1. One Family’s Housing Woe

    A couple of weeks ago, in Ready to Own a Home?, I talked about some mistakes made by too-anxious homebuyers. Well, what do you know? The LA Times presents a fine example of just what I was talking about:

    LA Times: Undone By Their Dreams

    It’s one family’s tale of housing woe, to be sure.

    In 2006, Dawn and Michael Meenan found what they were looking for in Hesperia, in a community called Mission Crest. But they had declared bankruptcy four years earlier and were uncertain they could buy a house here. Then the phone rang.

    “Your loan has been approved.”

    Ah yes, the joys of housing bubbles … when folks four years removed from a BK can go out and borrow hundreds of thousands for a home in the desert.

    Dawn and Michael Meenan first explored Hesperia on Thanksgiving weekend in 2005. …They followed the signs and billboards to the subdivision, set off from the desert by a cinder-block wall. Six builders were showing model homes. A large red balloon soaring above one tract tugged at its anchor.

    …Amid the imposing two-story designs, they settled on a modest single-story home — yet with 2,400 square feet, it was large enough for their growing family. The sales representatives told them that one would be available on Newport Street by midsummer, and if they put down a $3,000 deposit they could lock in the price at $365,000.

    Lesson One in Homebuyer Edumacation: When people use the word “modest” to describe a $365,000 home, with 2,400 square feet, much buyer heartache lurks down the road.

    They could barely scrape together the deposit, and they didn’t have a down payment for the mortgage. The sales representatives didn’t seem worried. Let’s see what we can do, they said, giving the Meenan children crayons to color with and taking notes on the couple’s credit history.

    Countrywide Financial Corp. turned them down. Freedom Plus Mortgage said yes. After signing the loan documents, the Meenans worried they would be overextended, but they told themselves that this was what first-time homebuyers do, especially when they’re in their 30s and their family is young.

    Now where have I heard that before?

    Given their bankruptcy, the Meenans qualified only for a subprime mortgage. Their first loan was fixed at 7.375% for three years and was then adjustable; their second was fixed at 11.625% for 30 years. The payments came to more than $2,500 a month.

    Both loans were two percentage points above market rates, and in 2036 they would have to make balloon payments totaling nearly $300,000. Then there were the property and the community taxes — nearly $3,000 twice a year.

    You just know this is going to end well, right?

    But they managed. When Dawn’s maternity leave was over, she went back to work as a bookkeeper for an Irwindale-based online company that sells vitamin supplements. Michael worked in the firm’s warehouse. Together they made nearly $95,000 a year.

    Wow. That’s a very, very nice salary — for any family NOT sucked into a piggybacked $365k deathtrap mortgage. For a family who DID take on the loan, though … ’tis a different story.

    And did I mention the home’s location required the Meenans to undertake a 1-hour commute every day?

    If it was a sacrifice, they told themselves, it was worthwhile. They were building equity. They were improving their credit scores. In time, their income would rise, and they could refinance. That was what the sales representatives had told them.

    In March 2007, Michael was laid off and had to take odd jobs. Three months later, Dawn’s employer gave her a chance to start her own bookkeeping business. She could work at home, and as she brought in clients, the family income climbed back to near six figures. She and Michael felt secure enough to landscape the backyard, put in a patio and plant a vegetable garden.

    Whew. For a minute there, I thought this whole setup might not work out as planned!

    The idyll proved brief. As the recession deepened, Dawn lost clients, and their income started to fall. In December 2008, they did not pay their property tax. They didn’t have the money. Besides, they rationalized, homes in the area had dropped almost $200,000 in value, and they’d be getting a reassessment and their taxes should go down.

    Then one day, as Dawn organized the bills, she saw how fast they were falling behind. She was paying the mortgage later each month, and in July the interest rate on the first loan would reset upward. It could cost them anywhere from $100 to $1,000 more each month.

    All completely unexpected, of course.

    Of course.

    They spoke to the bank but were told that they didn’t qualify for a loan modification, and in May they just couldn’t pay the mortgage anymore. Sad and angry, they stopped paying on the first loan — then, two months later, on the second.

    They contacted a real estate agent to list the house. They waited until after Michael’s birthday in August to put up the For Sale sign. They didn’t want to have to explain the situation to their family just yet.

    In October, the house was sold for $125,000. As the family waited in the car, Michael went inside for one last look. The sunlight streaming through the windows looked different without the curtains, but it still brought back a flood of memories. When he saw the stain on the carpet from one of the children’s spilled drinks, he cried.

    There might have been a time when I’d feel sympathy for these folks, but not any longer. I’ve long since tired of it. No matter what anyone tells you, bad choices have bad consequences. (Unless you’re a TBTF bank. If that’s the case, and you made this loan, good on you. Thanks for taking such a prudent risk. As always, we taxpayers got your back.)



  2. Ready to Buy a Home? No, You’re Not

    So I recently read this great article by Trent at The Simple Dollar

    Simple Dollar: Four Atypical Things to Do Before Buying a House

    …and it made me think about all the things I hear people around me say — people who are either house-shopping, or who recently bought their first home — that sort of pointed toward a, uh, less-than-dreamy home-ownership experience for them.

    Ah yes. I can hear them all now …

    “We can afford it. The house payment is barely more than our rent.”

    Think your current rent payments are equivalent to the monthly payment of a mortgage? If so, think again.

    This is because the costs of owning a home aren’t limited to your mortgage payment. Leaking roofs, lawn maintenance, broken windows, higher utility bills, plumbing woes, crapped-out central A/C systems, and an endless array of other “You’re on the hook now!” money drainers are always on the playbill for Joe and Jane Homeowner.

    And many times, the prices of such “homeowner incidentals” easily reach into the four-digit realm to fix.

    Because such expenses are essentially guaranteed when you’re a homeowner, and because they’d never be a consideration if you were a renter, it is downright deadly to equate rent payments and mortgage payments.

    Yet, like car buyers, potential homebuyers (especially young adults) tend to see everything in terms of monthly payments rather than total cost. “Payments” are simple, and hide a whole lot of things. There’s a reason the lending world wants you to focus on payments.

    “Cost,” however, is expansive. It includes all items stated, incidental, and accrued.

    Ignoring “cost” because it tells you something you don’t want to hear, in favor of “payment,” because it’s nice and cozy and your banker tells you you can afford it?

    That’s a fantastic way to end up broke and on stage with Dr. Phil.

    “What if we don’t have any money for a down payment?”

    Then you shouldn’t be buying a house.

    Anyone who tells you otherwise (1) is doing you a major disservice, and (2) probably has a paycheck that’s dependent on your buying decision.

    If you can’t come up with at least 3.5 percent down (the bare-assed minimum to qualify for an FHA loan these days), then you’ve made one thing perfectly clear: You have no control over your spending or your money. You haven’t shown any ability to plan for the future and the unknowns it will send your way.

    Having no savings for a down payment shows that you have no respect for risk. (Or no financial ability to acknowledge it. Either way, you’re not qualified for home ownership.)

    Remember the four-digit “unexpected” expenses I mentioned above? They’ll happen. They’ll happen at the worst possible times. They’ll have to be paid for.

    “It’s time to buy. Our agent says prices have bottomed.”

    The day potential homebuyers stop thinking of houses as a can’t-miss investment, just waiting to be snapped up at the bottom tick, is a day I’ll cherish. Until homes become a place to live again, rather than a no-risk-perceived lotto ticket to retirement cash, then the housing market will continue to deliver misery to a great many people.

    “It’s time to buy. My wife and I really need a tax break.”

    Ah yes, the old tax-deductibility hook, adored by real-estate agents and mortgage brokers alike.

    I’m pretty good with Excel, but somehow I still can’t make it show me how this is a path to riches: Send $100 to the bank (interest) so you don’t have to send $30 to the IRS (taxes).

    Maybe there’s a function I’m missing somewhere. Yeah, that’s probably it.

    “Yes, the payment seems high. But our agent said we would grow into it.”

    Back when Lisa and I were buying our home (our first, and still current, home), I had several people tell me not to be afraid of “stretching” to get into a “starter” home. My memory’s foggy, but I bet I heard it from our real-estate agent, too. Tough to recall.

    However, even at the tender age of 25, Lisa and I understood one thing: Just because the bank was willing to loan us $110k, that had no bearing on whether we could afford — or should even consider purchasing — a $110k house. In fact, we ended up purchasing a ~$65k house.

    Assuming we stay here, this house will be paid off by the time our kid hits high school.

    In Summary: Trent Nailed It

    Here’s the point where, for my money, Trent’s message is absolutely spot-on. He runs through a handful of reasons people give for why it will be “different” (always in a good way) once they buy a house:

    “Our lifestyle will be different when we own a house.” In what way? The only major change will be that you have less spending money and, most likely, more room to store stuff.

    Such statements are merely ways to pass the buck on to your future self, the responsible one who owns a house and makes more money and makes all of the payments. If that person doesn’t exist now, merely owning a house won’t make that person exist in the future. Don’t ever base your plans on what you hope might happen someday.

    Take responsiblity now. See whether or not you actually can make it work in terms of your month-over-month finances. If you can’t do it now, then you won’t be able to do it then.

    I could not agree more strongly. If you can’t do it now, you won’t be able to do it then.

    If you couldn’t save money while you were renting, you won’t save money once you’re a homeowner. There will simply be too many opportunities for money to drift out of your grasp. Having no ability to save before you make the leap to home ownership, even if it’s just a few percent of the purchase price, means you’ll be placing yourself in a terribly perilous position.

    Betting that you can handle it all because of a better future “financial self” is precisely what you must not do. Because it’s quite likely that the total cost of home ownership itself is what will consistently drag your financial future lower.