The Consequences Of Following Bad Advice

By your real estate dude

This week has been busy with phone calls from folks whom you might say, enjoyed the hot real estate market of a couple of years ago a little too much. At the time, money seemed to grow on trees, or at least on houses at any rate. Just like kids in candy stores many folks grabbed all they could eat without realizing that a belly ache was just around the bend.

Lenders were coming out of the woodwork to offer “miracle loans” with interest rates bordering on 0%. There were loans for everyone and just about any desire could be realized. Mortgage people were like magicians waving their magic laptops like wands and producing money out of thin air. People were magically purchasing houses they could never have bought before. Others were buying toys galore by pulling the equity out of their homes at interest rates that almost made it look like free money. All the while, long time real estate and loan professionals were being called “old school” and “out of step” because we urged our clients not to go for the money grab. Happily many listened, but sadly many did not. The truly sad thing is that often the lenders and agents who helped these folks get into a mess abandon them when it comes time to clean it up.

A broker friend of mine in El Centro called me about just such a tale. A woman called him to complain that she had purchased a home from another broker and was now in serious hot water. Her broker, who also acted as the lender, had sold her an $800,000 home with a “no money down, fully adjustable, negative amortization loan”. “Negative amortization” means that the monthly payment is less than the actual interest owed for that month. “Fully adjustable” means that as interest rates rise, her house payment rises as well. The net result is that, her house payment has doubled due to rising interest rates and the woman actually owes more on her home after making the payment than she did before. Her payment is not enough to cover the interest that is owed on any given month.

She was able to finance the $800,000 because the appraisal that was performed at the time of the purchase inflated the value of the property. My broker friend estimates that the home was never actually worth $800,000. It was worth closer to $750,000 at the time of purchase, but the appraiser overstated the value to get the loan funded. Due to the softening real estate market, the current value of the house is about $700,000, but the owner now owes over $800,000 because the unpaid interest is adding up.

When my friend explained this sad news to the woman she was heartbroken. She told him that her broker had advised her to make this purchase, that he had brokered the loan for her and selected the appraiser. She said she did not truly understand what kind of loan she was getting at the time. My friend had never spoken to the woman before and naturally asked who had referred her to him. There was a long pause after which she said, “The broker who sold me the house.”

Hopefully, you have been spared such a horrible experience and are not suffering from the money grab belly ache. But, just in case you are ever tempted when the market booms again, I remind you of an old children’s poem by Mary Howitt called “The Spider and the Fly.” The spider hoodwinks the fly and has her for dinner by flattering her and telling her just what she wants to hear. The moral of the poet’s story and this column are the same and I don’t think I can improve upon Mrs. Howitt’s rendering; “And now, dear little children who may this story read. To idle, silly, flattering words, I pray you, ne’er give heed. Unto an evil counselor close heart and ear and eye, and learn a lesson from this tale of the spider and the fly.”