Tube City Almanac

January 06, 2005

There's No Place Like Debt

Category: default || By jt3y

City Paper has rolled out a redesign of the dead-tree edition, and it's pretty snazzy looking. This week's cover story by Rich Lord is pretty good reading, too, and it includes a family from Our Fair City:

Look, up in the sky! It’s the Airship Liberty, one of two blimps in Ameriquest Mortgage Co.’s inflatable fleet. The other is called Airship Freedom.


And wasn’t that the Ameriquest logo -- the one with the Liberty Bell facsimile -- on the All-Star Game ballots during the 2004 baseball season? Sure was. It often showed up, too, when the highlight reels took us to Ameriquest Field in Arlington, where the Texas Rangers play.


And on Feb. 6, we’ll be treated to Paul McCartney headlining the Ameriquest Mortgage Super Bowl XXXIX Halftime Show. Ameriquest reportedly paid $15 million to snag the world’s most prestigious advertising slot. That’s quite a catch for a California company that started out in 1980 as Long Beach Savings and Loan. Back then, the firm was a bit player in the then-tiny subprime lending market, which makes high-fee, high-interest loans to people with tarnished credit or irregular incomes. The halftime sponsorship is part of what Ameriquest Vice Chairman Adam Bass has called "our long-term vision … to become the lifelong mortgage company of every homeowner in America." ...


The lending, political giving and marketing blitz "feels like it’s an attempt at legitimization. ‘We’re mainstream! We’re at the Super Bowl!’" says Kevin Stein, associate director of the California Reinvestment Coalition, which has studied and criticized Ameriquest’s practices. Legitimization is fine if the loans are fair, he says, but he fears some Ameriquest borrowers may get unfavorable terms "that they don’t actually deserve."


As part of his story, Lord interviewed a family from Our Fair City, and spotlights the foreclosure proceedings that Ameriquest has brought against them.

Consumer advocates allege in the story that Ameriquest issues high-interest mortgages for amounts much larger than homes are worth; builds in large penalties for re-financing or missing payments; misleads clients as to the amount their monthly payments will be; and then uses high-pressure sales tactics to close the deals.

In the case of the McKeesport family Lord talked to, their $43,200 home was refinanced by Ameriquest for $81,000; the monthly payments the company quoted didn't include the property taxes or insurance, which added another $300 per month; and when the family missed two payments, the company demanded $2,700 up front --- and wouldn't take installments.

In the interest of full disclosure, let me say that I worked with Rich twice on different occasions, and I admire his work greatly. And his stories on predatory lending --- including his recent book American Nightmare: Predatory Lending and the Foreclosure of the American Dream --- were much on my mind when I bought my own house.

But at the risk of sounding like the chairman of the Republican National Committee, where was the personal responsibility on some of the people who signed these mortgages? Why would anyone take out an $81,000 mortgage on a house valued at $43,200 --- in the language of the loan business, you're "underwater" on that debt as soon as you sign the paperwork, meaning you owe more than the collateral is worth.

I don't mean to kick these people when they're hurting, but it couldn't have been a secret to these folks how much their house was worth. They owned it already, after all. Even if they weren't sure, a quick call to the city tax office or a check on the county's Web site would have told them.

Lord writes that some people took out mortgages from Ameriquest at twice the prevailing interest rates through banks or FHA, which have the potential to rise to three times the prevailing rate. Who forced them to do that?

And then there's a couple that mortgaged a house valued at $139,000 for nearly $173,000. At any point did it occur to them that they were buying more home than they could afford? Or that it was dumb to repurchase their own house for more than they could sell it for? Maybe they should have sold that house and bought a smaller one.

(Look, I realize I'm sounding like a grumpy old man here. Just last night, someone asked me, "If you're this crabby now, what will you be like when you're 80?" Balder, fatter and crankier. But bear with me.)

This isn't rocket science. In high school economics, we were told that you should never be spending more than 25 percent of your monthly income on rent or mortgage payments. (See, Mr. Rozanski? I did pay attention!) Some of the people at risk of foreclosure, Rich writes, are taking out mortgages at up to 55 percent of their monthly incomes!

I've since heard another rule of thumb: The purchase price of your home shouldn't be more than two and a half times your yearly income. Do the people with the $173,000 mortgages have incomes of $70,000? If not, then it must be too much house.

Sure, although some mortgage company might be willing to loan you that much money, here's a clue: Most private businesses aren't working with your best interests at heart. They are trying to make a buck from you. Shocking!

Lest I be hypocritical, let me admit that I do a very bad job at living within my means or managing a budget. Yet it's instructive to realize that my grandparents raised two children to adulthood in a two-bedroom crackerbox house in the Westwood Hills section of Port Vue, and that my grandfather bought used cars for most of his life. When they took vacations, they stayed with relatives. And some how they avoided bankruptcy.

Finally, yes, predatory lending companies do employ unscrupulous tactics to woo people with marginal credit. No one says that you have to sign a contract with them. Shop around, for cripes' sake! Why would anyone take the first deal they were offered? Walk out of the Ameriquest office and down the street to someone else. Hand them the Ameriquest paperwork and say, "Can you beat this deal?" Walk to a third place and ask them.

If you don't know how to shop around, there are non-profit debt counselors, federally-subsidized mortgage programs, and other third-party agencies who can help you get an honest deal. (Start here.)

In the end, I sympathize with these folks. There are many reasons that people lose houses --- sometimes a run of bad luck, like a combination of a layoff, illness and a natural disaster makes it impossible to hold a household budget together. Some of these interest rates and penalties that finance companies charge border on usury, and they have lobbied very hard to prevent Congress from protecting consumers. In fact, one of the partners in Ameriquest was a major fundraiser for the Republican Party during the last election, and Congress is expected to lift state and local restrictions on predatory lenders. Coincidence? I think not.

But I just don't know if more regulation --- which some of the people in Rich's story call for --- is necessary to protect people from making terrible choices.

Rich quotes a professor at the Wharton School of Business, Jack Guttentag, thusly: "Say out of 100 such loans, 40 were the best option available to the borrower. The other 60 [borrowers] would be better off staying put, or they had a better alternative but didn’t know it ... Yes, the 60 add up to a lot of heartache and hardship, but would we want to deprive the 40 of an option that made them better off? I wouldn’t."

Me neither, frankly.

Can you believe that I've been told I'm too liberal? Now pardon me, while I go yell at some kids for playing ball in the street, and hitch my pants up around my armpits.






Your Comments are Welcome!

I have to agree with you. There is only so much that the government can and should do to protect people from themselves. Perhaps the government should take steps to ensure that the public has a minimum amount of economic literacy—a well-crafted marketing/advertising campaign. Beyond that, there isn’t much to be done.
Jonathan Potts (URL) - January 06, 2005



There’s no excuse for looking sloppy, Mr. Fair City Guy. You shouldn’t leave the damn house in the morning without your trousers properly tucked under your armpits. The government can’t be everywhere.
Prof. Quackenbush - January 06, 2005



I too often wonder about all the predatory loan stuff going on. How can people be so gullible? I guess everyone hasn’t been lucky enough to be educated in Our Fair City.

And you are not a liberal, nor are you conservative. You seem to be a member of the radical middle. Be proud of it.

And don’t worry about being 80. I’m sure you won’t be any balder.
Alycia (URL) - January 07, 2005



Ouch! See if I give you any more beer. Hmmph!

Me and my receding hairline will be awaiting your apology. As we attempt to part our scalp on the right.
Webmaster (URL) - January 07, 2005



Okay. I know unemployed people who have been approved for 90k, those who are VA who were approved for 200k who were out of work 2 days after the sale closed. I think race and ignorance and savvy salesmen and the fed dictating interest rates and adjustable rate mortgages have dictated the scenario. Call me fascist.

Since we’re on the subject, what is your opinion on the subject of the occasional (hah!) cheap-a** fixer in the mon valley? Take into consideration that I live on the west coast, am desperate, and find your figure of twenty-five percent 40 years out of date and hilarious….................

regards

heather
heather - January 10, 2005



Heather writes: “Since we’re on the subject, what is your opinion on the subject of the occasional (hah!) cheap-a** fixer in the mon valley? Take into consideration that I live on the west coast, am desperate, and find your figure of twenty-five percent 40 years out of date and hilarious.”

Well, it would be 40 years out of date anywhere but Pittsburgh, where real-estate prices are bizarrely depressed.

You should be able to get a “fixer-upper” house in the Mon Valley —- not a shack, but a livable house that needs some work —- for between $25,000 to $40,000, depending on the neighborhood.

You should be able to get a “fixer-upper” house in a good neighborhood in the Mon Valley for $50,000 or so. Houses in move-in condition in good neighborhoods start around $60,000.

That’s about what I paid for mine, but my house is fairly small by modern standards.

I sympathize with your plight. Several years ago, I passed up opportunities to go to the East Coast because I wasn’t going to get paid much more than I could make in Pittsburgh, but my housing costs would be two to three times what they are here.

Maybe the real problems —- besides, as you point out, “race, ignorance, and savvy salesmen” —- are the lack of good-paying jobs and the failure of middle-class incomes to go up with the cost of living.
Webmaster (URL) - January 10, 2005



I just noticed this great commentary by some of my favorite writers. Sorry this response comes late. I hope you’ll allow me to chime in with some thoughts that have been kicking around my cranium for a while, but which I can’t really fit in stories – even bloated epics in City Paper.
Having lost count of the number of people with lousy loans that I’ve interviewed years ago when after the number passed 100, I’ve often had occasion to think, “Why the heck did these borrowers let this happen to them?” But having had two mortgages myself (thankfully not bad ones), I can kinda understand it. Getting a mortgage is a lot like going to a restaurant, and finding that the menu is entirely accurate. Great. But instead of listing the names of ingredients, the menu lists their atomic formulae. And instead of listing firm prices, it includes an approximate cost, and then a calculus equation that may substantially change the price if you don’t eat everything on your plate, or stay longer than the wait staff prefers. If I walked into such a restaurant, I’d walk out, and try the next restaurant. But if the next restaurant had the same kind of menu, and so did the next 10 I walked into, I’d eventually tell the waiter, “Just give me whatever you recommend.” (Actually, I’d go home and eat some breakfast cereal or nachos or something, but let’s pretend that’s not an option.)
When you read predatory lending stories, you’re reading what some reporter who has probably looked at lots of peoples’ mortgage papers gleaned from a quarter-inch-thick pile of documents. So what seems obvious in the story might not have seemed obvious to a borrower, especially one with limited sophistication, to put it politely.
I don’t think government should protect everybody from bad decisions. But it should ensure that people have the necessary information, in an understandable format, with which to make good decisions. I don’t think that’s just a matter of making more understandable forms with larger typefaces. Rather, the feds should – at least for loans with high interest and fees – tell lenders to boil down all of their different costs and fees into one charge, called an interest payment, and eliminate hidden fees like prepayment penalties and balloon payments. The feds might also put limits on practices like getting people into loans that eat up half their income or more. If companies are allowed to make such loans (as they are today) they should at least make sure they have documentation of the borrower’s income, and clearly warn the borrower that they’re tying up half their earnings.
As for your increasing crotchetiness, Togyer, I can match you gripe for gripe. Just yesterday I yelled at the neighbor kids three times – once for building a fort made of junk (not my junk) in my yard, once for apparently dragging an old couch near my yard (they didn’t actually enter my yard with the couch) and a third time for hitting each other with a snow shovel that looked like mine, but actually wasn’t. So it is possible to be a social curmudgeon and a fiscal bleeding heart. – Rich
Rich Lord (URL) - February 06, 2005



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