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Busted

Excerpt from Busted: Life Inside the Great Mortgage Meltdown

A New York Times economics reporter details how he took out a subprime loan and nearly defaulted on his mortgage.

Three months after making my first unsuccessful bid for a house, Patty arrived in Washington, in July 2004. Flying in several weeks ahead of her children, who were staying with their father, she plunged straight into house hunting. She and Susan scouted all the neighborhoods within moderately close proximity of my old house, so that my boys could stay close to me and travel easily between our house and the house that I had turned over to my ex-wife. Patty and Susan began by looking at rental houses. Most of them were what they came to call “icky”—run-down, depressing, and expensive. Some looked like they had been lived in by either college students or drug dealers. We quickly reverted to searching for houses to buy.

After weeks of looking, Patty and Susan discovered a small but stately brick home in a leafy, kid-filled neighborhood called Woodmoor, in Silver Spring. The house had four tiny bedrooms and the owner wanted $480,000. But there was no central air-conditioning—a big negative in the former swamp known as Washington— and the house had been on the market for several weeks. The owner had moved to take a job in a different city, and he was unusually open to offers.

I was so busy at the time that I hadn’t actually seen the house, but I trusted Patty and Susan and sent in an offer of $460,000. One day later, we got our answer: the sellers had accepted. Not only that, but Susan had persuaded them to let us move in almost immediately, and to rent the house from them until the closing later in August. I felt both amazed and exhilarated, convinced that the stars had aligned for us. I loved the house as soon as I saw it. It was one block from a school and a park. My boys would be within a fifteen-minute drive, and it would be easy for them to come over and stay whenever they wanted. And we would be far less cramped here than in my old apartment. Best of all, we would be ready to move in just a day or two after Patty’s children arrived.

Bob Andrews jumped into action immediately, and I quickly began to learn the intricacies of “don’t ask, don’t tell” lending.

Bob’s original plan had been to write two mortgages, one for 80 percent of the purchase price and a piggyback loan for 10 percent. I would kick in the final 10 percent, cashing out a chunk of New York Times stock—my last. If I had been a normal borrower, the whole deal would have sailed through at a low interest rate. My $130,000 salary and my assets were easy to document. Even by the conservative guidelines for traditional fixed-rate mortgages, my gross monthly income would have been enough to qualify for a monthly “nut”— the mortgage payment, plus a month’s worth of property taxes and property insurance, totaling $3,000 a month. But given my actual income after alimony and child support, I couldn’t possibly qualify for a standard mortgage. In the parlance of mortgage lenders, my “back-end ratio”—the ratio of my income minus existing financial obligations—was almost 100 percent. No banker would sign off on a back-end ratio higher than about 50 percent. Bob’s plan was to write a “stated-income loan,” or “liar’s loan,” so that I wouldn’t have to give the game away by producing paychecks or tax returns.

The liar’s loan was amazingly cheap. In exchange for agreeing not to verify my income, American Home Mortgage would notch up my interest rate by about one-quarter of a percent. That was only a guess, because mortgage lenders didn’t disclose how much they had added to the basic interest rate to accommodate special risk factors. The fees could add almost $1,000 a year to my mortgage bill. The only logical reason for people to pay the extra money was to exaggerate their incomes, so it seemed like a semiofficial encouragement for people to lie. I wasn’t about to complain. Whatever extra fees I might be swallowing in the form of higher interest rates, the rate itself on the interest-only loan was only 5.6 percent and wouldn’t adjust for five years.

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