! It terrifies me to think where we’d be today if we were foolish enough to believe that, just because someone would loan us a ridiculous amount of money, it would be a good idea to accept it. No, we stayed the course; we were the traditional old squares with 20% down on our 30-year fixed-rate mortgage, which was sold to Citibank by our no-name broker before the ink was even dry on the contract. But that didn’t matter, because nothing changed other than getting nice online services; our 6.25% interest rate held firm, and we amused ourselves by trying to decide which fifth of the house we owned.

Then came 2008.

Do you listen to NPR? You may have noticed that I do, but there’s a specific reason I bring it up now. That reason is this episode of This American Life. I can give a rundown of what happened in late 2007-early 2008, and how my experience purchasing a home at the very apex of the housing bubble relates to it, and that is entirely thanks to that single hour of radio. It is brilliant, well researched, and comprehensible to people without degrees in economics. I highly recommend you listen to it.

Basically, why we’re in this giant hole? Look at me, your stable, 20% down, 30-year fixed-rate mortgage. I have a job, I have money in the bank, I’m going to pay you back when you loan me money. Now look at the guy next to me. No, not my husband. The other guy, over there, we’ll call him Ralph. He doesn’t have a job, not a dime in the bank. Is he going to pay you back? Think for a while about it. Would you lend him your money? No? Well, okay, what if you could lend him money, rake in the closing costs, and then immediately sell the debt to someone else? You get your money back immediately, and someone else takes the fall if Ralph doesn’t pay it back? Does this sound more appealing?

Well, it did to a lot of people in the mortgage business. Used to be that you went to get a loan from your bank, they’d look at your employment and what money you had saved, and decide whether or not to give you a loan based on that, because they were going to keep the loan right there in their pockets. With all these independent brokers, though? They were going to bundle mortgages up and sell them off as mortgage-backed securities to the world market, making money on all sides, so what did they care what kinds of risk their borrowers were? The world demanded these investments, so why not just start lending to any random dude off the street?

And that’s pretty much what they did. They stopped checking employment history, stopped checking credit history, stopped seeing if you had money in the bank. By the end of it, all you really needed was a pulse, and even that was negotiable. Remember when my broker said he’d lend me three hundred thousand dollars? That’s because he didn’t actually give a damn about the fact that I never could have survived under the weight of a mortgage that big. He wasn’t going to be footing the bill when I crashed–when my adjustable interest rate went up, or when my wages got cut, or when I had any slight interruption of my normal cash flow. Who was going to be footing the bill? All those investors from around the world who bought the mortgage-backed securities, of course!

From there, the economics of it all are pretty easy to figure out. High supply of cheap (or temporarily cheap, until the low intro rate on the ARM went up) money meant a high demand for houses, and high demand means prices rise. So, housing bubble. And when all that money falls apart, bubble bursts, because demand drops, so prices drop.

So how does this relate to me? Well, in the days of around 4% mortgages, 6.25% is suddenly looking nigh ostentatiously expensive. I don’t understand why Citibank repeatedly encouraged me to refinance at a lower rate, offering me rebates at closing such that I could give them less interest. What exactly is the business model in encouraging your stable, well-paying customers to pay you less money? Regardless, I’m grateful for it, because starting two weeks ago, I’m on path to stare down a 4.25% 15-year mortgage. There has been but one stumbling stone in the center of this path: the appraisal.

Remember how much I bought the house for? The estimate on my original application was that my house had probably lost a sixth of its value. However, I’m not surprised by the appraisal which came in today, cheerfully informing me that my house has, in fact, lost a full third of its value. This leaves me approximately seven thousand dollars underwater–owing more than my house is supposedly worth.

Fortunately, my husband and I Do Our Stuff Right. We’ve spent the past four years rebuilding our savings, and we can afford to pay this thing down enough to keep our shiny new rate. And the simple fact is that if we were still renting, and wanted to rent a place like this, we’d probably be paying well more than our monthly mortgage and escrow payments. So no, I’m not sorry that I bought a house at the worst possible moment; it’s a little akin to buying a bunch of stock in September 1929, but when the stock market crashes, all you have is paper. When the housing bubble bursts, if you’re not one of the ones who pricked it up, you still have a house. Might you lose money? Yes. But contrary to what the past decade might have one believe, making money investing is a risk, not a right.


One Response to “Magical Mortgage Madventure”

  1. Fallah May 1, 2011 at 1:34 pm #

    Ouch! Your appraisal came in at 1/3 lower? That really hurts.

    Here’s the crazy thing. We bought our place shortly after the bubble broke because we knew we’d never be able to afford a house in California otherwise. Plus, the interest rates were crazy-low. We had no down payment though! We just finished paying off a wedding and a Tahitian honeymoon (worth it!)

    Even with 2 stable jobs and good credit scores, we had a hard time finding something we could afford. FHA places were too expensive overall. The fixers that were cheap required a 20% down. We were stuck in this no-mans land with about a 10% down. We very nearly bought a house for $250k that was an FHA.

    Finally we bought a fixer-upper that we had watched the price drop on. We put our 10% down and our monthly payments on a 15 year loan were only $1100. Woo! We were ecstatic. We could pay this place off in about eight years. The more expensive house would have been the same payments, but would have taken 20 years to pay off or would have been twice as much for a 15 year.

    2 weeks later my husband lost his job. If we had purchased the more expensive house we would have been forced to refi it, if not foreclose on it. It would have been a nightmare.

    Thankfully we bought the cheap little house ($125k), my husband had plenty of time to fix it up (the only good thing to come out of his layoff) and 2 years later he’s employed and we may still manage to pay it off early.

    My point is: you never know what’s going to happen. We were approved for loans up to $350k! Instead of being a huge fiscal step forward, we could have wound up down shit creek. Even after the bubble, the whole system is still fucked.

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