How many times have you heard of those stories of woe and bankruptcy caused by the subprime lending and borrowing crisis, currently in the forefront of real estate market news? For me, too many. Here’s a typical account that I found in our local newspaper recently.
Well, there’s more where that came from: you don’t have to look too far to find more tales of struggle that echo the same theme over and over.
This is the type of stuff that could have repercussions across markets far and wide, and will be touching lives far and wide for years to come.
Ultimately, it all boils down to some typical scenarios that I’ve decided to illustrate in a graphical fashion. Following is an illustration that I’ve kept faithful to the actual stories of people caught up in this subprime lending mess (who are usually immigrants or lower income families). Everything here is factual.
Click here or on the image to enlarge it:
Don’t let your future end in an American Nightmare: stay away from those lousy loans! Sad to say, it’s already way too late for too many.
A Closer Look At Subprime Borrowing: A Case Study
Better to live in a garage than to live without enough to eat.
– Cristina Plata, subprime mortgage borrower
Now let’s segue into a case study that reflects how the American Nightmare typically unfolds.
With countless homes dotting the landscapes of California, all priced in the mid to high six figures (some even hitting $1 million), all on 5,000 or under square foot patches of ground, all with a maximum of 3 bedrooms and a couple of baths to make you feel like a “king”, how can you not attempt to get a piece of the property pie? How can you not help but play the real estate market like everyone else before you whose success you’ve coveted as well?
Seriously though, this is what a million dollars bought in certain parts of the nation, during the height of the housing bubble. Some of these homes are found in the outskirts of major cities in Northern California, some in flood plains or in baking desert-like surroundings.
During the height of the crazy real estate market, many new homeowners happily — no, desperately — made their first home buying purchase for such an abode. This may have been someone like Luis Mapula and his wife Cristina Plata, subprime mortgage borrowers and immigrants with 2 young kids who once lived in a converted garage and who tried to transition to a nice two bedroom house in East San Jose, California.
Back then, this fellow earned $54,000 a year working as a fence company construction worker, which by all accounts and especially by national standards, was a pretty decent living. But through a real estate broker, he found himself owning a ridiculously overpriced typical California home worth $543,000 with no money down. What’s surprising is that often, these people aren’t even in the market for a house to begin with and instead have been targeted by unscrupulous real estate agents. Many who are approached for home buying opportunities via these steep loans are people who have never heard of these schemes before, who are not financially savvy, who are the most vulnerable, and who are not familiar with how real estate is typically transacted. In the end, they are left holding the bag with ruined credit after perhaps struggling to pay for a mortgage that costs over and above their gross monthly pay.
How does this happen? Here is the usual chain of events that can happen to an unsuspecting victim.
The Subprime Borrowing Road To Broke
#1 Questionable real estate professionals begin targeting “customers”.
Sleazy agents frequent ethnic community areas to scout out targets. This would and could happen anywhere!
#2 If you are reading this list, you’re an unlikely target.
Targeted individuals and potential victims are often not native language speakers, and are enticed with stories of homeownership and the American Dream. The agents are relentless about contacting these people, reminding them of the opportunities that can be had.
#3 This is a case of too many real estate players handling an application.
A number of people work on the homebuyer’s applications and falsely inflate the buyer’s income to make them qualify for a house that is way out of their financial reach. This was how “liar loans” were concocted and born.
#4 Paying your mortgage can become a family affair or a rental business.
The homebuyers are encouraged to make their payments by doing creative things like renting out other rooms or pooling their finances with friends and family who may or may not decide to live under the same roof.
#5 Don’t look at me, I’m not the subprime lender!
When the fraud is discovered, usually when the homeowners get into trouble with their payments, the homeowners are then compelled to voice their complaints, which lead to rampant finger pointing among the accused real estate professionals. Involved agents will blame the subprime mortgage lenders for their “horrible loan programs that require little or no income documentation with low, teaser interest rates that rise dramatically after two or three years.” They’ll also fault the title companies or appraisers or anyone else they can shift the blame to.
#6 Fraudsters are playing a psychological game.
Scammers hope that the homeowner gets embarrassed enough not to sue or complain about what has happened to them. It’s a case of economic bullying.
Subprime mortgages and high rate loans are designed to help immigrants, low-income families and anyone with poor credit to purchase homes in heated markets. I find this whole concept quite incongruous, just like any kind of usurious debt scheme. When the market is heated, I always stay out of it. That’s been my philosophy all my life, so I deeply wonder why anyone with no money would want to buy anything when prices are going wild. I suppose that’s just how the system works: the types of loans that are made available to you when you lack the funds, become trendy and ubiquitous when demand is great and prices are sky high. We live in an amazing consumerist society that allows us to buy our dreams even if we are broke. But if I had no money, I’d be afraid to see how the dream could possibly end.
Better a garage than live without enough to eat, indeed.
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