Individuals Facing Foreclosure: Sympathy or Contempt?

On Monday, September 27, 2010, the first of a two-part series aired on NPR (I believe during All Things Considered) entitled Life After Foreclosure: Coping With Bad Credit.  I didn’t hear the broadcast but read the article online.

I am now in the habit of reading listeners’ comments.  The comments ranged from listeners who felt bad for individuals who lost their home to listeners who blamed individuals for placing themselves in that predicament.

Were banks and mortgage lenders predators?  Were prospective individual homeowners fleeced? Or did prospective individual homeowners “go along” with the game and bought more house than they could ever afford?

The answer is all of the above.

Yes, you had banks and mortgage lenders who were only concerned about the fees they generated.  It became so bad, and the banks and mortgage lenders were so addicted to the profits they generated, that they actually LOWERED the standards for issuing mortgages.

Do you recall the phrase NINJA mortgages?  NINJA stood for no income, no job, no assets.  Yes, prospective homeowners WITHOUT income, WITHOUT a job, WITHOUT assets were approved for mortgages.  Outrageous.

Banks and mortgage brokers were creative in other ways.  “No doc” loans (prospective homeowner did not have to produce documents verifying the information the provided in applying for a mortgage), negative amortization loans, interest only loans, 80/20 mortgage (piggyback loan – created to avoid paying PMI – private mortgage insurance – when a homeowner does not purchase with a 20% down payment).  Banks and mortgage lenders created a variety of instruments for prospective homeowners.

[CONFESSION:  When I purchased my house in 2005, it was a 80/20 mortgage.  The first trust (80%) was interest only [fixed for the five years] and the second trust (20%) was variable.  The interest rate on the first trust was 5%.  My mother had advised me to go for the fixed rate mortgage, but I was concerned about having a higher interest rate.  Of course, by June 2005 I was a tad concerned about the increasing interest rate on the 2nd trust.  I, fortunately, was able to refinance in September 2005 with my credit union and obtain a fixed rate for both the first and second trust.  The interest rate on the first trust is 5.875%.  Of course if I had taken the fixed rate at the time of the initial settlement in January 2005, the interest rate would have been 5.4%.  Yes, my mother was right and I should have listened to her.

And, yes, I did STRETCH to purchase my home.  But I didn’t go HOG WILD when the mortgage broker told me I was pre-approved for a mortgage of up to $500,000.  I knew I couldn’t afford monthly payments on a $500,000 mortgage.  The house I purchased was just under $400,000.

And, I have not had cable or satellite tv since I purchased my home.  I mow my own yard.  I grow my own produce (1st year).  I pack my lunch.  I take many steps to be frugal and live within my means].

So banks and mortgage brokers share responsibility for the housing crisis.  But so do individuals.  Yes, some were definitely taken advantage of [I recommend watching a segment of In Debt We Trust or especially Maxed Out].  But minus this category of individuals, a lot of individuals knew they couldn’t afford to make those mortgages payments or stretched quite a bit without a willingness to cut back on their lifestyles.

Returning to the comments of NPR listeners, some view the issue from a moral perspective.  Some listeners say obtaining a mortgage is a legal contract and a social one and the homeowner must honor his commitment by paying the mortgage.   These listeners are particularly disturbed by homeowners who can afford to pay the mortgage but because the house has dropped in value and the mortgage is “under water,” consciously walk away from their obligation.

Other listeners have a different perspective.  Some note that businesses have “strategic defaults” or will file for bankruptcy protection, either reorganization or liquidation.  How come there are no complaints about the moral obligation of businesses?

I found interesting the following comment by Bob Harvey, a bankruptcy attorney:

As a bankruptcy lawyer — who represents both debtors and creditors — I’m pretty comfortable reporting that a lot of bad things happen to people which affect their FICO scores, but which are not symptomatic of bad behavior, irresponsibility, profligacy, reckless disregard or any of the other myriad character defects that some of the more self righteous posters here seem to think.

If your FICO is 780, congratulations, but that credit report doesn’t come with a deed to any moral high ground.

Most Wall Street bankers have pretty solid FICO scores.

by Bob Harvey posted on Monday, September 27, 2010 8:11:42 PM. (These comments remind me of a bankruptcy attorney featured in the documentary, In Debt We Trust).

Should we  (those of us not facing foreclosure or short-sale) be sympathetic toward or disgusted with those who have or may lose their home?  Well, one cannot control how people feel.  But one should not harbor ill-will too long.  Express your point of view and get it out of your system.  Then we as a society need to deal with the split milk.

And, don’t forget, not all individuals facing foreclosure or short-sale “bought too much home.”  Due to the Great Recession, individuals have lost their jobs, have not found new jobs, could not pay their mortgage and now face foreclosure or short-sale.  I have more sympathy for individuals under such circumstances.  Honestly, I can say, but for the grace of God, there goes I.




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