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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.

Chapter 1: “Money for Nothing”

Alan Greenspan blanched. First he looked appalled. Then he looked perplexed. And for the first time that I could remember, his patient and gravelly voice turned curt and commanding. “Why did you do it?” he asked, interrupting me in midsentence. I felt like a teenager who had just told his father he had crashed the family car.

There I was, a fifty-two-year-old economics reporter covering the biggest financial calamity since the Great Depression, and I had just blurted out to the former chairman of the Federal Reserve that I was close to defaulting on the same kind of reckless mortgages that were drowning the nation’s financial system. “I took a gamble,” I answered irritably. “I knew it was a big risk, but I thought that we could manage it.”

Going into the meeting, the last thing I had wanted to do was confess that I had succumbed to the same foolish temptations that had trapped millions of other Americans. My credit scores were shot. Bill collectors called constantly. I was flirting with foreclosure. Almost none of our friends or neighbors had any idea how close to the edge my wife Patty and I were. Like countless others trapped in the mortgage meltdown, we looked like average suburban home owners. We grilled hamburgers on the deck, cut the grass on weekends, walked the dog in the mornings, and drove our children to soccer games. We had carefully preserved our image as normal, home-owning neighbors—stable, reliable, and responsible.

In truth, the words home owner and stable had stopped being inseparable for a lot of people. It was December 2007, and Wall Street had woken to the reality that millions of people who had bought homes with “liar’s loans” had—shockingly—lied to get their loans. Delinquency rates and home foreclosure rates were soaring several times higher than the experts and the financial models had ever predicted. In the press, the yuletide buzzword that season was jingle mail, house keys mailed back to lenders from people who had walked away from their properties. The trillion-dollar credit markets had been frozen since August, and seemingly immortal institutions like Citigroup and Merrill Lynch were hemorrhaging tens of billions of dollars in mortgage-related losses. Out in the “real economy,” tapped-out and stressed-out Americans were starting to buckle.

For two hours, I had been listening to Greenspan explain why he shouldn’t be blamed for what was happening. He had just published his best-selling memoir, The Age of Turbulence, and he was making as much as $200,000 per speech. But a host of economists, including a few of his old friends, accused him of having fostered the housing bubble and bust with low interest rates. An even louder chorus of critics blamed him for refusing to clamp down on sleazy mortgage lending. Greenspan, then eighty-one, was having none of it. “There has been an awful lot of selective reporting,” he grumbled. “The facts are not as they are presented.”

I had been ready to listen quietly. But then he talked about fraud, and I began to feel an irresistible urge to spill my guts. Greenspan was arguing that the bulk of the mortgage fiasco stemmed from criminal fraud—by borrowers, lenders, or both. The Federal Reserve, he insisted, wasn’t a criminal investigative agency. “It was up to the legal division,” he said with uncharacteristic meekness. Had I interviewed the Fed’s general counsel? How about the director of consumer affairs? “Deceptive and unfair practices sound very straightforward, until you try to define them,” he said.

What set me off wasn’t that the former “maestro” was hiding behind anonymous bureaucrats to justify his inaction; it was the idea that the wave of bad mortgages had resulted from criminals committing fraud. Yes, I had borrowed a huge pile of money without documenting my ability to keep up with the payments. But I hadn’t defrauded anybody, and nobody had defrauded me. It had all been perfectly legal. In fact, I had been assisted by a long chain of enablers and promoters—loan officers, underwriters, banks, Wall Street firms, and rating agencies. Blaming the mortgage meltdown on fraud ignored the rot and corruption in the whole system, up to and including policy makers like Greenspan.

“My question isn’t about fraud,” I interjected. “My question is whether the government should have prevented companies from making big loans to people who couldn’t repay them.” Then I took a breath. “Let me tell you about my own personal experience with these mortgages.”

Greenspan stopped short. He was never comfortable talking about personal issues and seemed to mirror my own discomfort. I might have been the only person he had known personally who had been caught in the mortgage meltdown.

I gave him the short version. In 2004, I had been in the middle of a divorce and was paying out well over half of my take-home pay in child support and alimony. I could barely make ends meet, but I was in love and wanted to get married. To my amazement, I had easily managed to buy a lovely little house in a cozy neighborhood. “It was like a ‘don’t ask, don’t tell’ loan,” I said. The mortgage company hadn’t asked to see my pay stubs or tax returns, and I hadn’t told them about the automatic withholdings. They hadn’t asked what percentage of my disposable monthly income would go to the mortgage, and I hadn’t told them that all of it would. They hadn’t asked Patty to cosign, and I hadn’t told them that she didn’t have a job.

The faith-based lending hadn’t ended there. Less than two years after buying the house, Patty and I had run up $50,000 in credit card debt. Yet we had been able to refinance the house—not once, but twice—with even bigger mortgages.

I was embarrassed, and Greenspan looked embarrassed for me. But I was trying to make a point: it had all been legal. My mortgage company hadn’t cared, because it would sell my loan to Wall Street. The Wall Street firms hadn’t cared, because they would bundle the loan into a mortgage-backed security and resell it to investors around the world. The investors hadn’t cared, because the rating agencies had given the securities a triple-A rating. And the rating agencies hadn’t cared, because their models showed that these loans had performed well in the past.

“Shouldn’t the Fed or some other government regulator have stopped them from lending to someone like me?” I asked. Green-span hated government regulation as much as he loved the free market. The best regulation, he was convinced, was enlightened self-interest.

“Have you defaulted?”

“Not yet. I’m hanging on by my fingernails.”

He thought for a moment, and then broke into a wide grin. If I had gone more than three years without defaulting, he said, I had probably validated my lender’s calculated risk after all. “They looked at you, saw your steady job history and saw that you had always paid your bills, and they were betting that you would do almost anything to avoid defaulting. And they were right,” he said. “I bet they’ve made money on you already.”

Greenspan’s initial question had been a fair one. Why did I do it? Why didwedo it? Why did millions of seemingly sane adults suddenly take leave of their common sense and load up on home mortgages they could not possibly manage? Why did we all jump off the cliff together?

We all had our reasons. Some of us were desperate to fulfill the dream of owning our first home, of arriving in the middle class. Others craved a bigger house, a newer house, a better neighborhood. Still others were dazzled by the seemingly surefire profits from soaring real estate prices.

I had two utterly compelling reasons for taking the plunge. The money was there, and I was in love.

The fever for romance and the speculative fever to get rich have a lot in common. Both are driven by primordial hungers and the allure of once-in-a-lifetime opportunities. Both evolve through a series of escalating gambles. The first is small and cautious—a sly flirtation, or a lowball bid on a condo. But each successful payoff emboldens you to raise the stakes. If the conditions are right, you can escalate very quickly from the harmless flirtation to the languorous dinner, the first kiss, the torrid weekend, and, ultimately, putting your future on the line.

The same can be said for flipping condos in Miami or Las Vegas.

Each winning roll of the dice seems to confirm the strategy and provides more money to raise the stakes. Prudence and patience become dull and petty. If you’re on a roll, it’s time for big ideas, bold decisions, and heroic leaps of faith. It’s all about adventure, danger, and fantasy.

In my case, the twin fevers of romance and housing collided on a glorious Sunday afternoon in April 2004. It was the kind of spring day that was perfect for both lovers and real estate agents. The magnolias and azaleas were ablaze in pink and purple. The young grass was fresh and bright green, and the soft clean breeze felt alive with possibility. On a day like that, even a four-bedroom rambler could look like a dream home.

I had decided on a whim to stroll through some open houses for sale in a modest tree-lined neighborhood in Silver Spring, Maryland. By any ordinary measure, I knew, I could not remotely afford to buy a house. But touring them seemed like a cheap form of entertainment, a harmless bit of voyeurism and fantasy.

At forty-eight, I had separated from my wife after a twenty-one-year marriage and was handing her more than $4,000 a month. I could barely make ends meet in a one-bedroom rental apartment, but I wanted desperately to start a new life with Patty, who was by then my fiancée. She would be moving from Los Angeles to Washington in July, and we would need a home with enough space for ourselves and her two youngest children, as well as for my own boys on the weekends. I had assumed we would start by renting a house or an apartment, but I knew enough about the new breed of mortgages to understand that it was at least theoretically possible to buy something.

The compulsion hit me when I walked into a three-bedroom cottage at the end of a tree-lined lane. The asking price was $400,000, which was low for the area. It was small, but immaculate and homey, and I immediately imagined how it could hold Patty and our mix of children. I felt a rush of sentiment and adrenaline. It was perfect! It was a sign from God. We would buy it, we would love it, and we would be living with our children and each other in our little paradise. I had to have it!

I couldn’t afford it, but that didn’t mean I couldn’t buy it.

I pulled out my cell phone and called the only person I knew who could point me in the right direction—Susan Kilborn, a close friend who was a real estate agent. She gave me the name and number of a mortgage loan officer at American Home Mortgage Corporation named Bob Andrews. Bob wasn’t related to me, and I had never heard of the company. “Bob can be very helpful,” Susan said. “He specializes in unusual situations.”

On a Sunday afternoon, Bob returned my call within minutes. “If we had talked earlier, I could have had you preapproved for a loan in time to make an offer today,” he said. He sounded vaguely disappointed, but also wired and ready to jump. “How big a mortgage do you think you’ll need?”

“My situation is a little complicated,” I warned. I told him about my enormous child support and alimony payments, and said I was banking on Patty to earn enough money to keep us afloat. Bob cut me off. “I specialize in challenges,” he said confidently. “As you might imagine, I’ve got a lot of experience with people going through divorce.”

As I quickly found out, American Home Mortgage had become one of the fastest-growing mortgage lenders in the country. It was a rocket of a company, even for the mortgage industry, and would ultimately flame out in a huge bankruptcy in 2007. But none of that mattered right then. It turned out that American Home’s specialty was people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what traditional banks and thrifts would allow. In industry jargon, we were “Alt-A” customers, and we paid slightly higher rates for the privilege of concealing our financial weaknesses.

I thought I knew a lot about the mortgage boom. I had already written several articles forThe New York Times about the surging growth of both subprime and Alt-A mortgages. I had interviewed people with very modest incomes who had taken out big loans. And though my own experience had been with traditional mortgages, I had owned a house for almost twenty years, had refinanced it twice, and had taken out a home equity line of credit. I had always thought of myself as conservative about borrowing. The mortgage on the first house had been a fifteen-year loan, which cost more per month but would ultimately save tens of thousands of dollars in interest charges.

Nevertheless, I had never really grasped how much had become possible.

Bob called back the next morning. “Your credit scores are almost perfect,” he said happily. “Based on your income, you can qualify for a mortgage of about $500,000.” That was an eye-opener. I had never contemplated buying a house for a half-million dollars, even before I started surrendering more than half my paycheck to my ex-wife. I was amazed that a company would even contemplate lending that much money to someone in my position, or that a lender simply wouldn’t care about the messy details of my life. Bob didn’t break a sweat. If I wanted to buy a house, he figured, it was my job to decide whether I could afford it. Once I decided what I wanted, his job was to make it happen.

“I am here to enable dreams,” he explained to me long afterward. “If you came to me and said you’d been unemployed for seven years and didn’t have a pot to piss in, who am I to tell you that you shouldn’t do what you want to do? I am here to sell money, and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage—not mine.”

You had to admire his muscular logic. My lenders weren’t assuming that I was an angel. They were betting that a default would be much more painful to me than to them. If I wanted to take a risk, for whatever reason, they were not going to second-guess me. In fact, money was so cheap and plentiful that they would make it available for almost as little as a conventional mortgage.

What mattered more than anything, Bob explained, was a person’s credit record. History seemed to show that the most important predictor of whether people defaulted on their mortgages was their “FICO” score (named after the Fair Isaac Corporation, which had developed the main rating system). Investors had become steadily less interested in the details of a person’s financial position. If you had always paid your debts on time before, the theory went, you would probably keep paying on time in the future.

Even if you had a troubled credit history, a huge industry of “subprime” mortgage lenders had arisen to cater to you. Like American Home Mortgage, the subprime lenders relied on complex mathematical models for pricing risk, and incredibly intricate techniques for slicing and dicing that risk. The models showed that defaults on the risky new mortgages were surprisingly low. The models were saying, “Go for it.”

In and around Washington DC, home prices had been climbing faster than incomes for so long that even skeptics were capitulating to the excitement by 2004. In trendy suburbs like Bethesda and Chevy Chase, the median home price had doubled since 1998 and hovered around $700,000. Investors there were tearing down three-bedroom split-levels from the early 1960s and replacing them with $2 million mansions. In slightly less affluent, less glamorous areas like Silver Spring, where I was living in a rental apartment, aging four-bedroom houses with small kitchens were selling for $500,000 and up.

I wasn’t betting on rising prices. With my luck, I thought, the market would head down the moment I decided to buy anything. What I cared about, passionately, was getting married. Patricia Barreiro was the perfect woman: brainy, regal, sexy, fiery, and eclectic. Best of all, she had been one of my closest friends when we were both innocents at an American high school in Argentina. I was the bookish, unathletic son of an American diplomat, a jumbled mix of sexual awkwardness, intellectual energy, and teenage rebellion. Patty, the daughter of an Argentine doctor and occasional political activist, had been born in Buenos Aires but educated in American schools. She was sexy and cerebral, and she loved talking to me about politics and books at a coffee shop every day after school. We were never romantic, and had gone our separate ways after high school.

Patty was now a mother of four in Los Angeles and had recently endured a bruising divorce after twenty-five years of marriage. At forty-eight, she was still a beauty—statuesque, with green eyes and auburn hair. She had remained a voracious reader, devouring books and newspapers, becoming a trained book editor, and nearly completing a master’s degree in Latin American studies by the time of her divorce. But she had become utterly estranged from her husband, a television commercial producer who had become depressed about his work and his life.

My own twenty-one-year marriage had become bitter and quarrelsome and reached the breaking point in 2003. I had just finished a six-year assignment in Germany as the Times’ European economics correspondent. My ex-wife Julia had liked Europe but resented my workaholic habits and frequent traveling. She complained that I gave top priority to the newspaper; second priority to our three boys; and last priority to her. She was probably right. I had become snappy and defensive, tired of what felt like a constant power struggle. Even though we were both happy to return to our old house in Washington, our fighting became even more frequent.

I had fallen in love with Patty on a trip through southern California in April 2003. It was the first time in more than twenty years that I had seen her, and she was one of several old friends I was visiting in the area. We talked for hours about what had happened to our lives. She was fascinated by my newspaper work and by the battles raging in Washington. “I’m so happy you were able to find the kind of work that you always wanted,” she said. She couldn’t understand why Julia resented the long hours or the traveling. Patty could see that I was swooning, but she firmly banished any hopes of something more. She was tired of men, and I was still married. “One thing that won’t happen,” she wrote me after my visit, “is that you and I become romantic.”

But Patty did give me an idea that precipitated the end of my marriage: to cover the war in Iraq. As it happened, I was watching CNN in her living room as US troops entered Baghdad and pulled down the statue of Saddam Hussein. “You should have your editors send you to Iraq,” she told me. “You’d be perfect, because the story will be about economic reconstruction.” I scoffed at first, but she persisted and I began to fixate on the idea myself. I was restless for some adventure, unhappy about my marriage, and unable to see any way of being with Patty. “Fine,” I told her. “If I can’t have love, then I’ll take the war.” Wasn’t that why men had joined the French foreign legion?

As it turned out, the editors at the paper were eager to relieve the exhausted reporters who had covered the invasion. They told me to pack my bags as fast as I could. Julia was enraged, vowing to make me sleep in the basement when I returned, and possibly move out entirely. I didn’t care. Deep inside, her threat made me happy. Iraq was the biggest story of my life and one that would tap almost every kind of skill I had as a reporter. Our boys—Ryan, 14; and 12-year-old twins Matthew and Daniel—were initially frightened at the prospect, but they relaxed as I explained that the job would not be as dangerous as they thought.

Less than three weeks after I had seen Patty in Los Angeles, I arrived at the Palestine Hotel in Baghdad and began a two-month stint as a war correspondent. I wrote her constantly to describe what I was seeing and experiencing in Iraq. We didn’t talk much about romance, though the undercurrent was always there. I wrote in the afternoons and evenings from Baghdad, and she would read my emails in Los Angeles each morning. At one point, Patty warned me that I should stop writing if I thought I was jeopardizing my marriage. I reluctantly broke off communication for several weeks, but I was so miserable that I soon resumed.

By the time I returned to Washington in July, my marriage was all but over. Julia, still furious that I had jumped into a war zone, made good on her promise and ordered me to sleep in the basement. I was relieved to be sleeping on my own. I was tired of defending myself, torn by my emotional conflicts and longing for love. I would have gladly stayed in Iraq for several more months, but I had missed my boys.

“Don’t you want to be a better person?” Julia asked me, during a meeting with our marriage counselor after I got back. “No,” I said, surprising even myself. “I want to be a happier person.”

A few weeks later, Julia got her hands on a raft of my emails to Patty. It was clear that we hadn’t so much as kissed, but it was also clear that I had become far closer to Patty than to my wife. “You have to stop communicating with her,” Julia demanded. If I didn’t, she warned, I would have to move out of the house and the marriage would be over. She was right. I told her I couldn’t or wouldn’t break off my contact with Patty. I didn’t have the heart for my marriage anymore. I had to get out, whatever the price might be. I moved out the next day.

Even though I had no idea how we could overcome the practical hurdles, I was already convinced that I wanted to spend the rest of my life with Patty. We poured out our feelings in long conversations on the telephone, night after night. She had touched my soul in ways I couldn’t explain and couldn’t really understand. Between my memories of the friendship we had shared as teenagers and the sad warmth that she radiated today, she was like a salvation to me. I asked her to marry me even before going out to visit her in person a few weeks later.

“You are the woman I want to grow old with,” I told her. “I’m as certain about it as anything I have been before.” Even in the delirium of the moment, that pronouncement took Patty aback. But she didn’t need much persuading. “I love you and I cannot wait to be married to you,” she responded, sounding as if she were experiencing something joyful for the first time in years. Over Labor Day weekend of 2003, I flew to Los Angeles and kissed Patty for the first time. We continued to live on separate coasts another year, flying back and forth for visits every month or so. By the spring of 2004, we were making plans for her to move east with her two youngest children in the summer and trying to figure out how we were going to pull it off with our limited resources.

Patty and I were complements—a “perfect fit,” she liked to say. She had always liked men who were brainy and even nerdy. “I don’t care what a man looks like, as long as he’s smart,” she said. To her, I was a refreshing change from the men she had known in Los Angeles. I didn’t care much about money or expensive cars. I dressed modestly and, at least at first glance, I didn’t seem to be an overbearing, self-absorbed macho. From what she could see, working at the Times was a bit like working at a university: fascinating and creative—an environment without much money but filled with very smart people. From my vantage point, Patty was a kindred spirit who also possessed things I could only imagine: an encyclopedic knowledge about fashion, literature, and pop culture; a passion for food; a shrewd but sympathetic awareness of the chemistry between men and women.

In the days and weeks following that glorious Sunday afternoon of house hunting in April 2004, I felt as if I had walked into a no-limit game of Texas hold ’em. Armed with my “lender’s letter” from Bob declaring that American Home was ready to lend me up to $500,000, I sat down with Susan, our real estate agent, to make an offer on the sweet little cottage for $400,000. “Don’t even think about offering less than the asking price,” Susan said. Fine, I agreed. “Do you want to make the offer conditional on the results of a home inspection?” she asked me. Sure, I said. Why commit myself to a house that might have a crack in the roof, right? But Susan recommended against that. Sellers wanted as few complications as possible.

Offering the full price, with or without conditions, was no guarantee, of course. Other home buyers had included “escalator” clauses in their offers—mechanisms that automatically raised their bids if any rival offered the same amount. If rival buyers had escalator clauses, they set off an instant bidding war until all but one of the escalators had reached its preauthorized limit. Within hours, I learned that the sweet little cottage had sold for $20,000 more than the asking price.

Sobered, I bid on a second house several weeks later. Once again, I met the seller’s asking price of $400,000. But this time, I added an escalator clause to raise the bid as much as $20,000. Once again, I was outbid.

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.

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.