How someone who makes $15K bought a $700K house

The Washington Post has a story about a single mother of three who made $15,000 a year as a daycare worker who managed in the real estate bubble to buy a house that cost $698,000, only, of course, to lose it. It’s a tale of unbelievable shenanigans on the part of the sellers and lenders, coupled with unbelievable lack of common sense on the part of the buyer. A sample:

The type of financing that had started it all would later come to be known as a liar’s loan because it required no proof of income. Across the country, thousands and thousands of such loans were made. White’s papers cited income of $163,320 a year, even though she says her 2005 income-tax earnings were less than $15,000 and she relied at times on food stamps.

The same papers showed how much she had in her bank account. The total was $14,026, appearing to reflect two deposits made the day before the closing, when a $7,000 check from Zhang’s husband [the seller] was deposited into White’s account at 12:20 p.m., which was one minute after $6,000 in cash was added. . . .

White didn’t dwell on these details at the closing table, and didn’t pay attention to the figures showing that the loan’s adjustable interest rate was starting at 8.6 percent and could rise as high as 15.1 percent after two years.

One after another, White signed papers while waiting for the one she cared most about: her monthly payment. She had not yet been told what it would be.

“Please let this be something I can afford,” she said to herself. She was pretty sure she could afford $2,000. She told herself that if her day-care business did well, perhaps she could afford $2,500. If it was $2,800, she would struggle. Here, now, came reality: $5,635 a month. . . .

For not using a real estate agent, the sellers gave her a 5 percent credit. Some of that was used for closing costs, but about $15,000 came back to White in a check marked “settlement proceeds.”

Added to the $13,000 that had been deposited into her bank account and $11,200 toward the first two mortgage payments, White ended up leaving the closing table with nearly $40,000.

The sellers took away more. After owning the house for 22 1/2 months, Zhang and her husband sold it for $203,000 more than they had paid.

So the buyer paid her mortgage for five months, until the cash she had been given ran out, and then defaulted. She became homeless, whereupon she became eligible for rent subsidies and now has an apartment.

Multiply this, with variations, by many thousands, and this is what brought down our economy.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • http://www.aoibhinngrainne.com Laura Short

    A variation on a theme:

    Back in 2007, as my Husband and I were approaching our Wedding, we wrote up a contract and placed a deposit on a house on the West Coast; not California. He is a Senior PM with a Fortune 500 Multi-National Corporation. I was a Widow with some assets. We both had houses to sell, he in CA, me in the Midwest. My house was on the market when we met.

    So we wrote the contract to reflect two things: 1. We would buy contingent on selling both our houses and B. That we would find appropriate financing.

    When the February close came around, we tried everything we could to “make it happen”. Some very creative financing was offered us. But my Husband didn’t want two mortgages, his and this new house (my house is paid for). So we opted out as per our contract.

    The builder sued us.

    To make a long, tortourous, expensive, and defrauding story short, we went through mediation first. We had proof of fraud on her part as well as our realtor. We offered a fair settlement. But the builder would not budge. Had we that same judge later…oh well.

    Months later, we went through binding arbitration. We lost. By this time, we had stacks and stacks of subpoena’d documents proving fraud. the builder and the builder’s lawyer insisted we refused a fair loan and unfairly excercised our right to cancel. It didn’t matter that we refused to indebt ourselves to the point of probable foreclosure. The judge was unmoved by our financial prudence. We failed to honour our contract by NOT risking foreclosure to satisfy our builder’s demands.

    The morning of arbitration, we discovered the builder sold the house, at only a $15,000 reduction *plus* the empty lot next door at @$130,000. Something we were interested in, but not at the time of our sale. So the builder got a settlement from us and a sale+.

    (Then there were travel fees, lawyers’ fees, court fees, and so on.)

    We also discovered the builder offered to build us a house, with our specs, at a price that made that impossible. We had proof of not honouring the contract.

    But I digress…

    At the end of the day, it didn’t matter we have a 6-figure income, little debt, a great credit rating, and so on. Our prudence at not risking financial overload fell on deaf ears.

    Greed won.

  • http://www.aoibhinngrainne.com Laura Short

    A variation on a theme:

    Back in 2007, as my Husband and I were approaching our Wedding, we wrote up a contract and placed a deposit on a house on the West Coast; not California. He is a Senior PM with a Fortune 500 Multi-National Corporation. I was a Widow with some assets. We both had houses to sell, he in CA, me in the Midwest. My house was on the market when we met.

    So we wrote the contract to reflect two things: 1. We would buy contingent on selling both our houses and B. That we would find appropriate financing.

    When the February close came around, we tried everything we could to “make it happen”. Some very creative financing was offered us. But my Husband didn’t want two mortgages, his and this new house (my house is paid for). So we opted out as per our contract.

    The builder sued us.

    To make a long, tortourous, expensive, and defrauding story short, we went through mediation first. We had proof of fraud on her part as well as our realtor. We offered a fair settlement. But the builder would not budge. Had we that same judge later…oh well.

    Months later, we went through binding arbitration. We lost. By this time, we had stacks and stacks of subpoena’d documents proving fraud. the builder and the builder’s lawyer insisted we refused a fair loan and unfairly excercised our right to cancel. It didn’t matter that we refused to indebt ourselves to the point of probable foreclosure. The judge was unmoved by our financial prudence. We failed to honour our contract by NOT risking foreclosure to satisfy our builder’s demands.

    The morning of arbitration, we discovered the builder sold the house, at only a $15,000 reduction *plus* the empty lot next door at @$130,000. Something we were interested in, but not at the time of our sale. So the builder got a settlement from us and a sale+.

    (Then there were travel fees, lawyers’ fees, court fees, and so on.)

    We also discovered the builder offered to build us a house, with our specs, at a price that made that impossible. We had proof of not honouring the contract.

    But I digress…

    At the end of the day, it didn’t matter we have a 6-figure income, little debt, a great credit rating, and so on. Our prudence at not risking financial overload fell on deaf ears.

    Greed won.

  • Peter Leavitt

    Yes, this is what brought down our economy, due in large part to the naive government idealists who, through Fan and Fred, lowered housing loan standards along with the Fed easy-money policy.

  • Peter Leavitt

    Yes, this is what brought down our economy, due in large part to the naive government idealists who, through Fan and Fred, lowered housing loan standards along with the Fed easy-money policy.

  • http://brbible.org/from-rich Rich Shipe

    Who were the people that loaned the money for this lady’s loan? They should feel the brunt of the poor business decision. Oh wait, we bailed them out.

  • http://brbible.org/from-rich Rich Shipe

    Who were the people that loaned the money for this lady’s loan? They should feel the brunt of the poor business decision. Oh wait, we bailed them out.

  • http://uest fws

    so would regulation be contrary to free enterprise or the imposition of the rule of law that is necessary in every area where humans endeavor? would it automatically be a good sign, a bad sign or a “depends on” sign if obama pushes for new regulations and more transparency?

  • http://uest fws

    so would regulation be contrary to free enterprise or the imposition of the rule of law that is necessary in every area where humans endeavor? would it automatically be a good sign, a bad sign or a “depends on” sign if obama pushes for new regulations and more transparency?

  • Peter Leavitt

    FWS, reasonable juridical regulation of economic activity is well within the framework of a free economy. Adam Smith made this point in Wealth of Nations; few modern capitalists dispute it.

    The trouble is that mostly liberals including Obama have favored regulations that resulted in an easy system of housing finance that has come to grief for both individuals and the economy as a whole. There is a reason that the feckless lady with an income of $15K bought a $700kK house.

  • Peter Leavitt

    FWS, reasonable juridical regulation of economic activity is well within the framework of a free economy. Adam Smith made this point in Wealth of Nations; few modern capitalists dispute it.

    The trouble is that mostly liberals including Obama have favored regulations that resulted in an easy system of housing finance that has come to grief for both individuals and the economy as a whole. There is a reason that the feckless lady with an income of $15K bought a $700kK house.

  • NavyMom

    Multiply this times the millions of honest, hard working, play-by-the-rules types like me and my husband who got gouged as our home value plummeted to next to nothing. Gee, thanks, America.

  • NavyMom

    Multiply this times the millions of honest, hard working, play-by-the-rules types like me and my husband who got gouged as our home value plummeted to next to nothing. Gee, thanks, America.

  • http://www.shempel.blogspot.com Sarah in Exile

    Hear hear, NavyMom. We were in the same situation. We bought a house at an artificially inflated price, but one we could afford. We put down 1/3 of the value, got a traditional loan and pumped a bunch of money into it. Because of the crash, my husband’s company transferred him and we had to sell. We lost over 1/3 of the value of our home. Had we not put down such a large downpayment we would’ve gone underwater. In the end we walked away with a couple hundred bucks.

    So, yeah, thanks America. The honest people are the ones who get kicked in the arse in the end. But at least we can sleep at night.

  • http://www.shempel.blogspot.com Sarah in Exile

    Hear hear, NavyMom. We were in the same situation. We bought a house at an artificially inflated price, but one we could afford. We put down 1/3 of the value, got a traditional loan and pumped a bunch of money into it. Because of the crash, my husband’s company transferred him and we had to sell. We lost over 1/3 of the value of our home. Had we not put down such a large downpayment we would’ve gone underwater. In the end we walked away with a couple hundred bucks.

    So, yeah, thanks America. The honest people are the ones who get kicked in the arse in the end. But at least we can sleep at night.

  • The Jones

    And this is why no company is too big to fail. Companies that do this can do nothing BUT fail. You will always reap what you sow.

    Even situations as complicated as the financial meltdown can be broken down to simple solutions: Make honest loans. Loan to people who can pay you back. Don’t lie on official papers to get past hurdles.

    The financial meltdown is not all that complicated at all. Liars and thieves always get what’s coming to them. The complicated part is how they got $700 Billion in TARP money.

  • The Jones

    And this is why no company is too big to fail. Companies that do this can do nothing BUT fail. You will always reap what you sow.

    Even situations as complicated as the financial meltdown can be broken down to simple solutions: Make honest loans. Loan to people who can pay you back. Don’t lie on official papers to get past hurdles.

    The financial meltdown is not all that complicated at all. Liars and thieves always get what’s coming to them. The complicated part is how they got $700 Billion in TARP money.

  • DonS

    FWS @ 4: The answer, of course, is for the government to get entirely out of the mortgage guarantee business, so that lenders actually investigate and qualify borrowers before making loans.

  • DonS

    FWS @ 4: The answer, of course, is for the government to get entirely out of the mortgage guarantee business, so that lenders actually investigate and qualify borrowers before making loans.

  • Peter Leavitt

    To understand this issue, it helps to know that at the height of the housing market boom, Fannie and Freddy Mae, plus the four largest banks, were sitting on twenty-six million sub or non prime loans, amounting to two-thirds of the housing market. The fact is that Fan and Fred were obligated to get into sub-prime loans in order to secure advantages from Congress; the large banks were forced to do so in order to pass muster federal muster on mergers and acquisitions.

    Don is right; it doesn’t take rocket science to figure out whether mortgage loan applicants are qualified, though government policy and intervention can badly distort such judgment. This is not to exculpate the banks and investment houses who should have known better.

    Too bad that many honest, hard-working Americans, including Navy Mom and Sarah, have had to pay a heavy price for this fiasco.

  • Peter Leavitt

    To understand this issue, it helps to know that at the height of the housing market boom, Fannie and Freddy Mae, plus the four largest banks, were sitting on twenty-six million sub or non prime loans, amounting to two-thirds of the housing market. The fact is that Fan and Fred were obligated to get into sub-prime loans in order to secure advantages from Congress; the large banks were forced to do so in order to pass muster federal muster on mergers and acquisitions.

    Don is right; it doesn’t take rocket science to figure out whether mortgage loan applicants are qualified, though government policy and intervention can badly distort such judgment. This is not to exculpate the banks and investment houses who should have known better.

    Too bad that many honest, hard-working Americans, including Navy Mom and Sarah, have had to pay a heavy price for this fiasco.

  • http://uest fws

    #9 don

    i am with u on that! but regulation requiring transparency and no fine print would be also very good and would enhance rather than inhibit true competitive market activity.

  • http://uest fws

    #9 don

    i am with u on that! but regulation requiring transparency and no fine print would be also very good and would enhance rather than inhibit true competitive market activity.

  • http://somewebsite.somedomain.com Christian Soldier

    Commune-ism never works–
    William Bradford made a change in the rules-Commune-ism (many died) to free market-every family owned their own property–you grow –you keep what you grow–you sell your excess…..Prosperity!!!!–
    C-CS

  • http://somewebsite.somedomain.com Christian Soldier

    Commune-ism never works–
    William Bradford made a change in the rules-Commune-ism (many died) to free market-every family owned their own property–you grow –you keep what you grow–you sell your excess…..Prosperity!!!!–
    C-CS

  • Patrick Kyle

    We bought a house last year. After suffering a cut back in hours, I contacted my bank to proactively head off any problems. We were not(and are not) behind on our mortgage. The only help they offered is called a moratorium; you don’t pay a large part of your mortgage for three or six months to’get on your feet.’ The catch is at the end of this time you owe a baloon payment to cover what you did not pay during the moratorium. If you cannot, they ‘explore other options’ but you still have to be able to show ‘affordability.’ It’s almost tailor made to get you in trouble with your motrtgage. My sister, a mortgage banker, stepped in an got us a decent refi and we avoided disaster.

    I asked a friend who is losing his home, why the banks and Gov’t help isn’t really help but seems designed to let you get farther behind. His answer was simple.

    1. You or the seller pay the loan fees.

    2. The bank gets your down payment and whatever morgage payments you make.

    3. The bank makes you pay mortgage insurance.

    If you go into foreclosure, the insurance pays the bank the full amount of the loan.

    The bank also get the house to sell again.

    There is absolutely no incentive on the part of the bank to help people who are in trouble with their mortgages.

  • Patrick Kyle

    We bought a house last year. After suffering a cut back in hours, I contacted my bank to proactively head off any problems. We were not(and are not) behind on our mortgage. The only help they offered is called a moratorium; you don’t pay a large part of your mortgage for three or six months to’get on your feet.’ The catch is at the end of this time you owe a baloon payment to cover what you did not pay during the moratorium. If you cannot, they ‘explore other options’ but you still have to be able to show ‘affordability.’ It’s almost tailor made to get you in trouble with your motrtgage. My sister, a mortgage banker, stepped in an got us a decent refi and we avoided disaster.

    I asked a friend who is losing his home, why the banks and Gov’t help isn’t really help but seems designed to let you get farther behind. His answer was simple.

    1. You or the seller pay the loan fees.

    2. The bank gets your down payment and whatever morgage payments you make.

    3. The bank makes you pay mortgage insurance.

    If you go into foreclosure, the insurance pays the bank the full amount of the loan.

    The bank also get the house to sell again.

    There is absolutely no incentive on the part of the bank to help people who are in trouble with their mortgages.

  • http://somewebsite.somedomain.com Christian Soldier

    BTW-the post shows an example of the welfare state which is – the taking of my $$$ and giving them to some ‘victim’ in order to gain power (votes-et.al)… in other words Commune-ism…..
    C-CS

  • http://somewebsite.somedomain.com Christian Soldier

    BTW-the post shows an example of the welfare state which is – the taking of my $$$ and giving them to some ‘victim’ in order to gain power (votes-et.al)… in other words Commune-ism…..
    C-CS

  • Bill S.

    Some months back The Baltimore Sun ran a story that was almost exactly like the Washington Post story.

    Single mother with 3 kids
    Ran home day care business
    Father(s) of children totally absent, at least financially
    Knowingly committed fraud by inflating income on loan application
    Broker also committed fraud
    Lived rent free for 2 years, subsidized by banks, state and local government
    Purchased and financed a house that far exceeded ability to pay at closing time, and probably never.

    As Puck said “Lord what Fools these mortals be”

  • Bill S.

    Some months back The Baltimore Sun ran a story that was almost exactly like the Washington Post story.

    Single mother with 3 kids
    Ran home day care business
    Father(s) of children totally absent, at least financially
    Knowingly committed fraud by inflating income on loan application
    Broker also committed fraud
    Lived rent free for 2 years, subsidized by banks, state and local government
    Purchased and financed a house that far exceeded ability to pay at closing time, and probably never.

    As Puck said “Lord what Fools these mortals be”

  • http://www.scyldingsinthemeadhall.blogspot.com The Scylding

    Way back when I bought my first house in South Africa, the bank had a very specific formula to determine eligibility: On a 20 year mortgage, the monthly payment should not exceed 30% of your single / 35 % of your combined income. Your income was thoroughly vetted, with bank cheques, letters from and phone calls to your employer etc. I’m not sure how much of this was law, and how much good practice. After my arrival in Canada, we bought our first (and current) house here. They thoroughly looked at my income and spoke to my employer. Then, if you put down less than 25% deposit, you have to buy a government mandated insurance on your mortgage, for the protection of the bank. Since we only put down 10%, we had to spend ca. $7000 on that insurance (house cost less than $200 K).

    I think it is simplisitc to say that gone shouls let the marketforces have free reign. The difference is to make sure that government doesn’t want to buy popularity by creating faux wealth through allowing (even mandating) questionable financial practices. Thus good law vs bad law, not necessarily “no law”.

  • http://www.scyldingsinthemeadhall.blogspot.com The Scylding

    Way back when I bought my first house in South Africa, the bank had a very specific formula to determine eligibility: On a 20 year mortgage, the monthly payment should not exceed 30% of your single / 35 % of your combined income. Your income was thoroughly vetted, with bank cheques, letters from and phone calls to your employer etc. I’m not sure how much of this was law, and how much good practice. After my arrival in Canada, we bought our first (and current) house here. They thoroughly looked at my income and spoke to my employer. Then, if you put down less than 25% deposit, you have to buy a government mandated insurance on your mortgage, for the protection of the bank. Since we only put down 10%, we had to spend ca. $7000 on that insurance (house cost less than $200 K).

    I think it is simplisitc to say that gone shouls let the marketforces have free reign. The difference is to make sure that government doesn’t want to buy popularity by creating faux wealth through allowing (even mandating) questionable financial practices. Thus good law vs bad law, not necessarily “no law”.

  • http://www.bikebubba.blogspot.com Bike Bubba

    What about this; if a loan is underwritten that costs the bank money on foreclosure, the underwriters take a hit to their pay?

    Yes, there are difficulties given corporate structures, but five will get you ten that would drastically slow down bad loans.

    I recently saw an ad for “no money down” townhomes.” Yikes. It’s like we’ve learned absolutely nothing from this debacle–except, perhaps, that Uncle Sam comes in to bail out idiots who make loans that never should be made.

  • http://www.bikebubba.blogspot.com Bike Bubba

    What about this; if a loan is underwritten that costs the bank money on foreclosure, the underwriters take a hit to their pay?

    Yes, there are difficulties given corporate structures, but five will get you ten that would drastically slow down bad loans.

    I recently saw an ad for “no money down” townhomes.” Yikes. It’s like we’ve learned absolutely nothing from this debacle–except, perhaps, that Uncle Sam comes in to bail out idiots who make loans that never should be made.


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