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The Houses They Could Never Afford

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The Houses They Could Never Afford

by Lynn Armentrout

homes-not-affordTo all those railing about "rewarding bad behavior" by helping "irresponsible homeowners who bought houses they could never afford," let me introduce you to Ms. A.

Ms. A is a 27-year old African-American woman with a decent-paying job at a large utility company who saved $40,000 to pursue the American Dream of homeownership. In 2006, she and her fiancé, also gainfully employed, went shopping for a house in Queens through a local real estate agency. The agency referred them to an attorney and connected them with a lender to finance the purchase. Unbeknownst to Ms. A, the agency and the attorney were not acting in her interests but rather in their own. What ensued is an all-too-common story.

An honest attorney will advise her client to have an independent engineer inspect a piece of property prior to signing a contract to purchase it. The inspection of Ms. A's home was done by an individual, like the attorney, "referred" by the real estate agency. The inspector gave the house the thumbs-up; soon after the closing, it started falling apart.

The real estate agency also acted as mortgage broker and the loan was equally fraudulent. Ms. A did not receive written disclosures, prior to the closing, of the terms of the loan and its costs—a violation of Federal law. While Ms. A and her fiancé met with the real estate agent shortly before the closing to discuss the purchase price ($440,000) and the amount of mortgage they would need ($396,000), they did not know what the monthly payments would be, though they had made clear that they could afford no more than $2,500. At a time when lenders, banking on the belief of an ever-rising real estate market, were providing 100% financing without even asking for proof of income, Ms. A and her fiancé responsibly made a down payment from their own funds of 10% of the purchase price and fully documented their employment and income.

At the closing they were presented with an adjustable rate mortgage with an initial interest rate of 9.7% and which is not fully amortizing—after 30 years, they will still owe $268,000. Learning for the first time at the closing table that the monthly payments would be $3,269, Ms. A stated that they could not afford this mortgage. But she was told by all of the professionals sitting at the table that she had no choice but to complete the transaction, that if she failed to go through with it she would lose her down payment. They assured her that if she could just hang in for six months or a year, she would be able refinance into a loan with more favorable terms.

Faced with no choice, Ms. A went through with the transaction and she and her fiancé did hang in for two years, by working a lot of overtime. But by 2008 the repairs had exhausted their savings, Ms. A's fiancé had lost one job and found another at substantially reduced pay, and Ms. A was out of work for several months while being treated for cancer. They are four months behind on the mortgage, and their hardship application to the loan servicer was recently denied. In the meantime, in today's market, any equity they had by virtue of their down payment is gone.

All this I have heard, over and over again, sitting behind my desk at the Lawyers' Foreclosure Intervention Network, a pro bono foreclosure defense program at the City Bar Justice Center in New York City. The money-pit houses, the innocent buyers hoodwinked by real estate con artists and the brokers, bankers and lawyers who aid the scam, the unexpected terms, and the useless assurance: "don't worry, you can always refinance down the road." Of course, refinancing opportunities have long since dried up.

Since the project opened its doors in July, we have interviewed 97 clients, essentially a random sampling of homeowners within the five boroughs who learned about the project through a number of sources, public and private. Of these homeowners, 29 were recent first-time buyers and all but two had some version of Ms. A's theme, some more egregious than others. Of the remaining 68 clients, eight were the victims of a foreclosure rescue scam commonly known as "deed theft" (another story for another day) and 14 had unique situations (from dementia to domestic violence).

Of the 97 clients, only two bought houses they knew they could not afford, and only a few knowingly refinanced into unaffordable loans for speculative reasons. In other words, fewer than 10% might be judged as "irresponsible" and therefore "unworthy" of help.

The remaining 46 clients had refinanced into subprime mortgages and fallen behind either because of major life losses, large drops in income, or because they were too marginal to begin with. Granted, some of our clients have been poor budgeters, lived beyond their means, and took equity out of their houses for the wrong reasons. But even among this group, most did not understand that what they were doing was a bad idea; they were carried away, just like the people making these loans, by a bubble economy and spendthrift culture. Except that the people making these loans knew better.

And therein lies the rub. Talk about "moral hazard"—how about the one involved in judging who among us is "worthy"? Who should be the judge and what are the criteria? How do we account for the hard-selling tactics and downright deception involved in issuing these subprime mortgages? And why is, say, the homeowner who foolishly took the easy money less "worthy" of government help than the bankers who reaped huge profits financing and securitizing her subprime loans?

While the stories of our clients have differed greatly—how and why they bought the house, borrowed the money, fell behind—there has been one constant in all of them: easy money, aggressively marketed and sold, mostly in communities of color, secured by mortgages that yielded huge profits for the financial industry while deceptively burdening homeowners with unsustainable terms. The problem here is not "losers with an extra bathroom" but an industry and culture run amok.

Just as, we are told, we have no choice but to bail out the financial institutions, I submit that the collective homeownership of millions of Americans is also an institution "too big to fail." Concerns over "worthiness" have not stopped the government from bailing out the banks, and such concerns should not stop the government from helping homeowners. The fact is, as the experts continue to remind us, the economy will not recover unless and until we stanch the national foreclosure epidemic. Perhaps the most important lesson we can take from this debacle is that, in the end, we are all in it together. There are moral lessons to be learned, for sure, but the moral conversation must not get in the way of solving the urgent problem.

Lynn Armentrout is Director of the City Bar Justice Center's Foreclosure Project.