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“My Personal Credit Crisis”, or “WTF, charge it!”

May 25, 2009

Edmund L. Andrews, an economics reporter for the New York Times, has recorded his tale of financial woe in the soon-to-be-published Busted: Life Inside the Great Mortgage Meltdown. An excerpt was published in the Times magazine a couple of weeks ago and, since I am still having trouble getting my head around the financial mess, I curled up with my laptop for a read.

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

So far, so good.  This seemed like the kind of person who might be able to put the crisis in terms I can understand and an anecdote is always a fine way to illuminate difficult concepts.  Even now when I see the initials “GFC” my first thought is a that perhaps Mary Mac’s in Atlanta is franchising their yummy chicken; “perhaps after reading this,” I thought optimistically, “I’ll understand how so many economies lost so much money so quickly”.

Andrews’ story begins when he meets a former school-mate, Patty, and finds that they still have much in common, including having endured “bruising two-decade-long marriages” (yay!).  They fall in love and decide to marry.  In order to settle down together, they need to find a house that can accommodate her two youngest children, as well as his two teenage boys who visit on weekends.  A possible obstacle to this is that he is only left with $2777 per month after paying $4000 in child support and alimony. In Andrews’ own words, he had

…barely enough to make ends meet in a one-bedroom rental apartment. Patty had yet to even look for a job. At any other time in history, the idea of someone like me borrowing more than $400,000 would have seemed insane.

Now, I have limited experience in financial matters.  Unlike Andrews, I don’t write about finance for a living.  Also, unlike him, I have only ever applied for one loan, and that was the mortgage we’re currently paying off.  Before we started looking for a place, we did some basic back-of-an-envelope calculations: income, expenses, impact of potential interest rate rises, possible additional savings for extras and unexpected expenses.  You know, the kind of thing normal people do.  We worked out our price range and went to our bank.  The loans guy asked for some very basic information – really, just our incomes and credit card limits – and offered us twice what we were expecting.  We asked some questions about repayments, decided to stick to our original plan and started our hunt.  It wasn’t easy. Prices were increasing as fast as the government could throw grants at us, interest rates were rising steadily, and we wasted weekend after weekend trusting the price guides supplied by real estate agents.  At one point, we found a place we loved.  It was a bit higher than our, admittedly conservative, budget allowance, but we thought it was perfect.  The bank – which had offered us much more than we were wanting to borrow – was leery of the property as it fell on the city side of Victoria Street.  They were happy to lend us the money, if we could find slightly more of a deposit.  We told the estate agent that we were not going ahead and he put us in touch with a lender we’d never heard of in Queensland.  We backed quickly away. Eventually we found both a place and a loan we could live with. End of our story.

So, what did this financially literate man do?  He figured a high street bank wouldn’t touch him, so who does he turn to?  His real estate agent who puts him in touch with a broker who “specializes in unusual situations” or, as Andrews describes it:

One of its specialties was serving people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what our incomes could justify. In industry jargon, we were “Alt-A” customers, and we usually paid slightly higher rates for the privilege of concealing our financial weaknesses.

As Andrews and his broker (also named Andrews but – he assures us – no relation) soon discover, the writer’s financial situation is worse than first thought.  Neither is deterred and they eventually find what is known as a “Don’t Ask Don’t Tell” loan.  The repayments will be punishing, but hey, Patty’ll get a job and… everything will be alright?  Sure, everything will be just peachy.

As I walked out of the settlement office with my loan papers, I couldn’t shake the sense of having just done something bad . . . but also kind of cool. I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast. Almost fun. I couldn’t help feeling like a high roller, a sophisticated player who could lay his hands on big money at a moment’s notice. Despite my nagging anxiety about the gamble that Patty and I were taking, I had whipped through the pile of loan documents in less than 45 minutes.

Wow, you’re so cool, Edmund!  You’ve been financially irresponsible, to the probable detriment of your wife and family!  The story goes on.  They get the loan, Patty gets and loses a couple of jobs, they start putting essentials on their credit cards – one of which has a staggering 27 per cent interest rate! – and only paying off the minimum.  All in all, it’s one of the situations featured in debt consolidation ads on daytime TV, where families sit around the dinner table with tight expressions, listening to the phone ring. Oh, except those families evoke sympathy, probably because they’re not shown charging

$700 in clothes from J. Crew, $179 at GapKids and $700 for airplane tickets for two of Patty’s children to visit their father in Los Angeles… $1,600 to rent a beach house the previous year for us and all the children.

So, obviously I didn’t learn what I was hoping to learn from this tale. I still don’t understand how the loans worked and how the system crumbled.  I don’t understand how “value” can disappear, virtually overnight.  And I really don’t understand what larger meaning, beyond a personal catharsis, Andrews’ tale of self-indulgent greed possibly has.

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One Comment leave one →
  1. realityravings permalink
    May 27, 2009 2:40 pm

    Wow child support is high over there. Interesting that Patty who has two small children does not appear to get as much child support from her ex.

    What a dumb f**k – agree with you we had money being thrown at us by the banks but we did the same as you guys we worked out what would be managable. Ok so I don’t live in the most fashionable suburb or in the biggest house but big deal.

    Anyway what happened to them? Are they homeless? Guy should be sacked from his job for being a tool.

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