Today’s essay is a warning. Call it a word of caution, specifically for people nearing retirement. But to be honest, young people could benefit from this story too.
Our protagonist in this tale is a man named Jim who sought me out for advice about his financial situation. Jim was in a real predicament because of a mistake I see a lot of older people make. That mistake is making a big purchase later on in life.
Jim bought a luxury condo at age 61. He was working at the time, making great money–$80,000 a year. But he was laid off only a year after he bought it, and with the economy being what it is, Jim decided he would never find another job making anywhere close to his salary. So he decided to collect his social security benefits. But because he was only 62, his social security income only amounted to $1,500 a month, a far cry from the thousands he had been pulling in.
So to keep up with the cost of the condo, plus his other bills, Jim was withdrawing $1,500 every month from his IRA. Jim had been doing this for a few years by the time I spoke with him, and he only had $40,000 left in it. You don’t need to be Stephen Hawking to see that the IRA money was not going to last very long. If he kept taking $1,500 out every month, it would be gone in 26 months. Two years. And here Jim was only 65 years old.
My advice to him was to let go of the condo. “At this point Jim, you may need to cut your losses,” I said. “You can only keep up with the cost of the thing until your IRA money runs out which will be in two years, and at that point you’ll lose the condo and you’ll have no cash in the bank with only $1,500 to live on every month. If you let it go now, at least you’ve got that forty grand to lean on.”
Now Jim couldn’t control getting laid off of course, but buying that condo and blindly trying to keep up with it killed Jim’s shot at a comfortable retirement. That was his mistake. Unless he gets a job, which he may have to do, Jim will only have $1,500 to live on each month for the rest of his life.
It didn’t have to be that way. When he bought that condo at age 61 Jim had over $100,000 in his IRA plus $20,000 in the bank, which was used as a down payment for the mortgage. And Jim had been making $80,000 a year. If a luxury home was what he wanted for his retirement, Jim should have been saving up so he could pay cash for a place and retire without a mortgage payment. With retirement on the horizon, a person should be looking to set themselves up with a low cost of living, not a high one.
Posts Tagged ‘mortgage’
John had a nice low interest mortgage, but he wanted to add an addition on to his home, which he could rent out for some extra income. He was a building contractor and planned to do the work himself. So far, so good. But it was still a costly project in materials alone, so he refinanced his house to its full market value, borrowing an extra $40,000 above what he owed on his current loan to pay for the project, borrowing a total of $245,000.
“The brokers I was dealing with were offering a fixed rate 5 percent loan,” John said. “The day before we were set to close, a broker from the company called to reschedule it. They had me go to their office at midnight to sign the papers.”
Now, let me just pause the story, and say that if a business deal needs to be consummated at midnight, it’s probably not a good sign. Let’s continue.
“John, who was this company that was doing business at midnight?” I asked him.
“I had only spoken to them over the phone. When I showed up at midnight, their office was in a storefront in a seedy part of town. Then they told me they couldn’t get me the fixed rate mortgage; they could only get me an adjustable rate mortgage. I was all set to start work on the addition, and I even ordered some of the materials so I went through with it.”
Now, three years later, his payments have doubled because of the screwy loan terms. With his own contracting business not doing well, he is probably going to lose the house.
“I should have known better,” he said. “It’s my fault.”
That one really made me think. This guy was a building contractor from Brooklyn. And he wasn’t streetsmart enough to walk away from a mortgage loan being made at midnight, in a storefront with the terms changed at the last minute?
Now, forget the fact it was midnight in a seedy part of town. Anytime, and I mean anytime, you find the terms of a potential business transaction being changed on you at the last minute, back out of the deal. Do not fall for the old bait-and-switch.
COUPLE EARNS $250,000 PER YEAR, BUT STILL CAN’T AFFORD TO HEAT THEIR HOME
A lotta my clients will say to me, ‘If only I made more money, I’d be OK.’
Whenever I am hear this from someone, I tell the story of a couple who were my clients and who were in very dire of financial straits. This couple had major problems. Yet their monthly income was $21,000. And that’s after taxes, in case any of you were wondering.
Now you might be thinking: “If I made twenty grand a month, I’d be set. I wouldn’t have a financial worry in the world, and my life would be great.” Well, maybe it would, and maybe it wouldn’t. I’m sure this couple thought that way at one point too.
What happened was these people had made a number of bad financial decisions. I mean, you couldn’t count them all on both hands, that’s how many bad choices they’d made to leave them in a position that $21,000 per month was not enough money for them.
See, the wife owned a business that did contract work for the government. And the government required her to maintain a good credit history, or else her business wouldn’t be given any more jobs, and that’d mean she would kiss her $200,000 a year salary good-bye for good.
This couple had taken on a lot of personal debt, and when the economy went into the toilet, both she and her husband saw their work slow down. They’d only lost a small fraction of their income, but this couple had such high debt payments, they couldn’t keep up after that. Even when they were making $25,000 a month, they were spending every dollar they made. So now, the wife is telling me how they can’t afford to go out and eat, or see a movie or anything. She’s saying the same things as people who make minimum wage.
Anyway, because she had to maintain good credit, they could not get rid of their debts, because doing so would have hurt her credit. They were stuck with the mansion, the Mercedes leases, the money-losing rental property, and everything else. They were between a rock and a boulder. They even had to dress in layers at home because their mansion cost too much to heat properly. Does this sound like people who make over a quarter million dollars a year?
So keep this in mind if you think a big income will keep you out of money problems. Only good financial decisions will do that.
How’s this for a housing horror story: Imagine you’re living your life, things are all hunky-dory, and then one day you come home from work to find a foreclosure notice on your front door. When you call your mortgage servicing company, they tell you that your mortgage is six payments behind, you owe them a ton of money, and they’ve begun foreclosure proceedings to sell the house. And as far as you know, you’ve been making your payments every month like clockwork.
This is what happened to a man named Tim, who called me after pulling his hair out dealing with the mortgage company for a month..
“I called the bank when I got their notice, and they said it’s no mistake, somehow my loan is behind and they want to foreclose. How can this be?”
Tim swore he had never missed a house payment, and had never been notified by the servicer that his loan was past due. Which is odd, because usually if you miss a payment on a debt, that creditor is going to hound you night and day about it.
Now, if Tim had made all the payments, this should have been fairly easy to prove. But the problem was this: Tim had his house payment automatically deducted from his bank account electronically every month. And the bank that had his checking account, which Tim’s house payments came from, was the same bank that serviced the mortgage. Some of the missed payments were from over three years ago, and they told Tim that yes, they could research the bank account to check on whether the payments had come out, but because the dates in question were so far in the past, it would take them several months to do the research. Meanwhile, the bank planned to auction the house in the next month.
“This is a nightmare,” Tim said.
That was putting it mildly.
Addiction is a horrible thing. When a person cannot stop him or herself from doing something destructive, even after the person has seen the consequences of their destructive actions, well, that is sad indeed. And people can become addicted to anything. People can even become addicted to giving out mortgage loans that won’t be paid back.
It’s true. Not a lot of people are aware of this addiction; it’s much less common than something like alcoholism, for example. And this particular addiction is usually only found among people who run banks.
Two years ago, you may recall, the world’s entire financial system nearly collapsed because so many people were defaulting on their mortgage loans. If I remember correctly, economic leaders explained the necessity of bailing out the too-big-to-fail financial institutions by saying that the world was, “Looking into the financial abyss,” or something to that effect. Treasury Secretary Tim Geithner said that the bailout was unfair to the public, but “had to be done.”
So you might think that the same banks that nearly failed only two years ago because of mortgage defaults would not be giving out mortgages that are likely to be defaulted upon, what with how doing that nearly bankrupted them and caused us to look into the financial abyss and everything. I mean it’s only been two years!
But no, banks still give out mortgages to people who don’t have enough income to afford the monthly payments. (To read a story about 3 people who took out mortgages just this year, and have never made a single payment, see the blog post, https://onthefrontlinesofamericanswarwithdebt.wordpress.com/2010/10/12/banks-still-giving-out-unaffordable-mortgages/ )
Because I’ve never been a banker, I’ve never had the chance to experiment with giving out unaffordable mortgages. I’m glad, because it seems like a real tough monkey to get off your back.
It’s almost comical. Talk about a quick relapse. Only two years since tons of taxpayer money was injected into the financial system to keep huge financial companies from insolvency because of mortgage defaults. And apparently they never quit doing it.
Did the people running our banks miss that on the news? Were the bank CEOs out roaming the streets looking for people to sign up for mortgages when that story came on? “Hey man, hey man, you wanna buy a house? I got the money right here.”
I mean, those people currently running the nation’s banks have to be aware that their own firms nearly collapsed from mortgage defaults, right? Why would they keep doing the same thing that nearly bankrupted their companies only two years ago? All I can think is, giving out mortgage loans that will likely be defaulted upon must be one hell of a drug.
If it’s decided to give more taxpayer money to banks, perhaps the government could require bank executives complete a 12-Step program as a condition.
After letting his homeowner’s insurance lapse, 85-yr-old sees his house payment jump 118%
One of the major costs in owning a home is the property taxes and homeowner’s insurance. You’ve got to make sure these are paid up, otherwise you could find yourself faced with expensive problems.
And I’m not even talking about the dangers of your house burning down during a lapse in your insurance coverage.
I’m talking about the needless costs a person can incur when their mortgage company finds out the taxes or insurance have not been paid. The bank that is owed your mortgage debt, and who has their stake in your home, can heavily penalize their borrowers for not paying these bills. I’ve seen it with my clients, and brother it is expensive.
Your house is their collateral, and they do not like to find out their collateral is not insured. Banks know the importance of insurance. And they really don’t like it when some taxing body puts a lien on their collateral.
I’ve never seen mortgage companies impose actual penalty fees in situations like this. But I have seen them pay the taxes or the homeowner’s insurance, and then extract huge sums of money from the borrower for reimbursement. When the bank has to pay your bills, its bottom line is violently disturbed. It’s like throwing a bucket of ice water on a hornet’s nest, and the reaction is similar.
When a mortgage company pays your tax or insurance bill, it will usually set up escrow accounts for these things to make sure they never go unpaid again. You will now have to fund these accounts every month as part of your monthly house payment. When this happens, the increase in the house payment can be huge. Because in addition to the current year’s taxes or insurance you have to pay toward each month, you must reimburse the bank for whatever it paid on your behalf. If you can’t handle this huge spike in your house payment, the effects can be disastrous.
Most recently, this happened to a client of mine named John. John is an 85 year old man who lives alone. He gets social security of $1,200 every month. That’s it. His mortgage payment was $500, and he paid the relatively small tax and insurance bills himself. The problem was that John had been short of money when his insurance bill came in, and he didn’t pay the bill until about five months later. By that time, his mortgage company had arranged for insurance coverage on the house, and set up an escrow account for John to pay into every month. John’s payment jumped from $500 to $1,089! That’s only $11 less than his monthly income. That was four months before he called us. He’d missed all four new payments, he owed the mortgage company a total of $7,000, and they had initiated foreclosure.
Now, if you noticed the numbers, you might be asking why John owed $7,000 if he only missed 4 payments at $1,089 apiece, which equals only $4,356.
That’s because the insurance policy put in place by the mortgage company cost $1,600 for only five months of coverage! (John’s policy cost only $1,100 for the entire year.) In a situation like this, a mortgage company will often get a “sight/unseen” insurance policy. This means the insurance company has not inspected the property, so they charge more because they don’t know what they are insuring. Also, these policies usually carry no deductible, which also drives up the cost for coverage.
John had about $50,000 in equity in his house and he stood to lose it all if the foreclosure went through. To stop the foreclosure, John would need to come up with the entire seven grand, or file for bankruptcy. And the mortgage company told us–in no uncertain terms–that the escrow account would be there for the life of the loan. There was no chance in hell of cancelling them and letting John pay the insurance himself. These were some angry hornets indeed. So even after the arrears were paid back, John’s monthly payment would be significantly higher. All because he didn’t pay an $1,100 insurance bill.
“John do your kids know what’s going on with the house?” I asked him.
“No,” he said.
“I think you’re going to have to tell them.”
Will they ever learn?
The biggest cause of 2008’s financial meltdown, we are told, was mortgage loans not being paid back. Our leaders and media tell us that all those mortgages being defaulted upon nearly caused another Great Depression.
Well, there must be something really attractive about giving mortgage loans to people who can’t pay the money back. Because apparently, it’s still happening. It’s nearly 2011, and I am speaking to people who are defaulting on mortgages they got after the economy collapsed in fall 2008 — from all the defaulting mortgages.
For example, there was a man named John who got his mortgage in January 2010. This man has never made even one payment on this loan because he simply has never been able to afford it. The budget we put together shows his monthly expenses are $1,000 more than his income. John told me that now, 10 months after taking on this debt, he is actually making more than when he got the loan. His finances were even worse when the bank gave him the money!
Another client named Donna told me how she is planning to refinance her condo, and how the mortgage broker setting her up with the loan plans to submit income statements she filled out five months earlier, back when she had a second job. Donna had always relied on that second job to live, but she was laid off from it in the time since getting approved for the loan. She told me the broker assured her there would be no problem; the bank giving her the money wouldn’t request up to date proof of her income.
The payment on the new mortgage would be $1,200; her income from the one job is $1,600. Donna is actively looking for another second job, but if she takes out this loan, and doesn’t find another job quick, she’ll probably default, possibly follow John and never make a payment.
My last example is a woman named Margo who got her mortgage in the winter of 2009 when the stock markets were in a tailspin. In the year and a half she’s had the mortgage, she’s made only 10 payments. She made the first five payments on time but then she started to be late or miss payments altogether. The payment on her mortgage is $900; her monthly income is $2,000. Margo’s budget shows that her expenses are $100 more than her income. And nothing about her finances had changed since she got the mortgage, she told me.
“I was really surprised they gave it to me,” she said.
So if you’re in the market to get a home loan, be sure you know the most you can afford in a monthly house payment. Because as you can see from these examples, the person setting you up with the mortgage isn’t going to tell you.
Just a thought…current and former Federal Reserve Chairmen Ben Bernanke and Alan Greenspan, along with all the CEOs in the banking industry say there was no way to forsee the disastrous effects of the mortgage meltdown, or to know there was even a problem.
Perhaps they read this blog.
Banks still giving out mortgages that will never be paid back
Scott from Georgia called in because he was having to borrow money from his parents every month to make his house payment. Scott was 26 years old, and he brought home $1,800 per month in income. He had just bought this home a year earlier, and his monthly mortgage payments were $900. Half his income went right to the mortgage! Anybody is going to struggle when half their income goes right to a house payment. Plus you’ve got to pay utilitites, plus whatever it costs when something breaks.
“I don’t know Scott, without a roommate or a big raise, it just doesn’t seem like you can afford this mortgage,” I said. “The house payment is half of your income. Did they know how much you made when you got the loan?”
“Sure, I had to submit my pay stubs and tax returns,” he said. “I was pretty shocked when they said I qualified.”
“If it were thirty years ago, you probably wouldn’t have,” I said.
As soon as he bought the house he began to have money problems. That’s because Scott’s salary simply didn’t afford him $900 a month for housing. He needed a house or rent payment that was closer to $600. And now his parents were getting tired of giving him hundreds of dollars every month to pay his bills.
“Unless you can get more money coming in, you should probably talk to the bank about letting go of the house,” I said.
Scott got his loan in the fall of 2008. By that time the default rate on mortgages had been climbing steadily and we were on the brink of economic meltdown. Maybe those bank executives whose bank lended Scott the money simply don’t read newspapers? Doubtful. More likely, the bank that loaned him the money turned around and immediately sold the debt for a profit, which is how the mortgage industry now functions.
So keep that in mind if you are in the market for a mortgage. Don’t let some loan officer or broker tell you what you can afford. Know yourself what you can afford so that you don’t end up in a situation like Scott’s.
Instead of checking out HSBC’s false claims, he accepts their deal and will soon be losing his house
A lot has been written about predatory lending practices employed during the housing boom. But the following was one I hadn’t heard of in the news.
The victim was a man from Texas who at one point had a nice 6 percent fixed interest rate mortgage. But in 2006 he refinanced his house with an adjustable rate mortgage, the rate had since soared to 10 percent, and his payment had gone through the roof.
Why would anyone do such a thing? This man told me that in 2006 he received a phone call from megabank HSBC, warning him that if he didn’t take this horrible refinancing deal they were offering, another bank could buy his mortgage and change the terms to be even worse.
“HSBC called me out of the blue,” he said. “The guy told me that any company could buy my mortgage, and they could change the terms to whatever they wanted. The guy said I should just refinance with them, so I would know what I was getting.”
“Mortgages are bought and sold everyday,” I said. “Whoever buys your mortgage can’t just change the terms on you. HSBC actually told you this?”
“Yup. And I panicked.”
This man was screwed. There was no way he could afford the house payment. And he couldn’t refinance again because like so many, the value of his home had dropped below what he owed on the mortgage.
This man was blatantly lied to, but instead of checking out HSBC’s claim, he unthinkingly rushed into their offer out of ignorance and fear.
If only he’d done some research. Most credit counseling agencies like mine offer mortgage counseling where the whole process is explained and all questions answered. If only he had called my agency before accepting HSBC’s deal. He would have discovered quickly that the con man offering this horrible loan was lying to him. Nobody can just change your loan terms if they buy your loan.
Please learn from this man’s experience. If you intend to get a mortgage, and you don’t know a lot about how the mortgage industry works, do your homework first. Just an hour on the phone could save you from ruin, just like it could have saved this man.
13 payments from paying off their mortgage, this unemployed couple are in danger of losing their home
Many of my clients think that because they have paid on time in the past, their creditors will be lenient with them. Usually they won’t.
You could pay on a 30-year mortgage for 29 years, never be a day late with a payment, and if you suddenly stop making that payment, they’ll foreclose to get that last year’s money they’re owed. And they’ll charge you all the normal attornies’ fees, late fees, and penalties in the process.
One of my clients actually was in this exact same predicament. His name was Jose, and this man had only 13 payments to make before his home would be paid off. But Jose worked in construction and as you may know, that industry has been at a standstill for almost two years. Jose hadn’t worked in a year and a half, and he’d missed six house payments by the time he called us. Now, the bank was moving to foreclose, and they were moving quickly. The home was scheduled to be sold at auction in the next month.
Jose’s unemployment benefits had stopped, and his wife didn’t make much at her job. The $6,000 they’d had in savings was long gone. Theirs was a 15-year mortgage, so the monthly payments were rather high–$1,500 per month. They’d moved here from Mexico thirty years ago, and they’d saved a lot of money by the time they bought the house in 1996. Jose made pretty good money doing construction, so they opted for the shorter term mortgage with a big down payment in order to pay off the house more quickly. If it weren’t for all the foreclosure costs and penalty fees, they would only have owed about $20,000 on the house. It was due to paid off in mid-2011. But all the costs associated with the bank’s foreclosure action came to another $5,000. They were so close to owning their house outright, but because Jose couldn’t find another job, they were in real danger of losing their home and their investment.
The reinstatement amount–legalese meaning the cost to stop foreclosure and bring the loan current–was about $26,000, due in a month. The mortgage company was offering one thing only: they would accept half the reinstatement amount, with the remaining half to be paid off over six months, in addition to the monthly mortgage payments. That meant a combined debt payment of $3,700 per month. It did not help.
“There’s nobody else I can borrow money from,” said Jose. “Isn’t there somebody at the bank I could talk to about this?”
We called his mortgage company–one of the major ones–to find out if they would be reasonable, or if we might actually talk to a decision maker.
I explained to the customer service rep that there was literally no way they could come up with the $13,000 by the deadline given, that they had no money left, and I asked if it was possible for them to pay some smaller amount each month, perhaps just the interest until Jose got back to work
“According to the notes here,” said the person on the other end, “We would need thirteen thousand, two hundred, dollars by June 26 or the house would be sold at public auction…”
“Wait a second,” I interjected. “Are you guys really going to take his house? He’s only got 13 payments until the loan is paid. He’s never been late on a payment in 14 years. You can’t work with him until he finds a job?”
“I’m sorry sir, the decision is the decision. There’s nothing I can do.”
I asked to speak to a manager, and it went straight to voicemail.
Jose and his wife were forced to declare bankruptcy in order to stop the foreclosure sale. And this was a guy who never was late with a house payment, he never had any excessive debt and had a good credit score. That’s the kind of behavior you should expect from a lender. Don’t expect anything less.