What’s a mortgage broker to do?

From today’s HooK story on foreclosures in Charlottesville:

Prang works out of his house for Carteret Mortgage; he says his mortgage consulting is geared toward the Christian community and home schoolers, which is what his wife does with their three children.

“I try to do things above-board,” says Prang.

Their original loan was with American Home Mortgage, the once high-flying firm that flamed out last August with a sudden bankruptcy and put about 7,000 Americans out of work. Then things went bad for the Prangs after they used their equity– or what they thought was their equity– to finance another business venture: buying houses and fixing them up.

“I had another foreclosure,” Prang admits. “I had perfect credit until recently.”

He advises homeowners in over their heads to avoid late payments, but he admits that’s easier said than done. He suggests that people unable to keep up with their payments try something called a “deed in lieu of foreclosure,” in which, with approval, they simply give the house back to the bank.

“It’s not as harmful to your credit as a foreclosure,” he says, but concedes, “I’m in the business, and I didn’t know about it.”

Prang is mortgage savvy, and yet he says, “There was nothing else I could have done.”

He and his wife bought their house for $650,000 in 2005 and converted the garage to boost it to 5,000 square feet, the biggest house in the neighborhood. They listed it a year ago for $800,000, then $775,000, and finally, $699,000 a few weeks ago, less than what they owe on the three mortgages.

“I could have come current,” confesses Prang. “I have the money. But that meant dumping a lot of money in a house losing value.”

And he says if he had sufficient funds, he wouldn’t pour them into buying a house now. “Why take the chance to buy something that a year from now could be worth a lot less?”

Prang isn’t in favor of current plans for the government to bail people out of bad investments. He personally didn’t want government help in avoiding foreclosure.

“In the long run, I’m going to be okay,” he says. “I know my credit has been dinged, but I know how to repair it.”

Update 02 May 2008: This comment at the HooK sums it up quite nicely:

“Oh, I could pay my debts, but I’d rather keep the money. P.S., I checked, and it’s fine with God.”

Just maybe these kids should go to a public school, where they can learn concepts like honoring contracts and morality.

Last Update – 04 May 2008 – I just noticed that the Calculated Risk noted this story as well. The comments are often fascinating and insightful.

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6 Comments

  1. Andy K May 2, 2008 at 07:21

    I am starting to lean toward LTV being the better predictor for foreclosure versus FICO score.

    What do you think? Is the Alt-A foreclosure damn going to burst if house prices keep sinking another 10 – 20%?

    Reply
  2. Mark May 2, 2008 at 23:05

    “Oh, I could pay my debts, but I’d rather keep the money. P.S., I checked, and it’s fine with God.”

    Just maybe these kids should go to a public school, where they can learn concepts like honoring contracts and morality.”

    What a crock of BS above. There is no morality involved here. What Prang did is completely legal, and it’s the bank’s fault for being greedy enough to lend him the money.

    What IS IMMORAL: you and I are paying and will continue to pay to bail out greedy homebuyers AND greedy lenders: in lower rates on our savings, lower values of our homes, and more taxes going to support the Fed’s insane interventions. It’s not an “emergency” just because the GDP fails to increase for one quarter. It’s part of the economic cycle. I hate the government.

    Reply
  3. Jeff May 2, 2008 at 23:50

    “What a crock of BS above. There is no morality involved here. What Prang did is completely legal, and it’s the bank’s fault for being greedy enough to lend him the money.”

    Some things that are legal are also immoral.

    Besides which…

    Not paying your debt when you can is legal? Sweet. Can I borrow some money, Mark? I promise to pay it back. 😉

    Reply
  4. Jim Duncan May 3, 2008 at 07:47

    I think there is morality involved – the shared responsibility to not make it harder on your fellow person – which those who consciously choose foreclosure are doing.

    It’s a business decision, sure, but one that should carry certain ramifications – like questioning the motives of the choice.

    To paraphrase Chris Rock – I’m not saying that I agree with him, but I do understand.

    So – I agree with both of you. How’s that for diplomacy?

    Reply
  5. cvillian May 3, 2008 at 12:21

    Nothing is wrong with this. The bank should have done a better job of underwriting the loan. For the borrower he’s just taking advantaged of the contract he signed for NONRECOURSE leverage. People in commercial real estate do this all the time.

    Reply
  6. Matt Sommer May 5, 2008 at 13:35

    I second Mark’s comment… see my comment over my name at the Hooke article.

    The biggest change in the business, Jim, is banks giving loans without adequate downpayments.

    In the past, with the standard 20% downpayment, you would be unlikely to find foreclosure an attractive option, and if it happened, the bank would be sitting pretty.

    Dropping the downpayments, plus sellers paying all costs, letting people get homes with nothing more than a signature is the cause of all this. It couldn’t have happened without that.

    That is why the bank’s should eat all of this. The loose financing, plus encouraging liar loans, puts nearly all the responsibility on them.

    As far as making it harder on “your fellow person” Jim, there are really only two options here, the banks and speculators eat it, or everyone eats it.

    What is better for Prang’s finances is actually better for America– now he can take his money and do something useful with it, something other than propping up insolvent banks and a crashing real-estate Ponzi scheme.

    And Jeff, I’ll gladly loan you 100 bucks in return for a repo agreement on a shiny new car and a lien on your house. You can walk away whenever you like, I won’t even make an adverse credit report.

    Reply

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