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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.

Unfortunately, Bob’s plan hit a snag a few days later. “Ed, the underwriters say that your name is on another mortgage,” he told me. “That means you’re carrying too much debt.”

The mortgage was on my old house, which I had turned over to my ex-wife. As part of our separation agreement, which I quickly faxed to Bob, she had accepted full legal responsibility for making the payments. But once again, I wasn’t a normal borrower. The separation agreement also spelled out exactly how much I had to pay each month to my ex-wife. If we showed it to the underwriters, they would see how much I was required to pay out in child support and alimony. They wouldn’t have any problem with the mortgage on my old house, but they would reject me because of my child support and alimony payments.

Once again, Bob did not let himself get flustered. If plan A hadn’t worked, he would simply move down another step on the ladder of credibility. Instead of taking out a “stated-income loan,” I wouldn’t bother to state any income at all. It was absurd, but it was true. It was called a “no-ratio” mortgage, and it meant that American Home Mortgage would verify only my assets (mainly the cash I had from selling my stock). Since I was not even stating my income, the lender wouldn’t care about my debt-to-income ratio. It wouldn’t matter whether I was on the hook for a second mortgage or not.

American Home seemed to be colluding with me to pull the wool over its own eyes. Why bother with income requirements at all if you knew full well a borrower couldn’t meet them?

As much as I thought I knew about mortgages, I was only obliquely aware of everything that was happening. I knew my total monthly payments would be about $2,500 a month for the first five years. After that, my interest rate and monthly payments on the first mortgage would adjust every year and would probably jump even if overall interest rates were almost unchanged. I wouldn’t have known even that much if Bob hadn’t personally explained how the formula for the adjustable interest rate would work. But even then, I had very little idea of how much I was paying in hidden fees that were rolled into my interest rate, or how much they might end up costing me five years down the road.

If I had investigated, I would have been surprised at what I learned. By any measure, I was paying 5.625 percent on my primary mortgage of $333,700. That was pretty low, given all the obvious machinations to avoid documenting my income. But I was also paying a sky-high rate of 8.5 percent on my second, “piggyback” loan for $80,300, and I would face a balloon payment for the full remaining amount of principal after ten years. It was easy to imagine the monthly payments jumping about 25 percent, or $600 a month on the first mortgage. If my monthly rate jumped by 2 percentage points to 7.625 from 5.625, which was entirely possible given that interest rates were at almost historic lows in 2004, my monthly interest payment on the first mortgage would jump from $1,579 plus taxes and insurance to $2,363. On top of that, I would have to start paying the principal on my loan. That would add another $130 a month.

“So even if interest rates don’t increase at all, I would end up paying more each month?” I asked Bob, shortly before I signed the huge pile of papers to close the deal on my house. “Don’t worry,” Bob answered, adding what almost everybody else in real estate was saying at that moment. “The value of your house will be higher in five years. You’ll be able to refinance.”

Reprinted from Busted: Life Inside the Great Mortgage Meltdown by Edmund L. Andrews © Edmund L. Andrews. With permission of the publisher, W.W. Norton & Company, Inc.

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