Last night I said that homebuyers were more likely to be greedy than lenders. I haven't changed my mind yet. Instead, I read a story that convinced me even more.
The New York Times describes a couple who bought "a modest home at the southern end of Silicon Valley". Now they're suing their broker and real estate agent for setting them up with a third loan that they didn't even know they had. They may well have a valid complaint -- from the facts presented in the article, the agent was playing both the lender and the buyer for suckers.
But that's not the part of the story I'm interested in. I'm interested in how much house this couple tried to buy. Here a few facts, hidden throughout the story.
First -- how much did their house cost? This is never directly mentioned in the article. It's buried beneath a photo caption.
Sarai Torralba, 5, riding by the home that her family bought for $595,000 in San Jose, Calif. Prospero and Cirila Torralba borrowed almost $610,000 for it.
Second -- how much does this family make? The article never actually says. I would have thought that a key piece of information. The article does mention the Hernandez family, who only earns "about $4,000 a month", or $48,000 a year. We'll assume that the Torralba's are in a similar situation.
Third -- how were these loans set up?
The first and biggest loan was a pay-option adjustable rate mortgage. The loan allows borrowers to pay less than the interest due, adding the difference onto the balance so more is owed with each passing month. The interest rate on the loans from Mr. Curiel was 10 percent, with a 15 percent upfront fee added to the principal balance. That loan called for borrowers to make interest-only payments and pay off the full amount in two years.
The loan from Mr. Curiel is the one that the owners are suing over. Still, what's with the pay-option adjustable rate mortgage? I'd think that simply considering such a loan for 5-10 minutes would convince me that having the loan get bigger month after month was a really bad idea.
Reading these stories, I'm convinced that these buyers were trying to buy something that they knew they couldn't afford. Rather than having enough of a backbone to say "no" to pushy agents and brokers, they allowed themselves to be talked into obviously bad loan ideas.
Again, lack of resources isn't a truly valid complaint. Internet site after internet site explains what the various loans mean and what the amortization schedules are. Even having a poor command of English isn't really a complaint. After all, you are the person signing on the line. It's your responsibility to find someone that you trust, with a good command of English, to go over the loan terms with you. Otherwise -- don't sign.
Though vowing to fight, Mr. Hernandez said his family’s hopes and goals have been dashed. They came to the United States from Mexico nearly three decades ago. Over the years, he and his wife have worked in agriculture, picking cherries, apples and asparagus. They had three sons here — two have their own families, and one son, 17, still lives with them.
They doubt they will be able to pay for him to go to college, as they had planned.
The Hernandez family was trying to buy a $745,000 house. Whether or not their mortgage was a good one, I'm not sure how you afford college at all with a three-quarter million dollar loan of any sort.
Although an apparently crooked agent was involved, I think greed ultimately did these families in.