How we got our mortgage. Or: Why so many people bought houses they couldn’t afford.

Our loan officer was insistent: we’d be nuts not to get an adjustable rate mortgage.

It was October of 2007. We’d met with this SunTrust loan officer—I’ll call him “Jim”—a couple of times so far, and we were moving ahead with a construction loan to be rolled into a permanent loan when our new house was built. I told him that, no, we wanted a 30-year fixed-rate mortgage. We are fiscally conservative, risk-averse, and intend to die in this house—it’s not like we’ll sell it a few years after we move in. Jim looked at his over the top of his reading glasses, adopted a paternal tone, and informed us that an ARM was the only sensible mortgage for us to get. We could just refinance in a few years, when rates would probably be lower. Plus, by the time the rate reset, we’d be making more money anyhow, so we could just deal with the problem then. Plus, based on our income and credit scores, he could give us a mortgage of substantially over half a million dollars, so we could have a house twice as big as the one we’d just paid Artisan Construction to design for us.

I felt a bit stupid. Here was this loan officer, who clearly knew a lot more about this than I did, insisting that we should take more money, that we should get a cheaper mortgage. The Dow Jones had broken 14,000 that very day, an all-time high—the economy was roaring along. At that time, I wasn’t equipped to refute his logic, but I didn’t want to look stupid by backing down, so I cast my gaze down, and quietly repeated that we would feel more comfortable with a 30-year fixed-rate mortgage. Shaking his head, he agreed to proceed accordingly.

Fast forward to our next meeting, in mid-March of 2008, when we were proceeding with construction. The stock market dropped below 12,000 that day, one fifth of the value of the economy having vanished in the past six months. The phrase “real estate bubble” was on everybody’s lips, and “subprime mortgages” was a phrase that most of us had learned by then. The bottom had fallen out of the housing market, a result of lending too much money to people who could barely afford their pre-reset ARM payments. When we walked in, I laughed a little at the recollection of Jim’s insistence on an ARM six months prior, and said, chuckling to indicate that I meant no harm, “good thing we didn’t take that half-million dollar ARM, huh?”

Jim looked at me, puzzled. What, he asked, would be the problem with that? I pointed out the collapse of the housing market as a result of ARMs. He didn’t comprehend. Was he not aware that the economy was crumbling? Did he not know it was because of the very lending practices that he was practicing just a few months prior? All of the above? I don’t know, but it was clear to me that he had no idea of what I was talking about. That got us back on the topic of an ARM, and we actually repeated the conversation that we’d had the prior year. He still thought we should get an ARM. He adopted the same paternal tone. He shook his head, disappointed in our short-sightedness. But this time—having had the same crash course in mortgages and the economy as the rest of the country, one that Jim had somehow missed—I had the confidence to know that an ARM would be a very, very bad idea.

It was at this juncture that we realized that Jim knew absolutely nothing about mortgages, finance, or economics. He just knew about getting people to sign pieces of paper. He had some paper that needed signing, and there we were. It was that simple.

Things went to hell pretty quickly from there. Jim ordered an appraisal of our property, and the appraiser returned a report that he generated without ever stepping foot or even seeing our land. The included photos of our property were actually of our neighbor’s property. The shockingly low appraisal compared our house to houses nothing like ours, claimed that our (unbuilt) house was built 1,008 years ago, and reported that our remote, mountaintop building site was subject to busy traffic, erosion, drainage problems, wetlands, was on a fault line, prone to fires, had a cave, a sink hole, a foul odor, dioxins, a pit mine, an infestation, endangered species, and a ravine. When I confronted Jim about this, he told me, “this guy’s been in the business for thirty years, so I think he knows what he’s doing by now.” The appraisal was right, I was wrong. In the meantime, mortgage rates had climbed, we had locked into SunTrust months prior, and so we were stuck with Jim. We repeatedly scheduled closings: April, May, June, July, and August. Jim repeatedly failed to make them happen, for reasons that he couldn’t quite explain. We started to wonder if he’d embezzled our deposit (he hadn’t), and tried to get his supervisor to intervene. It was almost too late in the year to start building, after several months of Jim dragging his feet. We hired a lawyer. Just in case, we hired another one. One of them uncovered that Jim had botched the interest rate lock-in paperwork, which both left us without enough money to build the house and gave us an out from our relationship with SunTrust.

It took a couple more months, but SunTrust agreed to give us our money back and let us out of our contract. Matt Hodges at Compass Home Loans was really helpful to us. (Though we’d hoped to get a mortgage with him, the collapse of the banking and housing industries left him without a market for us.) We had to start the process all over again, delaying construction by a year. In the meantime, we needed to start the month-long process of building the driveway—late summer being the perfect weather to do so—and, lacking a mortgage, we had to pay for that out of pocket, an expense that ate up our savings and left us in debt.

We wound up getting a construction loan / mortgage with First Citizens Bank. Why them? Because our loan officer, Susan McGuinnis, knew what she was talking about. She was cognizant of the world around her. She had a blog. And First Citizens is headquartered nearby, in North Carolina. Best of all, First Citizens hadn’t pressured dopes like us into getting loans that we couldn’t afford, so they hadn’t taken bailout money. The good news about the amount of time that elapsed between working with SunTrust and locking in a rate with First Citizens is that mortgage rates dropped enormously, with the prime rate going down by 20% in that period.

First Citizens has been great to work with, and we’ll close on a mortgage with them shortly. SunTrust? Wouldn’t touch ’em with a ten-foot pole.

Published by Waldo Jaquith

Waldo Jaquith (JAKE-with) is an open government technologist who lives near Char­lottes­­ville, VA, USA. more »

14 replies on “How we got our mortgage. Or: Why so many people bought houses they couldn’t afford.”

  1. We had a very similar experience getting our mortgage loan in 2005 (at Union Bank & Trust). We asked for a 30-year fixed. We’re a boring married couple with kids and we were buying a house that was well within our price range and we had no plans to leave Charlottesville. The guy tried several times to talk us into an ARM — he brought it up in the first place and kept bringing it up again. At the time, I was just puzzled; didn’t we make it clear that we want a 30-year fixed? It dawned on me a few years later that his job isn’t to give us what we ask for, but to try to sell us what benefits him and his bosses instead.

  2. Wow. I wondered why the process seemed to drag out for so long. Good thing you stuck to your first approach – even if you didn’t have all of the background understanding that you acquired later, you had enough to know what a bad idea those ARMs were.

  3. When I bought in 2004, I wanted an entry-level house and hoped to pay about $125K. The Suntrust person I was using to pre-qualify suggested several times that I could be a much bigger and nicer home if I borrowed $250K — that my income could support it if I used both a first and second mortgage, both adjustable rate.

    I’m glad I didn’t listen. I don’t need or want more space to heat and clean, and I like having a fixed rate house payment that doesn’t eat half my income. My experience with Suntrust matches yours, Waldo.

  4. We ended up having pretty much the opposite experience when we got the financing for our home building project. The only thing the guy were working with asked us about was whether we had considered a 15 or 20 year fixed-rate term instead of a 30 year term. The main weirdness we had with the financing process was the appraisal. Initially, apparently, there was a lack of decent comparables close by. As such, they had a second appraisal done by a separate appraisal company. This company didn’t seem to know up from down (similar to your experience) and actually wrote in the appraisal report that we would be devaluing our land by building ‘such a small house.’ Fortunately, our lender saw the inanity in this and wrote off and ignored the appraisal completely.

    I can see where your sort of experience would be fairly commonplace though as I did experience plenty of it when I shopped around for lenders. I crossed off the various lenders/brokers who insisted that an ARM was the way to go off my list and moved on.

  5. When I got a mortgage in 2006 the loan officer didn’t try to talk me into an ARM but did keep trying to talk me into taking a home equity line of credit (with extra origination charges, of course). She just didn’t understand why I would want to put 20% down and not take most of that back out in a HELOC. I was going through Bank of America because my mortgage was so small that their waiving of the origination, appraisal, etc fees made a big difference in my overall costs. But I wouldn’t use them again.

  6. It’s really interesting how commonplace that these bad experiences from that period seem to be. I’ll bet that banks hired a lot of new loan officers in that time, meaning that there were a lot of people who didn’t know that there was any other reality of lending other than the bubble-based one. In their world, it was totally reasonable to take a down payment back in a HELOC, build only unnecessarily large houses, and assume that one’s income would increase drastically in the near future.

  7. This sounds so scary. I don’t know if I could have ever managed anything like this. We bought a $1500 trailer that we lived in while we built our home up on the hill facing Old Rag. We had someone help us do the building until one day he said “I think you can finish it from here”….I hope my fear didn’t show. But we did finish it in about a year and a half. Well, it wasn’t quite finished when we decided to move in. One day wife and I decided to go ahead and move the refrigerator up to the house. We fixed a nice dinner and then decided to move the bed up too. That was about 27 years ago. It is about 2300 sf and costs about $15,000. We’ve made a few improvements over the years that probably brought it up to about $25K. We did a lot of scrounging for used materials, flooring, windows, doors, studs, rafters, floor joists, etc. and put in a lot of labor which was largely a learning process. For example I started doing the drywall in a little used room and worked my way up to more visable walls. We never did get a mortgage.

  8. +1 for Matt Hodges.

    He handled our purchase mortgage here in 2000, then two refi’s after that (taking advantage of plummeting interest rates). All mortgages were 30-year fixed (our preference too!), and Matt got them done for us without a hitch; he helped us understand the things we didn’t understand without even hinting at products that weren’t appropriate for us or that we clearly weren’t interested in.

  9. I appreciate the nice comments, Waldo. I’m so glad you are happy in your new house! It is good to hear your perspective. I have to say, as a loan originator, I don’t think I’ve ever been told to sell one product over another, so I think you are giving the institution too much responsibility there. Mortgage loan originators are salespeople; borrowers just need to look for the right individual to work with. Customers who trust too much in the institution or who go searching for the best deal set themselves up for the super salesmen. One point: ARMS are not inherently bad, and there are times when an ARM is the only product that will allow someone to accomplish their objective – and of course it is then their choice. I’ve learned that everyone has a different risk tolerance! You are correct that the last few years have been very difficult for this business, and I don’t see that changing any time soon. However, we DO still have mortgages – patience and cooperation required! Congrats again to you!

  10. Gotta give a shout-out to UVA CCU for not doing exactly what your loan officer did to us, years ago. Didn’t blink an eye when we asked for 30-year-fixed & sevral years later – well after they had sold the loan, of couse – intervened on our behalf to solve a problem with the loan, even though they had absolutely nothing more to do with it at that point. Calm, effective, & rational folks. Their refinancing seminars are also informative & cautionary… and no, I don’t work there, but am very pleased with them.

  11. Great post. Our mortgage broker tried to get us to buy a house that was three times what we determined was our price range, although this was in 1998, and it was before ARM fever. I was glad that my other half knew more about this stuff than I did and was able to prepare me for this. It’s really much better to avoid debt when possible, live within one’s means, keep one’s housing expenses to a reasonable percentage of one’s net income, etc. Why is this such a secret? They used to teach all this stuff in public schools back in the 40’s and 50’s, didn’t they? What happened?

  12. Waldo, I had a similar first-time home buyer experience with ARMs and clueless mortgage brokers back in 2003. Especially the part about “but I can get you approved for so much more!!11!1” – that’s more or less exactly my experience. Kudos for doing your own research.

    Did you know there are virtually zero requirements to become a mortgage broker or loan officer? Zero. Just a fee and a financial background check.

  13. Things have changed SO much since the “bubble” burst.

    Back then, I could have easily “qualified” for a million dollar mortgage.

    This year, Rodney and I are building a second home near Rehoboth Beach, DE. A very modest abode in a rural area slightly north of all the beach resort action. I only needed about $125,000 to complete the project…we were paying cash for the rest, and already owned the lot. I have a home in Virginia, paid off in full, which appraised recently for three times that much. I have long-term high-interest CDs (didn’t want to touch those!) plus other investments worth almost six times that much.

    Three mortgage companies turned me down despite this very favorable balance sheet. The reason? I’m self-employed, and you know how flaky us self-employed folks are. Too risky according to their cookie-cutter scoring.

    Before 2008, I could have gotten that small mortgage almost on a handshake. Today, it took a fourth lender that actually listened to common sense to get it. The pendulum has swung far to the other extreme.

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