For those of you without subscriptions to the WSJ, the article profiles a family, the Montes, who bought a house 2 years ago in Fullerton, California. Their credit wasn't that good, and they had a combined income of $90,000/year. They decided they should go and buy a $567,000 house with no money down and a 2/28 interest-only mortgage.
They are going to lose their house. It doesn't say so explicitly in the article, but there is no way they'll be able to keep it. The current payment on the house is $3,200/month in interest, which will reset in December for the remaining 28 years on the note. They estimate that their monthly payments may rise to $4,200/month. That's just the note. On top of that they have taxes, insurance and $700/month in car loans. The article doesn't mention credit card debt, but I'm going to assume that the Montes are like every other American family out there and throw in some of that too. Figure $200/month in credit card debt. That's over $5,000 in debt servicing, a ratio of 66%.
Let me say that again, 2/3 of their GROSS income will go to servicing debt.
They are going to lose their house.
This is where this whole housing mess gets very complicated for me. Clearly, the Montes bought a house that they couldn't afford and have, for the past two years, been living in a house that they shouldn't be living in. I'd usually be inclined to write them off - hey sometimes bad decisions have consequences. But I waver when I read things like this:
Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then "reset" to a much higher level. Mr. and Mrs. Montes say their mortgage broker assured them they would be able to refinance in a couple of years to keep their payments affordable.
And this:
The Montes family got their loan through a mortgage broker in Rancho Cucamonga. Using what was then a common formula, the broker offered to arrange for two loans, one to cover about 80% of the home price and the other, a so-called piggyback loan, for the rest. For the first two years, their total monthly mortgage payments are about $3,200. The loans are initially interest-only. Mr. Montes recalls feeling edgy about whether he would be able to afford the higher costs -- about $900 more per month -- due to take effect after two years. But he says the broker assured him he could refinance before those costs kicked in.
paired with this:
Worse for the Monteses, they learned that they faced a $12,000 prepayment penalty if they refinanced within three years of the original mortgages -- something that Mr. Montes says wasn't made clear to him when he took out those loans.
Housing is one place where I really struggle balancing the free market with paternalism. At a minimum, mortgage brokers should have a fiduciary responsibility to the people they arrange mortgages for. I think there are a huge number of people who got talked into something - namely a house they couldn't afford - that they wanted very badly. They got talked into it by a series of people who likely won't get badly hurt if the deal goes bad - the dealmakers will still have a home to live in at least. It just doesn't really seem all that fair to me.
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