How a financial pro lost his house

[walkinwood]

An article on how a financial planner got caught up in the housing boom, lost his home, but survived and wrote a book about it.

www.nytimes.com/2011/11/09/business/how-a-financial-pro-lost-his-house.html

For one thing, I am less quick to judge other people’s financial behavior. I’m also more inclined to take into account personal factors that determine how people behave around money.

The process of making financial decisions is about more than building a spreadsheet to calculate the answer, because life rarely fits cleanly into a spreadsheet. Our decisions often appear irrational until we understand the whole story.

 

[haha]

Thanks for posting this. I think it is an excellent article. Carl went along framing and reframing what was going on, and how he was reacting to it. To me, this is 4+ sanity.

On this board we often pretend that decisions are very cut and dried, but for most people with wants that go beyond security, they often are not.

 

[W2R]

The guy's not the brightest bulb on the tree, IMO.

We borrowed 100 percent of the purchase price. In fact, I was told I could borrow even more if I wanted. I had perfect credit and a solid income that was growing. But even so, when the lender approved us at 100 percent, it was more than I had expected. I remember thinking something like “Wow. I guess if they’re willing to lend it to us it must be O.K.”

This was in 2003 - - I bought my house in 2002 so I know what he is talking about. I could have borrowed more than I did if I wanted to be house poor and miserable. I can't imagine why anyone would subject their family to that in order to buy a half million dollar home in Vegas.

And then, when he refinanced the next year,

We picked the lowest possible payment, the one that added to our balance each month instead of subtracting from it. And we added a line of credit with Wells Fargo.

Seriously, how could he possibly think this was a road to financial security, even if the housing market hadn't collapsed? Sheesh.

But then, 7 years prior he had been looking for a job as a security guard so I guess he wasn't accustomed to handling money.

To me, the lesson here is not to expect a financial advisor to know anything at all.

 

[Texas Proud]

Still reading... but this caught my eye...

"I was a financial adviser, and I never sat down to figure out what it would take to make this work."

SAY WHAT

I guess writing these kind of things will get him more book sales, but I would never buy his book...


Edit to add:
OH MAN... this is just easy picking....

"The extra borrowing power was important, because while my income was growing rapidly it wasn’t enough to support all our expenses"

 

[Bestwifeever]

Obviously he should have become a security guard.

 

[Tom52]

Now I know why I don't trust financial planners. I never know if they are any smarter than I am.

"Six months ago I didn't know how to spell financial planner, now I are one!"

 

[haha]

Obviously he should have become a security guard.

I don't know. He is living a much more upscale life than that of a security guard, he still has his wife and 4 children and business, and the next time the screw turns his credit will be Ok and they can buy another upper middle class house.

Meanwhile, at the cost of some anxiety, he and his family have lived a pretty good life.

My realtor has been selling houses as a broker for >25 years. She didn't see the crash coming, and very few others did either.

Some people are constitutionally very cautious. Sometimes that helps, sometimes it hurts. I am so risk conscious that I think this kind of thing would be unlikely to catch me. But on the other hand, I have never really caught a good ride on a boom either.

Ha

 

[jerome len]

All this guy did was leverage........lots of debt, little cash. It ONLY works when values are increasing and will kill you when they aren't. Actually, it was this kind of behavior that caused the depression........lots of debt......no cash.

Today, the banks, overall, are safer but if you leverage and values go up.....you're a big winner........leverage and values go down.......big loser.

This is a retirement forum. Most of us can't recover is we lose a lot and we're older. So, I'm a lot more conservative, paid cash for my last home....pay cash for my cars....and worry less than I would if I were leveraged. To each their own but I sure like not having to worry and being able to sleep at night.

 

[Bestwifeever]

I don't know. He is living a much more upscale life than that of a security guard, he still has his wife and 4 children and business, and the next time the screw turns his credit will be Ok and they can buy another upper middle class house.

Meanwhile, at the cost of some anxiety, he and his family have lived a pretty good life.

My realtor has been selling houses as a broker for >25 years. She didn't see the crash coming, and very few others did either.

Some people are constitutionally very cautious. Sometimes that helps, sometimes it hurts. I am so risk conscious that I think this kind of thing would be unlikely to catch me. But on the other hand, I have never really caught a good ride on a boom either.

Ha

True, but there's nothing wrong with being a security guard. Maybe he would have been happier in the long run.

 

[skyvue]

Enjoyed how the article describes his emotions, feelings and pressures he was feeling while making these poor decisions. Even though he doesn't mention it, I suspect his spouse (and perhaps kids) wer also pressuring him to "buy more home", go on nicer vacations, buy things, etc...because everyone else around them was.

I think it describes the mindset of the bulk of the people I know today (not people on this forum) and why they really don't have much of a net worth despite having well paying jobs and solid careers.

I guess I am lucky in that I have never let these emotional pressures influence my spending habits (at least since I was 26 or so). When I was young and dating, I did get caught up in that a bit. I wanted nice clothes, nice car, etc.....because I felt that was a prerequisite to attract women.

Now that I can actually afford all those things, I find I don't want or need them. I spend less today on those type of things (wants) than I did when I was 26 and I make about 5 times what I did then.

 

[BellBarbara]

Obviously he should have become a security guard.

Hahaha! This is exactly what I thought. Does say much for the training he got.

 

[BellBarbara]

I think it describes the mindset of the bulk of the people I know today (not people on this forum) and why they really don't have much of a net worth despite having well paying jobs and solid careers.

To me it is a great illustration of people who are not able to delay gratification. I have a couple of friends like this, they have to buy the newest thing all the time. And even that isn't enough, it has to be the $900 monogrammed iPAD for example.

I know a couple who are both like this, their life is a disaster. Cars repossessed, cell phone bills unpaid, etc. It's something I really worked on with the kids, learning to delay.

Luckily my husband is the same as me.

 

[FinanceDude]

Boring.........

 

[Texas Proud]

All this guy did was leverage........lots of debt, little cash. It ONLY works when values are increasing and will kill you when they aren't. Actually, it was this kind of behavior that caused the depression........lots of debt......no cash.

Today, the banks, overall, are safer but if you leverage and values go up.....you're a big winner........leverage and values go down.......big loser.

This is a retirement forum. Most of us can't recover is we lose a lot and we're older. So, I'm a lot more conservative, paid cash for my last home....pay cash for my cars....and worry less than I would if I were leveraged. To each their own but I sure like not having to worry and being able to sleep at night.

Not quite.... he was doing what the Greeks were doing... borrowing money to pay current expenses HOPING that sometime in the future earnings would catch up to spending...

IOW, if he were leveraging, he would have been investing that money instead of spending it.... then you have a possibilty of being that big winner... under his method, the only way out was a lot more income... because at some time someone will want their money back....

 

[chinaco]

Many people could tell a similar tale.

Some those peoples' stories would not be a tale of excess.. they just took out a loan to buy a home at a bubble price (that they could afford) and lost their jobs for an extended period of time.

At a younger age... during that bubble, it could have happened to many of us!

His story and others' stories are the current version of the stories we heard from parents and grandparents about the great depression.


He made one statement that sums up the lesson he learned.

I’ve also learned some things about risk. Risk is an arbitrary concept, until you experience it. And I’ve noticed myself focusing more on the consequences of something going wrong than just the probability of that happening. As a result, I tend to urge my clients to make decisions that err on the side of caution.

 

[Texas Proud]

Many people could tell a similar tale.

Some those peoples' stories would not be a tale of excess.. they just took out a loan to buy a home at a bubble price (that they could afford) and lost their jobs for an extended period of time.

At a younger age... during that bubble, it could have happened to many of us!

His story and others' stories are the current version of the stories we heard from parents and grandparents about the great depression.


He made one statement that sums up the lesson he learned.

The thing is that I have more compassion for someone you describe than this guy... Sure, there are people who lose their house because of a job loss or even hours being reduced... or some medical complication etc. etc.... but someone who owes $200,000 MORE on a house than when they bought it does not get my sympathy... nor someone who claims to be a financial advisor and says they did not do the necessary analysis to see if it would work...

This guy made dumb decision after dumb decision after dumb decision.... and could have been super successful if he only changed a bit... heck, he said he did not buy a $2 million house... so his income had to be pretty good (well, who knows for sure)....

 

[Leonidas]

He made one statement that sums up the lesson he learned.

I’ve also learned some things about risk. Risk is an arbitrary concept, until you experience it. And I’ve noticed myself focusing more on the consequences of something going wrong than just the probability of that happening. As a result, I tend to urge my clients to make decisions that err on the side of caution.

I didn't learn that lesson until I was 30-something, but it was a tough lesson and I learned it well.

Figure out what can go wrong, and have a plan. Have a backup for those plans, and some contingency plans as well. It's not a question of if something go wrong, but what will go wrong and when.

The litany of all the stupid things he did in getting his family into this mess are tediously long. He seemed to have learned from all this, but I'm reminded of a guy who was a survivor from the oil boom of the 70's and 80's whose favorite plea was, "Please God, give us one more boom and I promise not to F**k this one up!"

 

[clifp]

Interesting article, but I really really really hate the headline.


How a Financial Pro Lost His House.

Ok I suppose you can argue that CFP is in someways a professional designation for a occupation "financial planning" which is really in need of some policing. Certainly his lack of financial planning in his own live does not speak well for his professionalism. However, what really galls me is saying that he lost his house. I am sorry somebody who put 100% down, than did a cash out refi, with a negative amortization, never ever owned even a tiny piece of the house.

A much more accurate headline, would be "savvy gambler enjoys the good life for a decade at the banks and taxpayers expense".

 

[WanderALot]

I don't dislike Fidelity, but this doesn't speak very highly of them.

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.

 

[obgyn65]

+1

At a younger age... during that bubble, it could have happened to many of us!

 

[kombat]

We have a friend who is under water on his mortgage even though he has lived within his means and done everything right. He’s sticking with his mortgage for as long as he can.

It's quotes like that that really bother me when it comes to people rationalizing walking away from their obligations. Read the quote again. On the face of it, of course he should keep paying his mortgage. Simply being "under water" doesn't mean anything unless he's trying to sell. Every 100%-financed new car ever sold is "under water" the second they're driven off the lot, but that doesn't mean as soon as the owner gets home, he should be fretting about whether he should keep paying the payment, or hand over the keys. It's absurd on the face of it.

At the time he bought the home, he felt it was worth $x. He borrowed $x. He can easily afford the payments on the loan. Nothing in his financials has changed. The only thing that's different is some appraiser somewhere said, "I think today, it's probably only worth $x-y."

So what? That quote above says nothing about his friend's ability to pay. It only says that he's "under water," but is going to soldier on and keep paying his payment anyway.

Of course he should!

 

[MichaelB]

Carl Richards appears to be more talented as an author than financial planner. Unfortunate for his clients.

But in hindsight it is clear that we were spending more than we should have on things like recreational gear and family trips for ourselves and our four children.
./.
As for our spending, we told each other that we’d catch up later, as my income and the value of our home continued to rise.
./.
The solution was always making more money, not cutting back. The fact is, it’s much easier to set a goal of making more money in the future than it is to buckle down and cut back today.
./.
We never really worried that things would go to pieces the way they ultimately did. But then came the collapse in the stock market.

Spending, saving, investing, managing risk and having realistic financial goals are the mainstay of financial planning. He failed across the board yet he continues to practice?

 

[skyvue]

I am about 8 months away from paying off my condo that is worth $80K less than what I paid for it for 4 years ago. I have even been piling all available cash flow toward the mortgage for the last 4 years to pay it off early. It feels like the right thing to do. When I read stories like this it makes me 2nd guess my strategy but I then focus on the fact that I will never have another debt the rest of my life and let that "feel good" sink in.

 

[frayne]

Carl Richards appears to be more talented as an author than financial planner. Unfortunate for his clients.
Spending, saving, investing, managing risk and having realistic financial goals are the mainstay of financial planning. He failed across the board yet he continues to practice?

It simply amazes me how dumb, smart people can be, and to think this guy was advising clients on financial matters, almost defies logic.

Of course he could always be a poster child on why you should be cautious when using a financial advisor.

 

[FinanceDude]

I don't dislike Fidelity, but this doesn't speak very highly of them.

You would be amazed at who is answering the phone at places like Fido and VG........it does not take a lot to get a job like that.......