How a financial pro lost his house

[SpencerM]

I would like to feel sorry for this guy, but just cannot. Since he is a Financial Adviser of sorts, I feel sorry for his clients mainly. It is because of many stories like this that we have a financial crisis.

This is what is called housing greed, thinking that a 100 percent mortgage is OK, plus a HELOC. Someone who is a financial professional should realize the basics of how bad it is to think of your house as a bank.

I have seen this in the past with my neighbors, when people leverage to the hilt blissfully assuming all will continue to rise. Next comes the indignation when it does not. I am sure that most of the ER people would not take a risk like this with something that is so important to ones family.

By the way, I would not buy the book, and if I was his client paying for advice, he would be fired.
Don't mean to be harsh, but I would not use a mechanic who drives a broken down car...this is not just bad luck.

SM

 

[dessert]

The author says here:

"It starts with me getting into the financial services industry more or less by accident. I answered an ad in 1995 that I thought was for a job related to “security” (as in security guard) but was in fact related to “securities.” That’s how little I knew about the stock market. A few months later I found myself working a phone at a Fidelity Investments call center".

When I read this he lost all of his credibility. I don't believe this for a minute. This guy is playing all of us for suckers. I have hired people for jobs before and they all had a "resume". How can a security guard get a job answering the phones for any investment company using his resume to apply for the job? Don't you think his resume would be tossed aside because of his work background?
I believe this guy's philosophy is "there's a sucker born every minute" so now he wants us all to buy into his self-promotion and go out and buy his book. No thank you. I'll pass.

 

[FinanceDude]

The author says here:

"It starts with me getting into the financial services industry more or less by accident. I answered an ad in 1995 that I thought was for a job related to “security” (as in security guard) but was in fact related to “securities.” That’s how little I knew about the stock market. A few months later I found myself working a phone at a Fidelity Investments call center".

When I read this he lost all of his credibility. I don't believe this for a minute. This guy is playing all of us for suckers. I have hired people for jobs before and they all had a "resume". How can a security guard get a job answering the phones for any investment company using his resume to apply for the job? Don't you think his resume would be tossed aside because of his work background?
I believe this guy's philosophy is "there's a sucker born every minute" so now he wants us all to buy into his self-promotion and go out and buy his book. No thank you. I'll pass.

This is getting humorous, folks on here get mad if they hear Fidelity hires inexperienced folks? What do you think a Fido call center guy makes, $50K a year??

 

[haha]

This is getting humorous, folks on here get mad if they hear Fidelity hires inexperienced folks? What do you think a Fido call center guy makes, $50K a year??

Who cares about the reason, we just like to get mad!

IMO, if you phone up a Discount Broker's call center and you can understand the person's accent you have won. After all, it is a call service center job; they do not tell you what to do.

Ha

 

[Nords]

Here's an interesting "gee-I-wish-I'd-thought-of-that" perspective from The Finance Buff: http://thefinancebuff.com/the-best-way-to-lose-your-home.html

Financial planners are humans. Humans make mistakes. It’s important to learn from our own and others’ mistakes.
In addition, this planner actually handled the bubble very well. He didn’t know it was a bubble. Even if he knew, he didn’t know when it was going to burst. Just like today we don’t know whether bonds or gold are a bubble.
[...]
Shorting on suspicion of a bubble would be a mistake. The market can stay irrational longer than you can stay solvent. Not participating in a suspected bubble would also be a mistake.
[...]
The best way to profit from a bubble would be exactly as this planner did: maximize leverage for the upside and protect yourself from the downside. I’m not saying this planner planned this way but I don’t think he’s as foolish as people think. Given the options put in front of him, he made very good choices.
When a bank offers 100% financing on a house you think will go up in value but you are never sure, putting 20% down would be foolish no matter which way the market goes. If the price goes up, you make more money with 100% financing because you have more leverage. If the price crashes, you lose your down payment if you put 20% down. Of course you should do 100% financing.

The end result was almost exactly as planned, whether the financial planner planned it or not. The planner sold the home in a short-sale and ended up with a thriving business, partly thanks to the $200k seed capital from the banks. Now the planner is writing for New York Times and going on public radio. His book will come out in January.
[...]
Short of timing the market top, I can’t think of any better way to "lose" your home. Think how many financial planners are in this country. How many of them get $200,000 free capital from the banks? How many of them get publicity in New York Times? How many of them appear regularly on public radio? How many of them will have a book published by a major publisher, which will help bring in more business?
[...]
Our financial planner is smarter than you think. 100% financing, cash-out refi, and negative amortization loan aren’t really mistakes. They are exactly the right moves in a bubble. A drop in the credit score as the consequence, you say? The capital, the publicity, the book deal, and the business make it so worth it. The credit score will come back up over time. Who cares about credit score anyway when your business brings in $800k a year?

The flaw in this logic is that I don't think the guy signed up for the "acute vomiting" part of the business plan. He took the only actions he could when he was forced to act, but he had to have regretted their initial decisions that set them on this path. In retrospect he wouldn't have shorted the market, either, but he could've done just fine with avoiding the entire bubble by continuing to rent.

I guess it's easy to avoid investing in a tech stock bubble if you're not in the tech industry. It's probably harder to avoid "investing" in a real estate bubble when you have to live in a home, especially if you feel that you're losing out by not building equity... for five or ten years!

 

[Leonidas]

Yep, I also can't help thinking that FP boy wasn't exactly a master of his universe and handling this well when his experience included:

Then, the sickness set in. The pain would start in my stomach, and then I’d spend six hours vomiting. It happened once, then three months later it happened again, then one month later it happened yet again. Eventually, it was happening every couple of weeks. The doctors couldn’t find a physical cause.

Plus, he got to live in his in-laws' basement. Bet that was a [-]special hell[/-] blast!

He took the only actions he could when he was forced to act, but he had to have regretted their initial decisions that set them on this path. In retrospect he wouldn't have shorted the market, either, but he could've done just fine with avoiding the entire bubble by continuing to rent.

I guess it's easy to avoid investing in a tech stock bubble if you're not in the tech industry. It's probably harder to avoid "investing" in a real estate bubble when you have to live in a home, especially if you feel that you're losing out by not building equity... for five or ten years!

Except for the differences in liquidity and one's wife and kiddies don't live inside those Enron shares.

Sure, dude came out of it better than most, and better than to be expected. At least he didn't go for the 3 million dollar house! But he drove past all those neon signs proclaiming a housing bubble, leveraged himself to nearly the max, and then stuck his whole future and the family inside that asset.

During a driver training course once I recovered from what was very close to a real bad moment (like flipping the car a few times bad). It looked hairy, the recovery was cool, and when I got out of the car after my run I got some "nice moves" comments from the other students. Then one of the instructors pulled me aside and told me the truth:

You reacted well to a dangerous situation. But dumbass decisions put you in that dangerous spot. You carried too much speed into the turn, didn't brake enough, and all that made you late on the apex. Avoiding all of that it in the first place would make you a good driver. Recovering from a bad place that your mistakes put you in just means you're lucky.

Kudos to Carl Richards for some cool moves in recovering from his financial blunders.

 

[Nords]

Kudos to Carl Richards for some cool moves in recovering from his financial blunders.

I like the point about the dumbass moves that caused the situation in the first place.

 

[lemming]

That IS a scary story. How to break into the financial business-just show up.
It wasn't even Ameriprise..it was Fidelity. I bet it is harder to get a pizza delivery job-you have to have a clean driving record and be able to make change.

 

[clifp]

What laws have changed to encourage default? If anything, the laws are tougher compared with two decades ago. Nevada is a recourse state, and lenders are free to pursue full damages if a borrower defaults. The laws are fine. Most people (that can) are paying their mortgages, and the financially sound thing to do is to continue paying and not default.

Don't you think that changing the law so debt forgiveness (only on mortgages I will add) is no longer consider taxable income is huge change?

If the financial planner had short sell of a more than $200K back in 2007, that would be treated as income putting him in 33% bracket and he would owe Uncle Sam ~$65,000 in taxes. It is extremely hard to get rid of tax debt and unlike mortgage the IRS is not big on 30 year repayment plans. I suspect his monthly payments would worse to the IRS than making his mortgage payments.

There are plenty of people who can make their mortgage payments but because they are underwater for $100,000+ they are considering strategic defaults. If Congress hadn't changed the law I suspect very few people would be considering it.

 

[tangomonster]

Most strategic defaults make my blood boil. I have a friend who stopped paying the mortgage on her condo on her attorney's advice. She could afford it, but the value declined. She wasn't happy living there since the neighborhood had "gone downhill" (code for Latinos moving in), so she walked away without batting an eye. She felt no moral obligation to pay the mortgage.

I was even more aggravated when Occupy Atlanta chose a local family to be their poster child about the housing/mortgage crisis. A police officer and his family were about to be evicted from their home, so OA came in to occupy it.

"This family is the perfect example of the fraud going on in the mortgage and banking industries," said Latron Price, one of Occupy Atlanta's organizers. "We plan to shed light on the foreclosure issue and we look to make a stand here."

But then I read in the newspaper:

Gwinnett | Occupy Atlanta protestors set up shop in foreclosed Snellville home

So this is a perfect example of fraud in the mortgage and banking industries? The family deliberately stopped paying their mortgage because a con artist convinced them to do so to get a loan restructure. They haven't paid for a year! They had the money to keep paying, but stopped. I don't understand if the con artist worked for a legitimate mortgage company or bank---if s/he did, then of course that IS fraud. But if it was some random person working on their own, I don't see how that is the fault of the mortgage and banking industry.

And don't even get me started on how scary it is that a police officer could fall for a con artist.....

Wouldn't it have been better for OccupyAtlanta to showcase a family who couldn't pay because of job loss and health care bills? Or better yet, a truly fraudulent case where the mortgage holder did something unethical? Does OccupyAtlanta really think that no one should be foreclosed on when they stop paying their mortgage?

 

[FinanceDude]

That IS a scary story. How to break into the financial business-just show up.
It wasn't even Ameriprise..it was Fidelity. I bet it is harder to get a pizza delivery job-you have to have a clean driving record and be able to make change.

You would be amazed at the things that happen..........

 

[HFWR]

That IS a scary story. How to break into the financial business-just show up.
It wasn't even Ameriprise..it was Fidelity. I bet it is harder to get a pizza delivery job-you have to have a clean driving record and be able to make change.

After a layoff in the late 90s, I thought about switching careers to the financial services industry. Went to Ameriprise, and a couple of insurance companies. They would "train" you to get certain licenses and such, but it mostly seemed like they want whole-life and annuity salespeople; not much mention of other instruments...

"Here, fill out this form of 100 people you know that we can badger relentlessly to buy insurance."

 

[dessert]

This is getting humorous, folks on here get mad if they hear Fidelity hires inexperienced folks? What do you think a Fido call center guy makes, $50K a year??

Financedude, I've been "out of pocket" for a few days and just reading your post. I didn't want to come across as "mad" for sure. The modicon I used expressed sarcasm but not anger. I have no idea what folks make at Fidelity but I have faith in human beings who are tasked with hiring personnel to represent their companies and I still think that there are certain minimum requirements set up prior to hiring someone for a job.
Now I still think that this guy is nothing more than a "con" and he's a pretty good one apparently.

 

[Dog]

I rarely buy books - I use the library. But I wouldn't waste my time checking it out at the library to read it. Unfortunately the people that can least afford to spend the money will buy his book because it will reasonate with them. I still believe your house is your home, not a financial investment (unless you want to risk living on the street (the part about looking in through the window at his family....oh please). The article really hit a nerve with me. I see him as an opportunist - I believe he is spinning his story to sell books)! Just my opinion.

 

[Sarah in SC]

I'm bumping this thread for an awesome reason---a book report!

I know, I know, I said earlier that I'd never read anything this dumb guy wrote, after seeing how he handled his own finances, blah blah blah.

But, I stumbled onto it by accident, not realizing it was the same guy. And I LOVED it!

Mostly I liked the way he used the simple Sharpie drawings to explain, in very basic terms, why our behavior is such a huge part of our success or failure in investing. And why it is so hard not to be ruled by either fear or greed in making decisions.

I should also say that it isn't going to be an "AHA" moment kind of book for our very savvy forum members who have already figured a lot of this stuff out, but it is, I think, an outstanding but quick-reading book to recommend or hand out to folks who ask questions about how to deal with uncertainty in the market and the financial planning process.

Also, because he's a fee-only planner, he makes a good case for why some folks can be helped by a planner who keeps them on track with their goals, rather than reacting to the nightly news. That may be a turnoff for you, but you may not have seen first-hand what it is like to overcome that fear, or try to talk someone off the ledge who is experiencing it.

And I also like that the guy readily admits that he fell victim to the same kind of thinking when he bought too much house and let it go, that he now has a much better understanding of that fear and greed dilemma than someone who hadn't been in the frying pan himself.

Here's an example of his sharpie drawings I got from his website, Behavior Gap, talking about that book "the Secret". He also has a lot to say about what he terms the Economist smirk, which I may or may not be guilty of!

 

[clifp]

Sorry Sarah but color me underwhelmed. There is a big difference between mildly amusing and useful.

 

[Sarah in SC]

Sorry Sarah but color me underwhelmed. There is a big difference between mildly amusing and useful.

I used to be like that, too, Clif.
Now I'm happy just to enjoy a good read.

 

[grasshopper]

I am a firm believer in a Universal Intelligence. I am still working on a close parking spot at the gym. I do think that if you don't ask/look for intentional goodness to come your way, you are messing out on stuff that just shows up. The Secret, not so much, A New Earth, by Tolle, watch out.

 

[LOL!]

A gallery of sketches is available here: The Sketchpad: Personal Finance on a Napkin - Interactive Feature - NYTimes.com

 

[73ss454]

I used to be like that, too, Clif.
Now I'm happy just to enjoy a good read.

That's only because you don't have a TV.

 

[EvrClrx311]

I felt we could afford around $350,000. We called a real estate agent named Mitch, who had signs on all the bus stops: Talk to Mitch! He picked us up in a gold Jaguar, and suddenly we were looking at houses that listed at $500,000 or more.
It felt a little crazy to be shopping for houses that cost half a million dollars, but my income was growing rapidly. Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one.

I can certainly relate... luckily for me, the stability of my job market as well as our 'quick' learning lead us towards a much more manageable situation. We never lost our home and we're doing extremely well today...

DW and I were 21 and 22 at the time we signed the papers for our $518,000 house (well actually a townhouse) to be built between January-May 2005. We were both in school full time and going to graduate in May. House was going to close May 28th, and our wedding was set for June 3rd. I had a dozen job offers I was deciding between to start in mid June (all ranging between $57,000-$85,000). I had never made more than $9,000 a year myself up to that point.

We put down 5% (or $25,900) more then half of which was an early graduation gift from my grandparents. The rest came from savings I'd accumulated working internships over the previous 3 summers.

So there we were... two 'kids' (or adults I suppose technically) about to leave the college atmosphere and enter the real world. A family friend was representing us as our realtor and had convinced us that if we didn't purchase a house now we'd have to wait until our 30's to get in at a much higher price. I didn't know until years later that she received a 3% commission from the builder... I always thought she was working with us for free. I'd estimate she spent about a total of 10 hours of work (showing and paperwork) on us as clients... not a bad paycheck, about $1,800 an hour.

I asked all the right questions:
"How can we afford this when I don't even work yet?" ["stated income... duh"]
"What happens if I lost my job in a few months/years?" ["sell the house for a huge profit"]
"I noticed the housing market has skyrocketed recently, how can this possibly continue?" ["everyone needs a house and the housing market is always going up"]

We were introduced to the builders lender. If we used him, we got a free $15,000 on upgrades, nicer kitchen, hardwood floors, etc...).

"This is how it is done..."

"Just use the highest job offer you have... and make an assumption on how much your wife will be making"

"Everyone does it this way... if you don't you can't get a house"

"Call me in 6 months and we'll refinance you into a 30 year fixed... if you're really worried about the rate changing."

"You are approved for a 5:1 ARM up to $550,000... congrats!"

"Can I get a 30 year fixed instead?" ["not without paperwork showing your income and putting more down... which would be silly to do"]

Yep... we were told by the 'professional' that it was silly to put down more than 5% on a house.

It is easy to look back now and think how foolish I (a millions of others) were with housing at the time.

Luckily today we're still in the same house and still love the place as much as the day we purchased it. We've paid our mortgage down to $365,900 and the house is currently worth about $430,000 according to Zillow. We're in a 30 year fixed

Certainly would have been much easier and less stressful ways to get from then to now (we've paid $201,400 in interest alone over the last 7 years... most of the $126,000 in principle that was paid down was additional payments and brought to the table at refinancing). We sometimes wonder what situation we'd be in if we had rented the last 7 years and saved on the side... how much we'd afford today. Oh well...

luckily we came out on the right side of this one, and learned an incredible amount about our financial health while side stepping many landmines.

live and learn...

 

[EvrClrx311]

...
I think the fundamental problem is the both laws and the attitudes of the banks and government officials have changed to encourage strategic default. In general I believe that when people stop paying their mortgage, they should either be forced into bankruptcy, or have so little assets and so little future income that are basically bankrupt. Instead Congress passed and then extended the law that changes the long standing rule that treats forgiven debt as income. Simply getting rid of that rule would discourage people from strategic default since they'd probably owe Uncle Sam 1/3 of the money.

...

Right now the financially sound thing to do for most people is to default and I don't thing morale lectures are working well. I don't see away out of this mess until we make our laws and actions align with encouraging people to pay their mortgage.

I agree. Many people put 100% of the fault on the borrower (using nasty words to describe them) while ignoring that the banks/lenders, as well as the rules in place that allow short sales and strategic defaults, deserve at least some of the blame (1%, 25%, 50%... you choose)

This reminds me of a lesson described in a great book called "Predictably Irrational"...

A daycare owner found that a handful of parents were continuously late in picking up their children by the 5:00 deadline (traffic, meeting, forgot, etc... always a different excuse). This was causing a headache for him and trouble in keeping staff. He had to pay them more and they were unhappy about waiting around for parents "breaking the rules"

The owner decided to implement a penalty fee for parents who came late to pick up their kids. He charged $20 per hour to help offset the additional pay his staff of two would receive that were waiting on them. What he found was that the number of parents arriving late increased...

The parents who were never late on principle, morals, what have you, now had a fall back to justify their tardiness. The cost of being late was now quantified into a $20 fee you could choose to make...

IMO, this is the problem with the short sales and strategic defaults... more so than the people making them. When you put a price on something, or a penalty, you are giving a person a reason to justify and calculate in their head why it makes sense to do... to wash their hands of the moral issues of it because they are "paying the price" after all.

Forcing people to declare bankruptcy to get out of their legal contract with the banks would be a quick way to bring morals to the surface of the decision making process... since that black mark on ones record is much more difficult to shake.

Short Sales make sense financially to the banks... but they give some people a reason to walk away who could have struggled through it had the option not existed at all.

 

[H2ODude]

Much of this makes no sense to me. We're still in a nice house we bought in 96 for 230k; paid cash. Income then $95k annual. Watched people who worked for me buying huge houses with big mortgages. House today worth probably $375 to $400k. Meanwhile, all the mortgage payments I didn't make went into 401 and 457 and other investments.

The mortgage scams made no sense at all to me...I remember last mortgage I got (1987?) I had to supply more evidence of income and assets, credit history, etc than you'd believe. And then, it was a 6 week wait while the "loan committee" deliberated as to whether I was worthy. With 20% down. In retrospect, that's the way it should have been and should be. The whole premise that every American should be able to own their own home? Um....I don't think so. Not from the financial behaviors I've observed.

 

[Texas Proud]

I agree. Many people put 100% of the fault on the borrower (using nasty words to describe them) while ignoring that the banks/lenders, as well as the rules in place that allow short sales and strategic defaults, deserve at least some of the blame (1%, 25%, 50%... you choose)

Looking at your last two posts is informative... and I do not think that most people is placing 100% blame on the borrower...

But let me throw out another thought on this... who made the final decision and signed the forms

IOW, if someone convinced you to jump off a high building, on the way down you can think to yourslef that you are not 100% to blame for jumping off.... but once you hit the pavement you are 100% dead...

Sometimes you have to think of the consequences of your actions because you will be 100% responsible no matter who or what got you there. That is one of the lessons that I keep trying to teach my kids...

 

[EvrClrx311]

Looking at your last two posts is informative... and I do not think that most people is placing 100% blame on the borrower...

But let me throw out another thought on this... who made the final decision and signed the forms

Point made, but what we're talking about are two different things:
1) Why did a borrower get into the mess (who is to blame for the mortgage and borrowing);
2) Why did the borrower default, or choose to walk away (who is to blame for the bailouts and defaults);

Then vs. Now

The two are certainly linked but entirely different when it comes to analyzing the mess we're in as a country.

People who default, strategically or not, tend to blame everyone but themselves - or they take responsibility, but then go on to justify why/how they got to where they are: "It wasn't entirely my fault, and this is why." I'm sure some of that resides in my post above, despite the fact that we never defaulted or received bailouts for our situation. We stuck it out. From the outside looking in, it is easy to point to them and say "you signed the papers, you deal with this mess!" (#1 above)

What I'm trying to address is #2... As an investor and citizen, we should all be mad that these loans were created... mad that people signed for them... but IMO, more mad that the banks took unnecessary risk in lending the money (or that they were allowed to). After all... the people wouldn't be able to sign on the line if the banks weren't offering the ability to get the money. As evident from our society... when money is available people take it. Banks and regulation need to be held to a higher standard than people... after all, its the banks (and their investors) who lose when money is lent to an individual who is a high risk of default... and does.

No one here would loan their own money to someone at a high risk of default that didn't put anything down... and if they did, would you blame the 'thief' or blame the poster who took on the risk of lending the money? Humans will take advantage of situations that present themselves to improve their lives in the short term... investors prove this often with their foolish investing habits. So why are we going so easy on the banks/lenders... while attacking the individual borrowers so vigorously?

Because they are people... we can put ourselves in their shoes (or try to) and say "wow that was a bonehead decision, [I think] I never would have ever done that!"

What really gets to me are the bailouts that now exist to reward that bad behavior (banks and individuals both benefit from their poor decisions). My wife and I chose to pay a lot for the house we live in... and we made it work. Others weren't fortunate enough to be given the opportunity to make it work. I fully understand that one small change in our situation could have lead us to be in the pool of defaulters... and that is why I don't carry apathy their way pointing a finger in judgement.

Today we're being punished (relative to those receiving aid) because we refinanced on our own instead of modifying our mortgage... because we decided to stay in the house regardless of the fact that it was underwater (who cares, make the payment)... because we weren't backed by Freddie or Fannie and HARP wasn't available (tough luck)... because we stayed in our house while others walked away... because we were responsible and paid back our debt.

The policy is the problem... it is teaching (I mean allowing/encouraging) people to walk away when life gets tough. If you're a bank and you give out some bad loans... we'll take care of you. If you bought a house you couldn't afford and missed your payments... help is on the way.

IOW, if someone convinced you to jump off a high building, on the way down you can think to yourslef that you are not 100% to blame for jumping off.... but once you hit the pavement you are 100% dead...

One might ask... why didn't the building have a wall to prevent the option to jump in the first place? Policies to prevent people from making suicidal financial decisions would protect both the borrowers and the banks/investors...

Seems what we have right now... are nets at the bottom of the building catching people who were advised to jump and made the decided to. "I noticed you made a horrible decision to jump... let me bail you out of that mess"

who are you really more mad at... the ones jumping (gonna die regardless), or the ones who caught them giving a second chance to make the same mistakes again?

Personally, I'm more mad at the system that allows this abuse... then I am at the people abusing it.

Sometimes you have to think of the consequences of your actions because you will be 100% responsible no matter who or what got you there. That is one of the lessons that I keep trying to teach my kids...

That is a great lesson... and a very difficult one to teach. Too many parents today ignore it.