Why do people buy homes they can't afford?

[NoPlaceLikeHome]

This is similar to what happened to my friend who lives in California. They didn't have an adjustable mortgage. Their property value dropped tremendously which allowed the bank to tell them they had to hand over $60,000 to get rid of the negative balance or the bank would take their house. Their lawyer told them to walk away, that they'd be throwing good money after bad. She had an inheritance from her mom and they decided to use it to keep their home.

 

Wow. That is scary. Is it really legal? Were they current on their loan?

[Mrs Mungo]

He was probably arguing since he only cared about his cut of the take which would be larger if you take out a larger loan. This is why I think many people may have been misled due to the financial incentives to lie or pressure on the part of brokers, etc.

 

:iagree:

[Mrs Mungo]

Wow. That is scary. Is it really legal? Were they current on their loan?

 

Yes and yes. They had been in their house for over 12 years and had never even had a late payment. However, it was in the terms of their loan that if there property value dropped so that their negative equity was a certain percentage then they would have to pay the difference or lose their home. That's a lot of what is happening in places where homes are dropping in value like crazy. My friend's situation actually happened a few years ago, their neighborhood was one of those early indicators (30 homes foreclosed in her neighborhood that year). I think banks are trying harder to work with people in these situations now.

[unsinkable]

Often, it's implied that the rates will never rise so high, or else, if they do then they will be able to refinance to a lower rate.

 

Dh has lived in our house for nearly 30 years. We inherited it. Because of rising costs, we're looking down the barrel of having to give up his childhood home. You're right, we didn't plan for this. I would have never imagined a day when our property taxes would leap up nearly 200%.

 

Sometimes, you think you have planned for the worst, only to find out the worst is far worse than you expected.

 

So the house is paid for but you can't afford the taxes? that's awful.

[ciyates]

And that about sums up the type of loans the BANKS were making.... the BANK should have said NO, and only allowed them to buy what they really could afford.... the problem is/was - there wasn't anything for sale that "cheap".

 

I can fully believe that not everyone did go into it with their eyes wide open..... but i have the benefit of having lived out there and thru it and saw and heard what was going on.... Enough that when we moved here 5 years ago i knew this is EXACTLY where we'd be.... my realtor here in FL laughed at my "predictions". SHe's not laughing now....

 

It is not the banks responsibility to tell you what you can and cannot afford. That is like saying KFC should not sell you chicken if you are overweight. The only people the bank has a responsibility to is its stockholders.

 

I understand situational hardships (a major illness, lose of employment etc). I do not understand berry pickers buying a 305k house.

[MistyJ]

We bought an old house in '99. As it appreciated (we're in AZ, and boy, did it appreciate) we borrowed against it to improve it, and to pay off some irresponsible credit. We were young, naive, didn't understand it was an artificial bubble.

 

My husband's salary has been stagnant 3 years, has dropped if you consider they increased our insurance premiums and REALLY increased our deductibles and copays. We've had a serious illness in the family.

 

Since the crisis, our home value has dropped almost 50%. We DID have an ARM at one point, which, PTL, my husband got rid of right before the crisis.

 

Maybe you're perfect and never make financial mistakes. Hopefully we'll make many fewer from here on our, if we make it through.

[Mrs Mungo]

We bought an old house in '99. As it appreciated (we're in AZ, and boy, did it appreciate) we borrowed against it to improve it, and to pay off some irresponsible credit. We were young, naive, didn't understand it was an artificial bubble.

 

My husband's salary has been stagnant 3 years, has dropped if you consider they increased our insurance premiums and REALLY increased our deductibles and copays. We've had a serious illness in the family.

 

Since the crisis, our home value has dropped almost 50%. We DID have an ARM at one point, which, PTL, my husband got rid of right before the crisis.

 

Maybe you're perfect and never make financial mistakes. Hopefully we'll make many fewer from here on our, if we make it through.

 

:grouphug:

[Senorita Tuna Fish]

We would have been making those same financial mistakes of living well beyond our means. It's sad when people lose their homes even if they didn't read the find print or had dreams bigger than their current pocketbooks. It really sucks the state of things...combinations of too much greed, living beyond means, amd a whole mess of other human foibles all rolled into one ghastly mess of a housing market.

[lionfamily1999]

So the house is paid for but you can't afford the taxes? that's awful.

It's all of the household costs that are driving us out. Our electric bill is 81% charges, meaning we are only paying 19% of our bill towards actual electricity consumption. Now that they've brought the sewer lines through our neighborhood, the county is examining putting in an extra tax for those of us still using septics, they claim this is to help offset the ecological impact... Everything has jumped up so high in price that we've cut back (no YMCA, no cable/satellite, no phone), but there's only so many corners you can cut to make up the difference.

 

I'm not alone in this. Unfortuneatly, I've had neighbors going without water and/or electricity for stretches, because taxes as well as utility costs have gone so far up. Most of it is the housing boom we went through. The new people on my street want it paved, so we are expected (by the county) to chip in, even though we've lived here (in dh's case 29+) 11 years happily driving and keeping up our section of gravel road.

 

My point being, sometimes you can't prepare. Sometimes you start off living within your means, but suddenly costs fly up and the paycheck holds steady. I've heard snide remarks directed at myself, because we say (now) we simply can't afford it (oh, but they can afford a house in that neighborhood). Well, it wasn't that neighborhood when we moved here, it was home.

[Scuff]

We bought an old house in '99. As it appreciated (we're in AZ, and boy, did it appreciate) we borrowed against it to improve it, and to pay off some irresponsible credit. We were young, naive, didn't understand it was an artificial bubble.

.

 

Not to pick on you, but I think this is where some hope is in our current economy. We don't borrow extra against the house for any reason. And when people were getting ARMs and telling me how great it was to have such a low rate, I just never could be comfortable with that even if it were true. My dad was terrible with $when were kids. My parents bought a house for $55K in the 80s that they sold for $140K (divorce) but only got about 40 out of 20+ yrs later because of all the extra loans against it. They had a baloon at one point, ect. So even though we haven't been perfect, and have felt the pressure of greed and have it now, we're a lot better off because we both grew up struggling and didn't want to go there. So, yeah, it's bad right now and people are hurting. It sucks for a lot of people right now. But if we can get through this (and I think we can, if the gov't stays out of it, but that's another issue ;) ) I think we'll all be better and wiser for it.

Edited September 10, 2009 by Scuff

[ciyates]

Yes and yes. They had been in their house for over 12 years and had never even had a late payment. However, it was in the terms of their loan that if there property value dropped so that their negative equity was a certain percentage then they would have to pay the difference or lose their home. That's a lot of what is happening in places where homes are dropping in value like crazy. My friend's situation actually happened a few years ago, their neighborhood was one of those early indicators (30 homes foreclosed in her neighborhood that year). I think banks are trying harder to work with people in these situations now.

 

In 12 years they had not built up enough equity to prevent this? Where they taking out lines of credit against the house so that it did not have the equity?

12 years ago the standard loans for home was 20 years. They should have been over half way done to paying it off. Even if they had a 30 year loan they should have been well under. I do realize that many homes lost 50 to 60% of their value but it was on today's market not 12 years ago.

[Mrs Mungo]

I do realize that many homes lost 50 to 60% of their value but it was on today's market not 12 years ago.

 

The only reason the didn't lose the house outright was because they had not lost as much equity as many of their neighbors who had not been paying on their loans as long. I know at the point when they were going through this 30 or so of the houses in their neighborhood were foreclosed on. Again, this is California. The housing bubble started there earlier than in many areas of the country and the home values have crashed way harder.

[MistyJ]

Not to pick on you, but I think this is where some hope is in our current economy. We don't borrow extra against the house for any reason. And when people were getting ARMs and telling me how great it was to have such a low rate, I just never could be comfortable with that even if it were true. My dad was terrible with $when were kids. My parents bought a house for $55K in the 80s that they sold for $140K (divorce) but only got about 40 out of 20+ yrs later because of all the extra loans against it. They had a baloon at one point, ect. So even though we haven't been perfect, and have felt the pressure of greed and have it now, we're a lot better off because we both grew up struggling and didn't want to go there. So, yeah, it's bad right now and people are hurting. It sucks for a lot of people right now. But if we can get through this (and I think we can, if the gov't stays out of it, but that's another issue ;) ) I think we'll all be better and wiser for it.

 

And my experience was the opposite. I grew up comfortably with a single father who was very old world. He was first generation American, son of a Russian immigrant who "arrived in 1916 with 19 cents in his pocket, died a millionaire" as those stories go. My father did not think a girl needed to know anything about money. If I needed something it was provided. I was not demanding and never had fancy clothes or a fancy car, but I was given the clothes I needed and a simple car when I needed one. Entering adulthood, I didn't know what I didn't know about money. I am definately teaching my kids differently.

Edited September 10, 2009 by MistyJ

[Jane]

It is not the banks responsibility to tell you what you can and cannot afford. That is like saying KFC should not sell you chicken if you are overweight. The only people the bank has a responsibility to is its stockholders.

 

Wow. This is a very weak analogy. Of course it is the responsibility of the banks to weigh the risks of their lending practices. Think for a moment what would happen if banks were required to lend to anyone who walked through their doors.

 

Of course, a wise borrower (oxymoron perhaps?) will also weigh the risks of entering into a borrowing contract. There is responsibility on both sides.

[TraceyS/FL]

It is not the banks responsibility to tell you what you can and cannot afford. That is like saying KFC should not sell you chicken if you are overweight. The only people the bank has a responsibility to is its stockholders.

 

I understand situational hardships (a major illness, lose of employment etc). I do not understand berry pickers buying a 305k house.

 

The only reason the didn't lose the house outright was because they had not lost as much equity as many of their neighbors who had not been paying on their loans as long. I know at the point when they were going through this 30 or so of the houses in their neighborhood were foreclosed on. Again, this is California. The housing bubble started there earlier than in many areas of the country and the home values have crashed way harder.

 

You honestly can't begin to understand the housing climate in CA the last 10+ years unless you (or close family) has lived thru it.

 

But berry pickers CAN make decent money - some my teachers in high school did that during the summer. :tongue_smilie:

 

The people that bought ours for $378k were slightly better off job wise- she packed the berries, he was a welder at the cooling shed. They were buying it without selling their nearly paid off home (keeping it for grandma). But heck, WE couldn't have bought our own house!

 

But really, while personal responsibility is good, i feel bad for the buyers that just didn't know what they were getting into. And trust me, there were A LOT of them. Fueled by the ease of obtaining the american dream by mortgage brokers paid on commission and doing some creative stuff.

[Scuff]

In 12 years they had not built up enough equity to prevent this? Where they taking out lines of credit against the house so that it did not have the equity?

12 years ago the standard loans for home was 20 years. They should have been over half way done to paying it off. Even if they had a 30 year loan they should have been well under. I do realize that many homes lost 50 to 60% of their value but it was on today's market not 12 years ago.

 

 

We bought our house 10 years ago and it is worth half what we paid for it. We've been paying on it 10 years, 30 yr morgage, but most of that has been interest, so our balance is only about $8-9K less than when we bought it. So it's entirely possible to not have the equity to cover that.

[NoPlaceLikeHome]

It is not the banks responsibility to tell you what you can and cannot afford. That is like saying KFC should not sell you chicken if you are overweight. The only people the bank has a responsibility to is its stockholders.

 

 

 

 

I think that the banks are responsible for making loans to people who cannot afford them since that is preying upon the borrowers and the stockholders. Frankly, I think some bankers/brokers should have gone to jail over this housing mess. Don't get me wrong, I firmly believe in personal responsibility as well. I also think that many consumers made many mistakes that got themselves in over their heads. However, I also think that many were duped into believing that they could afford these loans or that they could flip these houses for a profit. Look at how many news shows, financial shows, TV shows were extolling the virtues of buying houses, the housing market, and flipping houses. Plus it takes a lawyer to wade through all of the paperwork with a house loan which should not be the case. They should make it a law that the paperwork is easily understandable for the average person. They should also spell out all of the fees/rates like they do with credit cards in an easy to understand summary.

[Cera]

It is not the banks responsibility to tell you what you can and cannot afford. That is like saying KFC should not sell you chicken if you are overweight. The only people the bank has a responsibility to is its stockholders.

 

I understand situational hardships (a major illness, lose of employment etc). I do not understand berry pickers buying a 305k house.

 

:iagree:

[newbie]

You honestly can't begin to understand the housing climate in CA the last 10+ years unless you (or close family) has lived thru it.

 

But berry pickers CAN make decent money - some my teachers in high school did that during the summer. :tongue_smilie:

 

The people that bought ours for $378k were slightly better off job wise- she packed the berries, he was a welder at the cooling shed. They were buying it without selling their nearly paid off home (keeping it for grandma). But heck, WE couldn't have bought our own house!

 

But really, while personal responsibility is good, i feel bad for the buyers that just didn't know what they were getting into. And trust me, there were A LOT of them. Fueled by the ease of obtaining the american dream by mortgage brokers paid on commission and doing some creative stuff.

 

You are so right on pt. one. There is nooooo way we could have seen the market fall out from under us. That is what killed So. cAl. Especially if you bought right before it dropped 200 to 300k.

 

Berry pickers can make good money. And a lot of the time it is money they saved for yrs. They are usually cash buyers. But 305 will not get you much out here.

[ekarl2]

Wow. This is a very weak analogy. Of course it is the responsibility of the banks to weigh the risks of their lending practices. Think for a moment what would happen if banks were required to lend to anyone who walked through their doors.

 

 

 

This is near to what happened to cause this sub-prime mess. Banks were HIGHLY pressured by Fannie and Freddie to lend to anyone whose breath fogged a mirror.

[ekarl2]

I think that the banks are responsible for making loans to people who cannot afford them since that is preying upon the borrowers and the stockholders. Frankly, I think some bankers/brokers should have gone to jail over this housing mess. Don't get me wrong, I firmly believe in personal responsibility as well. I also think that many consumers made many mistakes that got themselves in over their heads. However, I also think that many were duped into believing that they could afford these loans or that they could flip these houses for a profit. Look at how many news shows, financial shows, TV shows were extolling the virtues of buying houses, the housing market, and flipping houses. Plus it takes a lawyer to wade through all of the paperwork with a house loan which should not be the case. They should make it a law that the paperwork is easily understandable for the average person. They should also spell out all of the fees/rates like they do with credit cards in an easy to understand summary.

 

Yes, banks and brokers want to make money, but a broker can't sell a loan that a bank won't approve. A bank won't approve a loan for a person who can't afford it or has bad credit UNLESS something lessens their risk. A bank won't make money if the mortgage payments don't get made. Their risk was lessened by Fannie and Freddie's government mandate to guarantee high-risk loans in order for "everyone" to achieve the American Dream. Banks knew they could sell that high-risk loan to the psuedo-gov't entities who were happy to buy that loan since the gov't guaranteed it. THAT'S what caused this. Banks had less of a risk and had to compete, but it's the gov't intrusion that lowered the risk in the first place.

[Jane]

Yes, banks and brokers want to make money, but a broker can't sell a loan that a bank won't approve. A bank won't approve a loan for a person who can't afford it or has bad credit UNLESS something lessens their risk. A bank won't make money if the mortgage payments don't get made. Their risk was lessened by Fannie and Freddie's government mandate to guarantee high-risk loans in order for "everyone" to achieve the American Dream. Banks knew they could sell that high-risk loan to the psuedo-gov't entities who were happy to buy that loan since the gov't guaranteed it. THAT'S what caused this. Banks had less of a risk and had to compete, but it's the gov't intrusion that lowered the risk in the first place.

 

Nicely articulated, Erin! I agree and think it's important that we keep the big picture in mind as everyone sorts through the details of this mess.

[WishboneDawn]

A bank won't make money if the mortgage payments don't get made.

 

Except that you're absolutely wrong on this. Mortgages were products in and of themselves that banks could sell up a chain that eventually reached global investors. Whether a client can make mortgage payments was irrelevent if you can unload them after the papers are signed.

 

But who would buy such sloppy mortgages? People convinced that even if a certain percentage of what they bought was rotten then it was still a no-lose situation because real estate prices always go up, right? Even if a person defaults on their mortgage they still have a property. And even that's just the tip of the iceberg.

 

The mortgage crisis became a global economic crisis precisely because banks could make money off even rotten, awful mortgages. Even without gov't intervention there would have been plenty of people happy to snap up those mortgages, bundle them as investments and sell them to investors. And then sell insurance on them - a whole 'nother mess.

 

There was no one cause to the mess. People overreached when getting mortgages, gov't stepped in when it shouldn't have and failed to step in when it needed to, brokers and banks signed awful mortgages, mortgages were turned into products, etc. Anyone who tells you there was one cause, except perhaps some general one like greed, is selling you something politically.

 

NPR has an excellent program on this that I can't reccomend enough! - Giant Pool of Money