Stories about families facing foreclosure seem to be in the news every day. It's usually a low- to middle-income family, often black or latino, who are working hard to achieve the American dream, but they've let someone talk them into buying an overly expensive house with some kind of crazy financing that is impossible to pay off.
The tone of these stories always seems to teeter between portraying the home buyers as victims and making them look like idiots who should have known better. Read this passage from today's New York Times article "The Loan That Keeps on Taking:"
The first and biggest [of three loans, two from banks and one from an individual person] was a pay-option adjustable rate mortgage. The loan allows borrowers to pay less than the interest due, adding the difference onto the balance so more is owed with each passing month. The interest rate on the loans from [the individual] was 10 percent, with a 15 percent upfront fee added to the principal balance. That loan called for borrowers to make interest-only payments and pay off the full amount in two years.
To assure that borrowers would qualify, the lawsuit claims that [the mortgage broker] and her associates exaggerated their incomes and assets using no-documentation loans.
Tomas and Martha Hernandez said [their real estate agent] had convinced them that they could afford a $745,000 home in San Jose, even though Mr. Hernandez earned about $4,000 a month and told them he could pay no more than $2,500 a month.
The couple balked after learning that their monthly payments would be $4,660. But [the mortgage broker] assured them that they would be able to refinance in a few months and reduce the payments to less than $2,900 a month, according to the lawsuit and Mr. Hernandez. They moved into the home two days before Christmas in 2005.
“They said not to worry, that we were in good hands,” Mr. Hernandez said of [the broker and real estate agent].
Do you just want to smack your forehead and say "what were they thinking!?!?!" Do people who are dumb enough to fall for these offers deserve everything they get? In this particular case, there was a language issue and it seems the home buyers should have been provided with a Spanish translation of their paperwork and weren't... but that isn't always the case. Should people who can't understand the financial transactions required to borrow a home just not be allowed to get themselves into these messes?
But really, although the average New York Times reader is probably a better-educated English speaker and might think they could never make this kind of mistake, don't we all put a lot of trust in others when we manage our finances? When I bought my home, I read all the documents and asked a lot of questions, usually via email so I'd have the answers in writing. I had an assumption of sleaziness about the mortgage industry, so I never gave anyone the benefit of the doubt. But there were times when I just had to assume my lawyer knew what he was doing about some point that I didn't understand. And in areas outside of real estate, how often do we read information about stocks or mutual funds and just assume that what we are being told is true and correct? When we use retirement calculators, don't we often just assume that their underlying assumptions are correct? What about other issues? We let teachers tell us about history and science, and we let doctors tell us what is healthy and what isn't. Even if we seek out second opinions and do our own research, how often can we really know something is true without putting ourselves at the mercy of someone else's expertise? The Hernandez family in the article put an awful lot of trust in what their real estate professionals told them-- perhaps they should have known better, but it's just a different version of what all of us do every day.
Here's an interesting part of the story: California doesn't require people to have a lawyer present at their closing, and this family didn't have one. Could they have been better protected by better laws? Some of the laws in place to protect them weren't enforced. Now they have a non-profit legal assistance group trying to help them. How could their situation have been avoided in the first place?