NYTimes Magazine: My Personal Credit Crisis

Since everyone will probably come across it this weekend, I want to point out My Personal Credit Crisis, in the New York Times Magazine Debt Issue. It’s an adaption from “Busted: Life Inside the Great Mortgage Meltdown,” a book by New York Times economics writer Edmund Andrews. He talks about how he gets trapped in a too-big mortgage, and how between that and credit cards he goes bust – mentally and monetary.

In light of some recent things I’ve been sketching here, I want to point this out:

…It was August 2004…Patty discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md. We sent in an offer of $460,000 and one day later got our answer: the sellers accepted…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….[Real Estate Broker] 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…“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”…

I felt like a crack addict calling up my dealer. It was April 2006, and I had just reached Bob Andrews, our once and future mortgage broker, on his cellphone…“What we’re going to do is a two-step plan,” he announced. “The bad news is that your credit scores are down, so we can’t just do a simple refinance. But the good news is that you’ve owned your house for a year and a half, and it’s gone up in value. So you can borrow against the equity. So in the first step of the plan, we’re going to get you a really ugly mortgage that is big enough to pay off all your credit cards.”…

Within a few weeks, an appraiser valued our house at $505,000, almost 10 percent above the original purchase price two years earlier. On June 12, Patty and I signed a new mortgage for $472,000 with Fremont Investment and Loan in Santa Monica, Calif.

Fremont gave us a classic subprime loan. Our monthly payment jumped to $3,700 from $2,500. If we kept the mortgage for two years, the interest rate would jump as high as 11.5 percent, and the monthly payments would ratchet up to as high as $4,500.

The paperwork was so confusing that I was never exactly sure who was paying what. I hazily understood that I was paying most of the fees, one way or another, but I couldn’t figure out how, and I couldn’t see any better alternatives. After it was all over, I figured we had paid about $5,800 in fees to Bob’s mortgage company and the settlement company, on top of the sales commission that came out in higher interest rates every month…. In October 2006, Bob refinanced us once again, and our payments dropped just as he had predicted.

I’m not going to quote it, but look at how eager the real estate agent is to get the author, who has alimony and child support eating up 60% of his salary, to get his loan. He’s exactly the kind of guy who is going to need to keep coming back to the bank to refinance his mortgage. Note he also refinances the mortgage at 20 months, exactly as banks expect them to get refinanced – a perfect time to extract some of that house equity through penalties and fees.

$460,000 appreciates 10% to $506,000, at which point the author needs to redo his mortgage. Bob gets $6,000 of it, probably more if the author really paid attention. $6K/$46K = 13% of the rise in house price extracted to the bank. That’s on top of a high interest rate. $6K for a mortgage dude to resell the same mortgage he’s already done, to someone who can’t even follow it and won’t, because it is all coming out of his rapidly rising house price anyway.

In economics, adverse selection tends to be a worry because a person knows his situation better than his counterparty, be it an insurance company or a bank. Situations like these make me wonder if the opposite is often true. The author has no clue how stable his income his and is terrible at predicting it, while I bet that the mortgage company knows just what is going to happen to this guy’s mortgage.

UPDATE: After thinking about this overnight, it is a really good article. But I’d like to see more about the house. Was it even nice? Was it primarily an investment? For the schools? It seems that the house was the primary albatross around his financial neck, though as a hero or villain, or even as an object, it is missing from the story. I wonder if the houses of this crisis are going to disappear from our collective memory.

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17 Responses to NYTimes Magazine: My Personal Credit Crisis

  1. John says:

    But the mortgage company didn’t care because it was a volume business and they were simply repackaging them into securities. And so it goes on….

  2. Woodrow taft says:

    This is pathetic. I just heard this guy talking about how he won’t apologize. He did something wildly irresponsible, knew it all the time, and it contributed to an unprecedented financial meltdown. Look, I know he’s small potatoes. But if your excuse is that you’re not the biggest fraud, only a relatively small fraud, where have ethics gone? This guy is covering economics for the Times? This guy claims to be an economic conservative? God help us. There’s only one word for this: unconscionable. I am also disturbed at the family narrative. He gets divorced, and all we hear about the ex (God bless her) is that she gets alimony. From his own account of his temper and recklessness, we might surmise that he was at least partly responsible for the breakup — but all he can do is hold a pity party for his alimony. And how nauseating is this “love of my life” nonsense? If he wants to hook up with an old soulmate, great. But this love affair is no excuse for this reprehensible behavior. And did hey need to spend thousands on Christmas when they knew their financial world was collapsing? Disgraceful. Some of us out here struggle to get by and do without once in a while. I would love to be around Lover Boy when he talks to his kids about responsibility. My only fear is that the media humping for this piece of trash will sell some copies and he’ll avoid real accountability.

  3. Steve Sailer says:

    The New York Times pays this guy $120k per year _plus overtime_? How does it work? He gets $60 per hour for the first 40 hours per week plus time and a half over that? So, if he works 50 hours per week, he makes 174K annually? Sweet ….

    And he’s been living in this beautiful house in Silver Springs rent free for the last eight months!

    Man, this guy’s got it made. No wonder he’s such a highly paid economics reporter.

  4. Not the Mike You're Looking For says:

    Speaking of adverse selection, I keep wondering, why has no one spoken about adverse selection in the credit default swap market?

    I mean, as I understand it, these derivatives were written on *specific* securities. So, in a lemons model, the only buyers should be the ones who know they have the worst crap to sell. Sellers–AIG, etc.–generally aren’t stupid. So the only explanation I have is that, like the mortgage brokers, they’re just venal–they figure they won’t be around when it blows up, so why not collect the fees now?

    It would seem far more logical to connect CDSs with an instrument–for instance, a statistical indicator or basket of securities that tracks a specific part of the housing market, something that’s out of the buyer’s control. That leaves the buyer facing only the risks that derive from decisions s/he has made, which is what I thought insurance was all about.

    Yet I’ve read nothing in the media that makes the (to my mind) crucial distinction between a regular derivative, such as an interest rate swap, and a CDS. They explain them as if they’re substantively the same. Yet the latter strikes me as unprecedented in form.

    What’s going on? Am I missing something here?

  5. Steve Sailer says:

    Countrywide securitized and offloaded every mortgage it sold. That should have told you something, no?

    We need a new term to complement predatory lending: “predatory securitizing.”

  6. justthefacts says:

    This guy deserves to lose his job over this. He is reporting as a journalist when he hasn’t checked his facts. His wife drove her last husband into bankruptcy and when she was ordered by the court to pay $30,000 she owed to her sister, she declared bankruptcy in her name so Edmund, her new husband, wouldn’t be liable. She has kited checks and owes money to several businesses in Los Angeles including a hairdresser to the “stars”. This guy is in way over his head — between the two of them, they have seven children who were affected adversely by the divorce of their parents when these two decided to fall in love with their “soulmates” while they were both still married. The wife in fact left her 16-year old behind in L.A. to live on the streets while she honeymooned with her new beau.

  7. Steve Sailer says:

    Dear Justthefacts:

    Very interesting.

    Do you have any links to public documents corroborating this?

  8. justthefacts says:

    This can all be corroborated if a real reporter cares to dig a little deeper. I’m sure the bankruptcies are a part of the public record. As for the son left behind to fend for himself with no place to live, social services in Los Angeles were contacted.
    I am deeply appalled that they are trying to make money and sell books off a story that is truly a family tragedy.

  9. Steve Sailer says:

    What name did the wife use when she was previously married?

  10. Tim says:

    Does anyone have a link to the interview that Woodrow mentions above?

  11. Steve Sailer says:

    Thanks.

    But, some casual Googling doesn’t show much of interest under that name. If you can come up with a URL to some good stuff, I’d be interested, but I’m not digging up much through normal channels.

    (My view, by the way, is that the husband and wife have forfeited their privacy over their financial affairs by publishing a heavily promoted book about said affairs as if their lives have much to say about financial matters in general. That makes their past financial dealings of public interest, especially those they chose not to disclose or to spin.)

  12. gijanefinances says:

    Wow, this story is amazing. As a person who bought in 2004 ($152,000 mortgage on a $75,00 income) and sold in 2008 at a loss ($142,000) with no bankruptcies in my record, this is mindboggling. I had to pay my mortgage for six months, rented it for six months, property taxes, realtors without expecting anyone to bail me out. I blame no one but myself (maybe Alan Greenspan:). I had to pay the piper on my own. Ed Andrews should to do the same. More on http://www.gijanefinances.wordpress.com.

  13. person says:

    As a person who has wanted to purchase a home in the same neighborhood as Mr. Andrews, but could not afford to do so because real estate prices are high…..I will say that I was harmed by Mr. Andrews and people like him. I bet he never thought about that. As someone who earns similar amounts as he does and who d/n have children, I knew that I could not afford to purchase a $460K house on a $120K salary.

    Now Mr. Andrews wants US(A) to bail him out and that extra $50K that he pulled out in a refi to boot. I think I should call the lender and tell them that whatever Mr. Andrews says is fair fro a write-down, I will pay an extra $5K. I will get pre-approval from for the amount as well.

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