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October 27, 2008 / allyo

Why we went with an ARM

(and they took a leg.) Oh dear, how punny.

Something I have been reading on both sides of the political spectrum in the past few weeks regarding the financial crisis is language that throws everyone who went with “risky” financing on their house and/or bought a house they couldn’t afford in the long-term together in the same leaky, sinking boat. All these folks are irresponsible mouth breathers who suscribe to the basest interpretation of American materialism – buy buy buy now, damn the consequences.

The question I’ve heard and read repeatedly ask why. Why would someone risk everything with an ARM that will inevitably balloon beyond containtment?

Well, I can’t tell you why millions of Americans made this choice. I can only tell you why we did. Let’s see, it was, um, it must have been 2002. Month after month we were finding it impossible to make ends meet. And yes, some irresponsible spending had occurred. We had bought a house the year before that was well within our means, even though it needed considerable fixing up. My dad helped us a lot with that, paying for 99% of the raw materials we needed, the deal being that we did the job ourselves. We were happy to do so, back then – a whole six years ago – MD’s joints were a wee bit creaky but we were a ways away from knee surgery and a chronic hip condition. So we worked, hard, to fix the place up. And we spent beyond the raw materials that my dad financed. We bought a couch. It was $850 because I wanted a sleeper sofa. We…honestly, that’s the biggie. We probably spent less than $3,000 total on things for the house. But life was good. I was close to finishing grad school. I had a great job that didn’t pay a lot but paid well for the non-profit sector at the time. MD had a direct-deposit paycheck and health insurance for the first time ever. And we thought we had finally crossed some magical threshold once we were approved for our house. It meant something, it meant that we were responsible, that the bank could trust us, that we had arrived. Never mind the joke our friends told us, how it was easier to buy a house than a car. Or that our credit report was ok but not great. We were on our way.

Except, our air conditioning broke a couple of months after we bought the house and we had to buy a new one. Another $1500 on the credit cards. Some plumbing needed to be fixed. Credit card. Our marriage was crumbling, and the ways we both dealt with it involved spending money we didn’t actually have. And so on, and so forth. We had no savings, no cushion, no extra, except for our credit cards. And a year later, my car died. I had been riding the bus to work for 2 years to save on parking but we weren’t on a bus line. And the way our neighborhood was laid out, I would have to walk down a dangerous, hilly road without sidewalks, across a freeway exit ramp, under the freeway where there were (finally!) sidewalks, to the bus line with frequent runs to and from downtown. At this point panic was setting in (about finances and about whether our marriage was going to survive, but that’s another story). Refinancing was everywhere, and what we had over most people is that we had bought our house for a sale price that was $13,000 below appraisal value. So we did it. We refinanced, bought my car outright, and paid off our debt. And to do all this we went with an ARM that was fixed for what we thought was 3 years, which would then adjust every (we thought) 6 months.

Why? Because I had had two good raises in a row. Because we thought that MD had very real potential to move up in the company he was working for at the time, plus he was working at a private college (for a food service company) and would receive free tuition after a year. And we assumed that our incomes would continue to increase enough that with paying off our debt we would be able to save some money and improve our credit rating to the point that in 3 years when the loan was due to adjust, we could refinance with a traditional mortgage.

But that’s not what happened. MD’s company lost the account and in 2004 he worked for 4 employers in the same year. One at College A, two at College B (where the company that hired him lost its account a few months later*) and finally, Non-profit C, the same non-profit that fired him earlier this year. Because he had racked up so many points taking sick time (that he earned) last winter with Jamie having two nasty viruses in a row, that when someone, feeling vindictive, reported him for *gasp* yelling at someone in the kitchen, he pointed out and was fired on the spot. Anyway, back to 2004. Major job turnover with MD. Jamie was born that October, and then, oh boy. The shit hit the fan. Daycare killed us. And suddenly, after only two years our mortgage started adjusting every 3 months. Or was it 2? I’ve blocked it. We had been baited and switched, and by someone that MD knew.

We were this close to bankruptcy. My parents’ generosity are the only reason we still have our house. Were we stupid? Maybe. Should we be vilified for it? No. We thought we were making the best choices we could. Our endgame has always been to have more income than expenses. To be able to afford shoes and a car payment and daycare. But we were operating under a faulty assumption – that if we worked hard we would continue to get ahead, and our income would slowly, but steadily, rise. Sadly, that’s just not true.

There are a lot of issues in this post that are front and center in this election. Health insurance, family/sick leave, bad mortgages, debt. And this is just our story. I used to be too afraid, too ashamed to tell it. We are not poor – we go to bed every night with full stomachs. We’re still in a place where it’s a worry about quality of food, not whether we’ll have food at all (although organics? Pshaw. Not unless they’re cheaper than conventional.) And we’ve gotten even smarter. This past pay period has been an exercise in penny-pinching restraint. Two years ago I would have thrown my hands up and put the groceries on the credit card. The toiletries too. And probably a couple of lunches. Not now. Now we squeeze the budget until it cries, but we’re going to make it to Friday with one charge on our credit card – Cory’s meds. Even those we’re filling 1/2 at a time so that we can pay for some of the refills with cash.

But we still don’t have any savings, our delicate balance of low-interest credit cards is under threat, and Christmas is just around the corner.

———-

This was not easy for me to write.  My birthday is in two days. I’ll be 38 and I think I should probably feel younger than I do right now. I miss my grandma. I even miss my mom. I feel a little rudderless and alone. And I can’t help but think about 2000, and whether having Gore in office would have made a difference. Clinton was in office when the push for deregulation began. If Obama is elected, will it truly make a difference? I can only hope.

———-

*Both cases were examples of international mega corporations out-bidding smaller local or regional companies. And sadly, neither mega corp’s contracts were renewed. They were bad fits for small, liberal arts colleges.

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6 Comments

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  1. LittleWit / Oct 27 2008 3:16 pm

    Aww. I am sorry for your struggles. (hugs) Thanks for sharing your story. It really helps to add in the human aspect to what is going on. The number of people who were cheated out of homes, bought homes they truly could not afford is astounding. There was a whole neighborhood that foreclosed on the Western side of Columbus (Hilliard?). Seeing things like that proves that it’s not simply a matter of reckless spending. There is so much more to take it account.

  2. dawn / Oct 27 2008 4:12 pm

    May good times be on the horizon as you enter a new year! May they catch up with you pretty damn quick (and may my good times be right behind ’em)!!

  3. MystikMomma / Oct 27 2008 6:22 pm

    Hmm, good post and thoughtfully provoking. You voiced one of the things that has been bothering me as well. Why is it irresponsible for people like you, or me for that matter to buy a house? We were 100% financed when we bought our house. We put in over 10, 000 in improvements and bought a new bed, sofa, chairs, dining table, outdoor furniture etc. We used the interest free pay off periods and worked hard to pay off the debt before interest started on all of our housing purchases. I used credit cards and credit to my advantage and it worked out okay. When it came time for a refinance, we did and I brought down our monthly payments from 1300 to 1025 a savings of 275/month. I thought that was good. In fact I put some extra to the monthly payments too.

    We went with a 3 yr arm, principal and interest payment. We did this because we wanted to lower monthly payments and we knew that in year 3 we were either going to sell and move or we would refinance into a fixed rate. There is nothing wrong with playing with other people’s money and using low or no interest to get ahead. Also this is how successful people do it, they borrow, flip it around before they have to pay it back. We were trying very hard to get ahead. We were fortunate to sell our house before all of that arm stuff activated, but other financial woes came our way, that we are still working on.

    The end of the story… why is it considered stupid for people to buy a house, who aren’t able to put down 20% and may need a little extra help with monthly payments? We are the same people that would have to pay a monthly rent payment, which typically is higher than a mortgage payment. So if we can afford rent, then why can’t we be approved for a mortgage? This concept really bothers me. AT this moment, we have no savings and want to buy a house in the next 2 years or so. Will we be denied because we are now not capable? Mind you my rent today is 1700 a month for a small 2 bedroom apt! If I can pay this, then I certainly can afford to buy a house for 175K at 100% financing! This much I know.

  4. bmiad / Oct 27 2008 8:37 pm

    Thank you for writing this. This isn’t just your story, it’s the story of the whole middle class, give or take a few details. I don’t think it makes you look like anything less than human –not perfect, maybe, but operating under legitimate assumptions that we’re all collectively having to let go of. There’s solidarity, anyway, right?

  5. Abby / Oct 28 2008 7:10 am

    I think this is such a common story and I think most of the families like you were duped. Even the ones who weren’t outright duped were taken advantage of in some way. I mean, if you go into a bank and they tell you you can afford to take out a loan for 6 times your income, you believe them. Because you’re talking about your house. Your HOME. And who doesn’t want the best house they can afford? And who doesn’t trust the bank to let them know what they can afford? Maybe some people really understand how all of this works and can think about every what-if scenario, but the majority of the population is thinking that the bank will not loan them more than they can afford. And nobody thinks the worst about their own future. It’s just not the way it goes. We all think we’ll stay healthy or get healthier, we’ll keep our jobs and get a raise or two, and we’ll raise our kids in the best house we can afford because, dammit, we work hard and this is America. So sad that it hasn’t turned out that way for so many Americans.

  6. Jody / Nov 6 2008 8:47 am

    We were still getting fancy letters inviting us to switch to ARM mortgages six months ago — of course they look like a smart choice, they’re promoted everywhere. Calder’s co-workers thought we were crazy not to take one when we moved here. And how the heck else were people supposed to pay for their exploding health-care costs in the past decade?

    There are markets everywhere in which ARMs were the only way people could afford to buy homes, and rentals were scarce on the ground. It was sheer dumb luck that our housing purchases worked out as well as they did, and I hope you don’t beat yourself up too much.

    Heck, if this recession drags on too long, the language of your ARM should work out so that your interest rate drops. That’s the gamble with those things.

    And fie upon the asshole who screwed you with the every-2-months ARM. Those shouldn’t even be legal.

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